Infometrics chief economist Brad Olsen says it's "ironic" that the government has no proposal to cap taxes. Photo: 123RF
A leading economist says it's "galling" to see government planning a rates cap for councils when it is imposing no restraints on the taxes it levies.
The government announced earlier this month that it planned to introduce a variable target band for council rate increases, probably starting with minimum increases of 2 percent and maximum of 4 percent from 2027.
But Infometrics chief economist Brad Olsen said there was a certain irony about the cap.
"It seems like it's good enough for the government to cap rates for local government, but it's not willing to do the same to itself.
"There's no proposal for a tax cap that's been put forward, which seems highly ironic, given that the government is still spending more than it's earning for the next five years or so on most forecasts.
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"That suggests that if, as it's been put out, that the idea of the rates cap is to limit levels of spending to more reasonable levels, then government should take a leaf out of its own book and look in the mirror a bit more."
Infometrics calculated the average tax bill of a household with two median income earners, earning $71,760 per person before tax, not including any Working for Families credits.
Olsen said they would pay $39,080 to the government, made up about $13,750 in income tax each, and $11,600 in GST. They might pay another $3800 a year in local government rates.
He said the cost that local governments had been facing were driven by increases in spending on things like bitumen, concrete and structural steel.
"From 2019 till now, you've seen a 40-plus percent increase in the cost of building water infrastructure and running water infrastructure and constructing a bridge… And all of that's now got to be funded.
"I worry that sometimes the points that are being made around the rates capping policy have been oversimplified, particularly given that there's no recognition in the current policy for any of the differences in how different councils are currently situated. Some councils have had considerable and still have considerable growth that they're going through, yet they're only going to be able to change rates between inflation and headline national GDP."
He said Wellington was an example of an area where there had not been the right level of investment into various infrastructure over time.
"For all of the challenges that are there around rates affordability, and I very much hear them every day, that's also often what households want. They want the services that are being provided by the councils. And the challenge now with the rates capping policy likely to come into play is going to be that communities will not get what they got before.
"Something's got to give, something will not be funded. And I think if there's one silver lining in my mind of the rates capping policy, it will force the community to be very clear over what it's happy to give up and it will require that there is no additions that come in without other changes.
And that means that from a council point of view, someone's going to have to front up to some members of the community and say, you used to get something, now you don't. What is that? Is that community halls that now don't get funded? Is it alcohol licences that don't get supported? Do dog registrations go on hold for a year because there's no money? I mean, those are potentially some of the trade-offs that have to be made."
He said part of the solution could be more willingness from the government to fund the work that it requires of councils but provides no money for, or paying rates on things it owns around the country to keep money flowing to councils.
"Because at the moment, you've got central government over time has continued to push more and more on to local government. There's never any money that comes from central government to do much of that work.
"All of the various changes and rules and regulations that come through over time, they are expected to be paid for locally by the community.
Rehette Stoltz Photo: RNZ / Angus Dreaver
"There's a huge amount of money, time and effort that goes into reviewing council budgets every three years. The community has to be consulted. It has to go through all this detail. We don't do a lick of that when it comes to central government funding, and it takes a whole heap more money out of us every year.
So, I find it a little bit hard to stomach and understand the sort of restrictions that are being put on rates here without any sort of constraint on how much taxes continue to take out from people. It's a whole lot more than rates ever will."
Local Government New Zealand said the move away from a rates cap to a rates band would offer more flexibility but the band will restrict investment in core services like roads, bridges and public transport.
"We will be working through the policy detail and with our members - and taking that feedback to the government."
Vice-president Rehette Stoltz said councils like Gisborne District were rebuilding their infrastructure following multiple severe weather events, so the policy needed to recognise different, specific needs.
"Keeping rates low is a priority for all elected members. Our community's expectation is also that we deliver the critical infrastructure and services they rely on in a timely way," Stoltz said.
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