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On the path to localism

Published in The National Business Review (Auckland), 20 July 2018

This week saw the beginning of not one but two separate studies into local government.

Speaking at Local Government New Zealand’s annual conference in Christchurch, Finance Minister Grant Robertson announced a Productivity Commission inquiry into local government funding and finance. At the same conference, LGNZ and my own organisation, The New Zealand Initiative, launched ‘Project Localism’ which proposes a radical recalibration of power between central and local government.

Perhaps it was just coincidental that both these studies were announced within minutes of each other. But there is a deeper symbolism in this: The time is ripe for an overhaul of local government arrangements in New Zealand.

Readers of this column will know that decentralisation, subsidiarity and localism are issues close to my heart. From the moment we formed the Initiative in 2012, I have been arguing the case against New Zealand’s dominant centralism.

I pointed out that the concentration of power at the centre has weakened local democracy, reduced incentives for economic growth and contributed to many of our most pressing policy challenges, especially around affordable housing. To overcome it, I have recommended strengthening and incentivising councils.

The initial response to these ideas was disbelief. “How could anyone seriously argue to give councils more power and money?”, people asked. “Doesn’t he know how incompetent and wasteful our councils are?”

I lost count how often I heard questions like these. And I know how much I got on politicians’, business leaders’ and journalists’ nerves by insisting that the perceived inadequacy of local government was the result of the stupid set-up of local government in New Zealand.

And so I explained again and again that local government, like any other institution, is driven by incentives. And unfortunately, the incentives facing local government do not make it perform well.

Briefly, the problem is this: New economic activity often requires local government to support it with new infrastructure, which is costly. Local government must also deal with NIMBY resistance, which is a political cost. However, the bulk of new tax revenue from increased economic activity does not go to councils but to central government.

Thus we have two very different tiers of government. One that finances economic growth, and the other one that benefits from it. Is it any wonder that central and local government do not see eye to eye? And should anyone be surprised that local government is not the greatest promoter of new economic activity?

To overcome this sad state of affairs, we introduced a new word into New Zealand’s political debate: localism.

Localism means the realignment of incentives and powers between central and local government. The basic idea is simple: Both tiers of government should participate in tax revenue increases from new economic activity. In this way, they will be aligned and work together toward growth.

Over the past years, we have presented many ways in which this simple idea could be operationalised. We suggested, for example, that councils should keep the GST revenue from new housing developments.

Imagine how such a measure would change the dynamics of the Auckland housing market. If Auckland Council had access to the GST from development, it would be better placed to finance residential infrastructure. It could also better sell the benefits of development to the resident population. And it would find it much more attractive to consent to new housing projects – and consent fast.

Last year, the Initiative also organised a business delegation visit to Switzerland. It demonstrated to a large group of business people how Switzerland’s localist set-up has created a growth-friendly business environment in that country. This trip has had an impact on the discussion of localism in business circles and beyond.

The idea of localism has changed the debate on local government. It is no longer a discussion about tweaking a broken system. Instead, it is now a conversation on how to move toward a radically different way of organising and delivering government in New Zealand.

Both the Productivity Commission inquiry and the joint LGNZ/Initiative project will examine what a new balance between central and local government could look like. And, with localism being an increasingly understood and more popular concept, we can expect a lively debate over the coming months.

Some commentators, however, still must learn to leave their old habits behind. When LGNZ’s president, Dunedin Mayor Dave Cull, was interviewed about the inquiry on talkback radio, the question he was asked was “Why do you need more money?” Well, that emphatically is not the issue. Localism is not about channelling of extra money to councils. It is all about having the right set of incentives so local government will behave more dynamically and more entrepreneurially.

Having campaigned for localism over the past six years, I am excited about the shift politics toward it. But now I want to see this great idea filled with life and practical recommendations. And I look forward to developing a new central-local balance that will serve New Zealand much better than the flawed system we have now. Keeping the status quo is not an option.

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