This paper is prompted by To enshrine and define local government once and for all, a Briefing Paper by Christine Rose, which presents a useful analysis of central-local government responsibilities. Localism – empowering local government and communities to make more of the decisions currently made by central government – is a current hot topic with Local Government New Zealand and the New Zealand Initiative launching Project Localism, promoting more devolution and decentralisation.

While generally agreeing with Christine’s conclusions my paper seeks to offer some additional perspectives on the key issue of “centralisation”. Christine repeats the common observation that New Zealand has “one of the most centralised political systems in the OECD”. However I suggest we need to distinguish between different aspects of “centralisation” or its counterpart “autonomy”, namely:

• The allocation of functions between central and local government
• The extent of centralisation of decision making within central government (e.g. to local or regional offices of central government agencies)
• The degree of autonomy local government has in undertaking its (comparatively with other OECD countries) limited role.

Project Localism covers the first two aspects of decentralisation set out above. Christine’s paper points out that government functions such as education, health delivery and policing are central government functions in New Zealand, whereas in many other countries they are local government functions, albeit such as in the United Kingdom, financed largely by transfers from central government. Local government expenditure in New Zealand amounts to less than 4 percent of GDP.

This “centralisation” in terms of allocation of functions between tiers of government may arguably be appropriate for our country of less than 5 million people. But at least it should be tempered by the second aspect of centralisation – local offices of central government – so that local knowledge and needs are fully considered in the delivery of central government services. I am not aware of any serious analysis of this important second issue in terms of New Zealand local government.

This paper focuses on the third aspect, the degree of autonomy local government has in undertaking its role. New Zealand local government has considerable autonomy in its financial policies and budget decisions compared with many OECD countries. Its position has been described by LGNZ as “strong financial autonomy across a small task profile”. I see this financial autonomy as a key determinant of autonomy in local government decision making which should be retained in any changes to local government financing, an issue which is now under review by the Productivity Commission.

However this financial autonomy is tempered by the obvious exceptions of Auckland and Christchurch which must deal with the accumulated infrastructure deficit and the aftermath of the earthquake respectively. This means heavy involvement of central government in their financing decisions.

Local government financial autonomy is best measured by the proportion of council’s own source revenues compared to funding (general or tied grants or loans) from central government. This reflects its capacity to determine its own level of expenditure, its revenue policies, and its expenditure priorities.

Rates are the largest source of income for councils – over 60 percent of total operating income. The Rating Act provides considerable flexibility as to how councils may allocate the rating burden: on the rating base to be used to reflect property values; on using differential or targeted rates for different groups of ratepayers; and (within a limit) on the mix between a uniform annual charge and rates based on property values. Water supply may be based on user charges or subsumed within rates. Councils adopt their own policies for rates remissions, including on particular land such as Māori land. Councils may (within certain limits) levy development charges to fund capital expenditures associated with particular development projects. Councils may, (within limits), make their own decisions about how to fund their important and increasingly significant capital expenditures – whether by borrowing, by development contributions, or by rates, or even in Auckland’s case (which was subject to central government approval) by levying a regional fuel tax.

In addition to rates as own source revenues councils have access to user charges and a number have significant dividend income from their part or full ownership of ports, airports and other trading undertakings. For example Ports of Auckland is fully owned by the Auckland Council and Port of Tauranga is 53 percent owned by Bay of Plenty Regional Council. These undertakings are profitable and return useful “own source revenue” comprising on average about 6 percent of operating income to their council owners, adding to their financial autonomy.

But more significantly there is no limit (beyond obviously a political limit) on the total level of rates which may be charged. Unlike many other OECD jurisdictions,  there is no capping of rates or general local government charges by central government.

Councils are however required by the Local Government Act Section 100 to adopt a “balanced budget” meaning operational revenues should at least cover operating expenditures, although this is qualified to the extent that the budget need not be balanced if it is “otherwise prudent not to do so”. There are also the requirements in Sections 101 and 102 to manage financial matters prudently and to adopt funding and financial policies which provide certainty and predictability about sources and levels of funding.

The 2007 Rates Inquiry encouraged councils to use more debt to finance capital expenditures. There are no formal limits on council borrowing (again reflecting their considerable financial autonomy) except for a requirement that councils compare their debt position with certain financial benchmarks, which were developed by the Department of Internal Affairs and set out in the Local Government (Financial Reporting and Prudence Regulations) 2014. Supplementing this is the rating of councils’ debt by the ratings agencies, the review of councils’ 10 year plans by the Auditor-General in terms of their financial prudence, and by the disciplines imposed by the Local Government Funding Agency on those councils wishing to borrow from it.

This highlights the often overlooked degree of financial autonomy enjoyed by New Zealand local government. Greater financial autonomy increases the power of councils to decide on how much to spend and on what. This is not to say that councils have total freedom to determine their expenditure priorities. Central government imposes various requirements on them such as administration of the Resource Management Act and there are likely to be new water quality standards including drinking water standards which also limit councils’ discretion in expenditure decisions.

This financial autonomy should come with requirements for transparency, accountability and citizen consultation. And it does, but only in the form of budgeting and financial reporting requirements which are so onerous and complex that elected councillors and citizens drown in a sea of paper, while council officers largely control the process. This must be addressed by the new government if we are to have local democracy. The 2007 Rates Inquiry made a number of recommendations in this area but they were not acted on. Perhaps the Productivity Commission’s review will fare better.

Conclusions

• We should note the considerable financial autonomy enjoyed by local government in New Zealand.
• Such financial autonomy is key to local government decision making autonomy.
• Any changes to funding sources should retain and reinforce this autonomy.
• Such financial autonomy requires strong accountability reporting mechanisms.
• Existing mechanisms are overly complex and reduce democratic control and need urgent reform.