Media statement
For immediate release
Tuesday, 12 September 2006

United Future's plan for local government reform

United Future today weighed into the controversy over rising local body rates by calling for a solution to the real problem, not the symptom.

Issuing a research paper on local government in New Zealand, party leader Peter Dunne said "The recommendation of this paper is the creation of a Royal Commission of Inquiry into local government in New Zealand, with full powers, and with the clear intention of vastly streamlining the structures of local government.

"The Commission would clearly define local government's core functions that it must provide; identifying those functions that have been devolved from central government and which therefore should be adequately resourced; identifying economies of scale that could be achieved by streamlining; and identifying the qualitative improvements that can be made from having fewer councillors and local body bureaucrats."

The research paper points out that New Zealand has 12 regional councils and 74 territorial authorities, 16 of which are city councils.

"In a nation of just over 4 million people, that seems to us to be a remarkably high level of over-government.

"We recognise that a Royal Commission would not address the immediate issue of this year's rate rises, but we believe it's time to sort out the real problem, not simply relive the same debate year after year after year," said Mr Dunne.

ENDS

www.unitedfuture.org.nz

Attached:

Policy document on local government in New Zealand

Towards a Policy Platform on Local Government and Domestic Rates

In February 2006, United Future leader, Hon. Peter Dunne, was approached by a constituent who was seriously concerned by the recent domestic rates rises and the approach to local government funding in New Zealand. The constituent briefly outlined the local government funding situation in Ireland, where domestic rates were abolished in 1977. United Future began their own inquiry into the situation in Ireland and the development of a strong policy platform on local government and domestic rates for New Zealand. This paper outlines the research already done by United Future on this topic.

1977 Irish Election

On June 16 1977, the Fianna Fáil party in the Republic of Ireland won a landslide election victory. The party, who had produced its first ever general election manifesto for the campaign, gained 84 seats in the 148-seat Dáil Éireann. Their manifesto offered “a strategy for recovery and placing the main emphasis on the creation of jobs. It offered other things besides, including the abolition of rates on houses and of car tax.”

As soon as Fianna Fáil assumed power, domestic rates and road taxes on certain cars were abolished, the social welfare stamp for low wage earners was reduced, and there were some increases in personal tax allowances. There have been no domestic rates in Ireland since 1977.

The Government aimed to keep the tax burden at the lowest level possible conditional on achieving the goals outlined at the beginning of the White Paper. For this reason about £160 million in tax cuts were part of their manifesto and many of these cuts had already been put into effect by January 1978.

Taxation on farming and farmers was increased, because “the farmers’ contribution falls far short of the share of income contributed in taxation by the rest of the community.” The Irish Government decided that the various additions to the current account deficit would be, at least in part, offset by an increase in indirect taxation on tobacco products and alcohol.

Local Government in Ireland

Local government in Ireland consists of a number of local and regional authorities at three levels:
- At county/city level: 29 County Councils, 5 City Councils, 5 Borough Councils and 75 Town Councils;
- At regional level: 8 regional authorities co-ordinate some of the county/city and sub-county activities; they also play a monitoring role in relation to the use of EU structural funds;
- Two regional authorities, known as regional assemblies were established in July 1999 under new structures for regionalisation. They promote co-ordination of the provision of public services in their areas, manage new regional operational programmes in the next Community Support Framework and monitoring the general impact of all EU programmes of assistance under the CSF.

Local Authorities are responsible for an extensive range of services and these are typically broken down into eight broad categories:
- Housing
- Planning
- Roads
- Water Supply and Sewerage
- Development Incentives and Controls
- Environmental Protection including rivers, lakes, air and noise
- Recreation Facilities and Amenities
- Agriculture, Education, Health and Welfare

Financing Local Government in Ireland

After the 1977 election, the local government financing shortfall created by the abolition of property rates led to the introduction of service charges for water and refuse, but these were highly unpopular in certain areas and led in certain cases to large-scale non-payment. Domestic water charges were abolished on January 1 1997, placing further pressure on local government financing.

It is worth noting that over the past three decades numerous studies carried out by consultants on behalf of the Government have recommended the reintroduction of some form of local taxation/charging regime, but these are generally seen as politically unacceptable.

Local government is funded through a combination of commercial rates, charges for goods and services, and transfers from central government. Within transfers from central government there are grants for specific activities and a general transfer from the Local Government Fund (see below).

Charges for goods and services in 2004 accounted for the highest share of local government income, at 31%, followed by Government grants/subsidies at 23%. Commercial rates accounted for 25% while the general purposes grant from the Local Government Fund provided 21%. Importantly, only 56% of financing is locally based. Road transportation and safety accounts for 27.6% of all expenditure, while environmental protection and housing and building account for 19.2% and 14.9% respectively. Water supply and sewerage accounts for 12.5% of expenditure.

Better Local Government - A Programme for Change, published in December 1996, set out a programme for the future development of local authority services. Central to this programme was an initiative on financing, entitled, A New Deal for Local Government. This was launched in January 1998 with a new improved financing system introduced with effect from 1 January 1999. It involved the establishment of the independent Local Government Fund (LGF).

The Fund consists of an Exchequer contribution and the net proceeds from a motor tax. The Local Government Act 1998, which established the new financing system, provides that the Exchequer contribution will be index linked each year at least in line with inflation and will also take account of the additional expenditure needs of local authorities. The Fund is used to finance the general-purpose needs of local authorities and the non-national roads programme.

It is a legal requirement in Ireland to have paid a motor tax if you want to drive a vehicle in a public place. The revenue from this tax is used to maintain and upgrade the road network in Ireland. Motor tax is collected by your local authority on behalf of the Government. The amount of motor tax paid, is proportionate to the size of the vehicle engine - in other words, the more powerful the vehicle, the higher the cost of the motor tax.

The following table sets out the income by source to the Local Government Fund from 2000 – 2006.
2000 2001 2002 2003 2004 2005 2006
Exchequer Contribution €400.0m €475.0m €419.6m €451.0m €465.7m €500.5m €518.6m
Net Motor Tax Receipts €464.9m €511.8m €539.5m €680.0m €745m €802.0m €846.5m
Interest Earned on the LGF € 2.0m € 2.0m € 1.6m € 2.0m € 1.9m € 2m €2m
Total LGF €866.9m €988.8m €960.7m €1,133.0m €1,212.6m €1,304.5m €1,367.1m
* Estimated

In 2006, 27% of the Local Government Fund (LGF) was provided by central government, while 62% came from the motor tax. The proportion of the LGF provided by the motor tax has increased slowly but steadily since 2000, when motor tax receipts accounted for only 54%.

The Local Government (Financial Provisions) Act 1997 also established a Value for Money Unit. The Unit carries out VFM studies on local authority operations, with a view to identifying best practice and recommending ways of improving existing procedures, practices and systems and thereby promoting efficiency and cost effectiveness.

The 1997 Act also widened the role of the Local Government Auditors. Under the Act, the Auditors of local authorities are empowered to examine economy and efficiency in the use of resources and the adequacy of management systems that authorities have in place to appraise the effectiveness of their own organisations.

Local Government in Ireland – Financing Review 2006

An independent review of local government financing in Ireland was commissioned by the Minister for the Environment, Heritage and Local Government and was completed by Indecon International Economic Consultants in March 2006. The report recommendations include:
- A significant increase in the level of resources available to local authorities over the period to 2010;
- A change in the system of local government financing, with a move towards more locally based sources of financing. The two key elements of this should comprise an increase in local charges [for services] and the introduction of selected targeted local taxation;
- The introduction of domestic water charges;
- The introduction of rates on non-principal private residences and from commercial buildings not currently covered by commercial rates;
- The delivery of local authority services on the most cost effective geographic basis.

The Irish Government response to the report outlined that Government policy, and public opinion, did not support the introduction of domestic water charges or the imposition of a new tax on non-principle private residences. New legislation, however, will be introduced to make new commercial properties liable for rates as soon as they are valued as opposed to the current situation where some properties are able to gain a rates free holiday of up to a year. The Minister also committed to tackling motor tax evasion, although has not outlined any methods for dealing with this problem.
Local Government in Ireland – Conclusions

All research and reviews into Irish local government indicate that significant financing increases are necessary to maintain the current levels of service provision through to 2010. Understandably the Irish Government have wanted to keep the public onside and are working to make local government more efficient, while increasing financing slowly through reasonably uncontroversial changes. It seems likely that more controversial changes will be necessary in the next 10 years to cover increased service provision.

Local Government in New Zealand

New Zealand has 12 regional councils and 74 territorial authorities, 16 of which are city councils. As at June 2002, local authorities contributed 2.8% towards the total GDP for New Zealand. In 2004, their total annual operating income was $4.625 billion, while their annual operating expenditure was $4,370 billion. Total annual capital expenditure was $1.983 billion in 2004. The local authorities own assets with a combined value of $62.788 billion, including 87% of New Zealand’s roads, and owe approximately $3.521 billion in liabilities.

Of the $4.625 billion received in operating income, 57% came from rates, 12% from central government assistance, 6.5% from investments, 5% from fees and fines, and 19.5% from other sources. Of the $4.370 billion spent by local authorities, almost 50% goes towards purchasing goods and services, around 25% on employee costs, 20% on depreciation, and 5% on interest and grants. Land transport made up the largest single expenditure category, accounting for 26% of operating expenditure.

Could New Zealand Abolish Domestic Rates?

Although the complete abolition of domestic rates in New Zealand is not a feasible option, there is serious need for New Zealand to urgently review options for local government financing. The Local Government Funding Project is supposed to be working on this, however the project appears to have stalled. They released a report on funding problems on 8 July 2005, but this did not suggest any options for resolving the problems identified.

Changes to commercial rates or a motor tax are possible options, although these could possibly be seen to run counter to other Government policies. Looking at financing options internationally, as well as previous financing methods, may be the best way to determine what system would work best for New Zealand.

Possibilities from International Practice

International practice can provide possibilities for changes to New Zealand’s system of local government funding. A current inquiry in the UK into local government funding has provided a number of possibilities from international practice that could also be relevant for New Zealand.

In 2004, the English Deputy Prime Minister and the Chancellor of the Exchequer commissioned Sir Michael Lyons to undertake an independent inquiry to consider the case for changes to the present system of local government funding in England and make recommendations, including on the reform of council tax. An interim report was released on 15 December 2005, and the final report is expected out in December 2006.

This inquiry has examined systems of local government in a number of European countries including Sweden, Belgium, Italy, France and Germany. Other recent research reports used by the inquiry have examined Australia, the USA, and Canada.

Structural possibilities:

Local government income in New Zealand is made up of rates (57%), fees and user charges (5%), government grants (12%), other grants and subsidies (6.5%), and other (19%). To maintain current levels of services provided by local government while reducing or eliminating rates, the four other areas of income would need to increase significantly.

- Fees and user charges – New Zealand’s local government gets the lowest proportion of income from fees and user charges (5%) when compared with Australia (30.5%), Ireland (31%) and the UK (19%).
- Government grants – Australia gets remarkably low proportion of its local government income from government grants, at only 7.9%. New Zealand sits on 12%, while the UK and Ireland are between 20 and 25%. New Zealand is internationally recognised for having an independent local government system, which does not rely heavily on government grants. This is seen as a good thing.
- Other grants and subsidies – In New Zealand, this proportion of funding comes from investments however there is little information available on where this proportion comes from outside New Zealand. In the UK system this accounts for 29% of local government funding.

- Other – This accounts for around 20% in Australia, New Zealand and Ireland. There is little information on where this “other” comes from for New Zealand, but in Australia it includes interest on income, grants and subsidies as well as dividends and fines.

Possibilities to supplement or replace domestic rates:

- Local Income Tax – The UK Liberal Democrats campaigned at the last election on replacing the council tax (similar to domestic rates) with a local income tax of up to 3%. This is added to the national income tax and run through the existing Inland Revenue Tax mechanism. In Scandinavian countries, the Local Income Tax is relied upon for most of local authority funding and sits between 20% and 30%.

- Local Business Tax – A business value tax, which is levied on productive output. Local authorities have an important role to play in promoting the economic development of their local areas. They provide some services directly to businesses, and also manage other services of indirect importance, without which successful business activity could not take place.

- Motor Tax - It is a legal requirement in Ireland to have paid a motor tax if you want to drive a vehicle in a public place. The revenue from this tax is used to maintain and upgrade the road network in Ireland. Motor tax is collected by your local authority on behalf of the Government. The amount of motor tax paid, is proportionate to the size of the vehicle engine - in other words, the more powerful the vehicle, the higher the cost of the motor tax.

- Land Value Tax – Some argue that there would be economic efficiency and equity benefits if land alone, rather than the value of the property and the land, were taxed.

- Tourist-related Taxes – Taxes on tourist activity were suggested in the Lyons Inquiry as a way of raising revenue for authorities, and ensuring that visitors contribute to the local public services that they use. The most frequent proposal to the Inquiry was for a tax on hotel and similar accommodation. Such taxes exist in various US states, Austria, France and the Netherlands.

United Future’s recommendation

United Future is concerned that the fundamental problem is that the debate is, somewhat understandably, centred on the result, not the cause. The key problem is local government, not rates. Sort out the primary cause, and the result will become much more amenable to long term correction.

The recommendation of this paper, therefore, is the creation of a Royal Commission of Inquiry into local government in New Zealand, with full powers, and with the clear intention of vastly streamlining the structures of local government; clearly defining its core functions that it must provide; identifying those functions that have been devolved from central government and which therefore should be adequately resourced; identifying economies of scale that could be achieved by streamlining; and identifying the qualitative improvements that can be made from having fewer councillors and local body bureaucrats.

The core of the problem has already been identified in this paper:

“New Zealand has 12 regional councils and 74 territorial authorities, 16 of which are city councils. As at June 2002, local authorities contributed 2.8% towards the total GDP for New Zealand. In 2004, their total annual operating income was $4.625 billion, while their annual operating expenditure was $4,370 billion. Total annual capital expenditure was $1.983 billion in 2004. The local authorities own assets with a combined value of $62.788 billion, including 87% of New Zealand’s roads, and owe approximately $3.521 billion in liabilities.

Of the $4.625 billion received in operating income, 57% came from rates, 12% from central government assistance, 6.5% from investments, 5% from fees and fines, and 19.5% from other sources. Of the $4.370 billion spent by local authorities, almost 50% goes towards purchasing goods and services, around 25% on employee costs, 20% on depreciation, and 5% on interest and grants. Land transport made up the largest single expenditure category, accounting for 26% of operating expenditure”.

For a country of just over 4 million people, this seems to be gross over-government. If the ultimate desire is to achieve local body funding based on people's ability to pay, rather than the value of their property, then a new mix of funding will have to be defined and it may be that it is better politically if that mix is recommended by independent commissioners than politicians.

The immediate concern: Of course, this call does not deal with today's issue, which is the current crop of rate rises and the outcry especially from those on fixed incomes.

The long-term goal needs to be the fundamental reform of local body organisation in this country, which hasn't really been touched since the 1989 reforms of Michael Bassett.

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