The benefits of going local

Published in The New Zealand Herald (Auckland), 30 October 2015 (with Khyaati Acharya)

auckland“The way this country is run is broken”, the cabinet minister said in his speech. “It is high time we faced the facts. People feel remote from the decisions that affect them. Cities are held back. There is no incentive to promote local enterprise. It’s time we fixed it.”

If only these words had been spoken in a New Zealand context. However, they were uttered by George Osborne, the British Chancellor of the Exchequer. Osborne recently unveiled his localism agenda to the Tory party’s conference in Manchester.

Britain’s system of government is highly centralised. So is New Zealand’s.

Local governments, both here and in the UK, have little flexibility to control their own affairs. Osborne, in favour of greater localism, is promoting a radical departure from this.

Greater devolution of decision-making from central to local government is a bold step — and New Zealand should consider doing the same.

Imagine if New Zealand’s regions had the ability to create specific solutions for their specific needs. Imagine if Auckland Council were able set itself up as a special economic zone for testing tailored policy changes that could help solve its unique problems.

It is a fresh and innovative suggestion for routing around policy reforms that are otherwise trapped in a political impasse.

And it is something The New Zealand Initiative has just proposed in our new report In the Zone: Creating a toolbox for regional prosperity.

Devolution and subsidiarity are a common sense approach to policy-making. Though regional diversity is well-recognised, the Beehive is still too focused on a one-size-fits-all policy for the whole country. But the result is lukewarm policy, which may suit the needs of a few regions, while avoiding complaints from any of them. It is a system where decision-making is far removed from those most affected.

How effective can policy be if it is meant to cater for the needs of both rural and urban regions, of both growing and shrinking towns, and of both services hubs and primary sector centres?

The opportunities for an Auckland-wide special economic zone are huge. A good start could involve piloting policy reforms aimed at tackling Auckland’s housing market. Restricting them to the Auckland region provides an efficient and much less risky solution to a major problem.

The Resource Management Act (RMA) is often cited as major obstacle to housing affordability. It is also a piece of national legislation that is political dynamite. The Government is too risk-averse to touch it in a comprehensive way, save for superficial tinkering. It currently does not have a majority for any radical reforms either.

But red tape and poor policy play major roles in determining house prices. Regulation makes it difficult to release land for development. It also dictates what you can and cannot build on a particular pieces of land.

An Auckland-wide special economic zone could test-bed changes to the RMA. These changes could involve clarifying the importance of housing and urban environments. Auckland could pilot RMA-reforms aimed at releasing more land for building more residential properties.

Another suggestion is to experiment with particular changes to the Overseas Investment Act (OIA). In their recent report Using Land for Housing, the Productivity Commission argues the Act is far too costly and time-consuming for foreign investors who want to buy land for building residential properties.

Why not trial a more liberal reform of the OIA within Auckland? Reform the Act to make it easier for foreign investors to purchase land specifically for the purposes of building more houses. It makes no sense to put investors through a regulatory nightmare when they are trying to ease some of the pressure in the housing market.

But it is not just the lack of regional-specific policy that is a problem. Giving more responsibility to local councils and encouraging them to make smart decisions also requires better incentives. Ensuring a special economic zone in Auckland is successful needs much better co-ordination between policy objectives and fiscal incentives.

One way of doing this is to improve revenue-sharing between local councils and central government. This way, if you grow your region’s economy, you will also grow your revenue.

For example, Auckland council might receive a Housing Encouragement Grant for each new house built within the area. This would encourage more residential construction. It would also entice Auckland Council to reduce consenting time and other bureaucratic delays.

The grants would be a straightforward calculation, based on the GST generated by housing construction and sale.

Local government might also get a share of increased revenue created by general extra growth. Ensuring that Auckland Council receives some stake in growth more strongly encourages Auckland to pursue pro-growth policies.

For example, Auckland contributed $21.7 billion in taxes to central government in 2014. Suppose Auckland experienced an additional 1 per cent growth in economic activity, leading to an increased tax-take worth $217 million. Shared equally between local and central government, $108 million may be small relative to the national budget, but it is a considerable figure for Auckland Council.

This extra revenue could be put towards providing more infrastructure for residential developments. It might also encourage Auckland Council to zone more appropriate areas of residential, retail and industrial space.

These are, of course, just a few suggestions. But the possibilities are huge. Auckland could benefit greatly from being set up as a special economic zone for piloting policy changes. Devolving more power to our local councils and giving them a greater say in setting the right solutions to their problems, could unleash major growth. Devolving more money to local councils gives them a real incentive to make smarter decisions.

It is high time we brought policy-making closer to local communities. Let’s follow the British example and end the love affair with centralised control. Let’s allow local councils to take charge of their own matters.

Abraham Lincoln once said that government should be “of the people, by the people, for the people”. It should also be much closer to the people.