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Targeted solutions needed to relieve funding pressures on councils

Final report
12 December 2019

The New Zealand Productivity Commission today released its final report on local government funding and financing. Following an in-depth inquiry, the Commission recommends changes to support councils in dealing with some large and growing pressures.

“The current funding and financing framework for local government has many strengths - it is simple, efficient and provides stable revenue,” says Commission Chair Murray Sherwin. “We have concluded that the current rates-based system remains appropriate for New Zealand. Internationally no single way of funding local government is clearly better.”

“Local government in New Zealand has access to a range of funding tools, and a lot of autonomy in how they use them. Councils also have the flexibility to respond to local needs and preferences. This autonomy, and the accountability that goes with it, are strengths of our system, and should be preserved.”

“However, it is also clear that councils are struggling to deal with some big challenges. Stress points include coping with rapid population growth, central government handing councils more responsibilities and higher environmental standards, and increasing tourism. The costs of dealing with the impacts of climate change is also a major and growing pressure on some councils. Rising sea levels and more frequent and extreme weather events threaten many communities, and a lot of local infrastructure. These pressures are significant, rising and not evenly distributed around the country.”

“Small, rural councils serving low-income communities are also under strain because of their limited resources. Their rates have grown to high levels relative to median incomes.”

To help councils deal with these pressures, the Commission has focused on targeted solutions that do not compromise councils’ autonomy or accountability.

The Commission finds that payments from central to local government are justified in some circumstances, and that co-funding will be needed to help some councils deal effectively with the challenges they face. The report sets out guidance about when costs should be shared between local ratepayers and general taxpayers.

“Ratepayers and taxpayers are substantially the same people, and there needs to be a good, principled reason for shifting costs from one group to the other” notes Murray Sherwin.

The Commission recommends central government co-funding to help councils redesign and possibly relocate infrastructure at-risk from climate change, as well to assist small, rural and low-income councils upgrade their three-waters infrastructure.

Many councils can make better use of their existing funding tools. Improvements to organisational performance, transparency and decision making can also help to relieve cost pressures. Spatial planning would also help to coordinate council efforts as they plan and respond to the various stresses, both regionally and with central government.

The report makes 44 recommendations to deal with cost pressures, and to better align council and ratepayer interests.