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The charade of Tamihere vs Goff on rates

The Auckland mayoral debate is in theory about rates increases, council profligacy and 'being tough on Wellington.' Bernard Hickey argues this is all a charade without infrastructure funding reform.

Council election debates about rates profligacy and 'being tough with Wellington' are a charade for growth cities like Auckland because the incentives for infrastructure development are broken. Until there's a fundamental reworking of how these cities raise money and how the Government shares GST and income tax, these debates are just stuff and nonsense.

That's because Central Government sets migration policy for economic and population growth and gets all the immediate benefits through higher GST and income tax. Local government is responsible for funding and building much of the infrastructure to cope with population growth, but gets few of the revenue benefits of that growth and its political and economic incentives are actually designed to limit that population growth.

The end result over the last decade in Auckland has been massive population growth (it has almost doubled in the last 20 years) without the infrastructure development to house that growth. Sadly, the incentives for ratepayers and taxpayers, particularly the ones in the established leafy suburbs who vote and still read the New Zealand Herald, are to vote against any borrowing or rates increase that would fund the housing and transport infrastructure needed for that growth.

Essentially, the homeowners of Remuera and Devonport didn't vote to pay higher rates so more people could live in Albany and Pukekohe. They vote against high debt and the rates increases it brings, essentially over-ruling the central Government's drive for higher economic growth from population growth. Councils are stuck in the middle of this funding catch 22. Their only option is to beg Wellington to fund the infrastructure, or to frustrate growth by imposing urban boundaries and blocking new suburb and greenfield developments in the Environment Court or through their city planning process.

The end result has been perfect for the inner-city dwellers in their leafy suburbs. They benefit from the economic growth that keeps the central Government in surplus and planning income tax reductions and middle class welfare such as free tertiary fees. And they benefit from population growth without housing supply: the leveraged equity in their land prices goes up much faster than their incomes and is not taxed.

What's not to love if you're a regular listener of Mike Hosking. The trouble is young renters in the city are locked out of owning a house unless they are related to one of the Mike Hosking-like property owners or win lotto, and their rents rise faster than inflation. The resulting pressures worsen housing poverty and create a widening divide between the owners and renters.

So the debates to elect mayors and councillors are often just a charade. Candidates beat their chests about bloated council bureaucracies and how much they'll contain rates inflation, simply to appeal to those older leafy suburbanite Herald readers, who vote at ten times the rate of young renters. The Government watches on in silent horror at the prospect of having to pick up the bill for the infrastructure (see the City Rail Link and light rail lines) and the social costs of this mess.

But Wellington can't quite bring itself to change the funding incentives that would allow councils to keep some of the income and GST revenues associated with growth. It argues it can't trust local politicians and the poor governance around them to do the right thing. The tougher reason is few politicians give up the power associated with the ability to spend tax money.

So the country is stuck in a massive infrastructure funding catch 22 and pretend debates about rates profligacy and 'being tough on Wellington.' Meanwhile, land prices rise ever higher and the inequality driving many of our social problems is unchecked.

We saw it again on the weekend.

Phil Goff has opened his campaign for a second term as Auckland Mayor by declaring he would increase rates by 3.5 percent, triggering the usual response in any council election. His former Labour colleague and now main rival for the mayoralty, John Tamihere, appeared unable to believe his luck.

"It's most unusual to come out and declare that you're going to run for Mayor, but you're running on a tax-and-spend platform," Tamihere said.

He then launched into an attack on Goff's ability to harass Wellington for more infrastructure money.

"I think Phil's a puppet for central government. I'm the only independent running. You've been fooled once - don't be fooled again," he said.

Any voter who understood the infrastructure funding incentives and wanted to fund growth would know this is an irrelevant argument. Central Government holds all the cards and has no reason to do what Auckland's mayor wants, nor any ability to change the situation to get Auckland to fund the growth. Anything different would require a reworking of how growth pays for growth.

Currently, revenues from council rates don't 'pay' for growth in advance, or even in retrospect. The only way for a council to pay for growth as it happens is with higher debt and higher interest rates that drive rates inflation. Ratepayers won't allow that and, currently, the rules of the centralised Local Government Funding Agency also won't allow it.

The LGFA essentially operates as a wholesale issuer of local government debt to local investors, but to do that it has to maintain a sufficiently high credit rating to keep the de facto central Government guarantee that keeps interest rates low. In essence, that means that Auckland's credit rating sets the base for LGFA bond issues for all councils.

Auckland has a AA credit rating from Standard and Poor's, which is just one notch below New Zealand's sovereign rating of AA+. To keep the AA rating, Auckland Council must not have debt above 270 percent of its income. That's a ratings agency rule. Any move higher would simply see Auckland's credit rating downgraded to AA-, which would in turn increase interest costs for Aucklanders, and all other ratepayers because LGFA uses Auckland for its base rating. Some think it would also trigger a sovereign rating downgrade, but that is debatable.

So essentially, the way our infrastructure funding and debt issuance system is set up, we have allowed the creation of a combined Catch 22 and Doomsday machine. Dealing with Auckland's infrastructure crisis using the current system would require more Auckland Council debt that would simply drive up everyone's interest bill, and would be politically impossible for any Mayor and Council anyway because of the ensuing revolt from voting ratepayers in the leafy suburbs, not to mention other mayors and councillors outraged and their interest bills going up when Auckland's credit rating was downgraded.

The only sustainable solution is for either the central Government to stump up for the infrastructure using its own balance sheet, or for the central Government to share some of the centralised revenue such as GST and income tax so Auckland could borrow more and not breach the 270 percent of revenue limit.

All the rest of the debate is just noise.

See more on this in Tim Murphy's piece on the mayoral debate and Thomas Coughlan's piece on the problem with local government funding.

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