Lead me to the Magic Money Tree

A week ago Stuff ran an article on the theme mothballed community projects symbols of broken Council funding model. It began with the attention grabbing statement “Councils around Wellington are mothballing and delaying major capital projects as they battle to keep a lid on skyrocketing rates rises.”

It detailed major capital projects within each of the Wellington region’s five largest local authorities which councils were deferring as ratepayers were already under pressure from rates rises far higher than have been the norm. Demand for the deferred projects is driven by a mix of circumstances including deferred maintenance/renewal or replacement, the impact of sustained adverse weather events, and rising expectations for public amenities. 

The clear impression from the article is the affected councils believe rates as the primary source of revenue for councils can no longer deliver what is needed. Indeed, by implication, councils are suggesting the ability and indeed the willingness of ratepayers to be the source of additional funding for their councils regardless of the precise mechanism used has reached its limits. One possible alternative option suggested is a share of the GST collected within a council’s district.

This option would face major technical difficulties; there is a far simpler approach which could draw on Australian experience which demonstrates its workability. Government would set aside a percentage of total GST revenue for allocation to individual councils by an independent grants commission applying criteria intended to achieve horizontal equity across the sector.

The argument for more government funding is supported by the president of Local Government New Zealand who is quoted as stating he, and by inference, LGNZ wants more central government funding for local government.

This all looks reasonable. Local government as a creature of statute can only use those revenue sources which government is prepared to make available, either by giving local government the requisite statutory powers or through means such as grant funding. Anyone who has closely followed local government funding issues in recent years will know central government has been aware for a long time that local government lacks the funding sources it requires to deliver the services for which it is responsible as rating by itself simply cannot carry the load. The three waters situation is the classic illustration. While successive governments have berated councils for failing to invest adequately in three waters, they have at the same time declined to give councils the additional funding resources which would be needed and compounded this by pressure, especially from the previous national government, to do what they can to ensure rates do not rise faster than the rate of inflation.

So, should government be the Magic money tree? First, how big would the tree need to be? The problems facing councils in the Wellington region in terms of funding implications are not greatly different from those facing councils elsewhere. The additional funding requirement, if councils were funded so that they could afford both the asset maintenance and upgrades that are all facing, together with new investment (and the operating costs that would generate) is likely to be in the order of billions of dollars a year. Can the very real challenges councils currently face, now magnified by the increasing devastation from adverse weather events and other climate related demands, be managed by an ongoing transfer from central government to local government of additional funding when the need is at that level of magnitude?

Let’s imagine the writer of the Stuff article decided to do a series of similar articles each one dealing with a different but major area of central government expenditure. Start with health. The story would be even more dire. Many billions of dollars of capital expenditure to bring health facilities, especially hospitals and their associated equipment, up to the standards we now expect. More billions would be required to address staffing issues - it’s not just about recruitment, it’s very much about further and major investment in training at all levels. It’s happening at a time when there is a desperate shortage of qualified health workers globally. A recent article in the UK journal the Economist notes that the NHS has almost 11,000 medical posts and 46,000 nursing ones unfilled.

Increasingly, the health labour market is an international one, not purely a domestic one. New Zealand will have to match or possibly exceed terms and conditions in countries such as England, Australia and Canada to ensure confidence in both the quality of our health services, and timeliness of access.

The next article might deal with care of the elderly with current predictions for seeing exponential growth in demand for rest home and related services. This is another big ticket item in terms of investment in both capital and in staff - training, increase in numbers, and increase in salaries.

Now move to education. The continuing decline in our performance relative to our peers in the OECD’s Pisa assessments looks partly like a policy failure, but also flags other and big-ticket expenditure challenges such as teacher training, teacher salaries, adequate support for teaching staff… It’s clear we need what’s almost a total rethink of post secondary education ranging from university to vocational training, a rethink which will require major additional investment.

The article on affordable housing, if it really gets to grips with costs, is going to flag the need for additional billions of dollars to get New Zealand back to the stage at which everyone has access to decent affordable housing.

Then there’s our current headline producer for underinvestment, Waka Kotahi, which is really the proxy for the wider question of provision of roading and transport services generally. State highways attract a lot of attention including questions about maintenance, upkeep and safety but there is a range of other issues arising. One Mayor has recently raised the possibility that councils may need to consider dropping some rural roads from the network which they are prepared to (can afford to) maintain. One problem is the demands placed on many rural roads now far exceed the capacity, especially in terms of vehicle size and weight, which they were designed to sustain. Forestry is a standout problem in this respect and getting worse.

Do we find a Magic money tree to deliver the additional billions roading and transport services will require or do we accept ongoing decline? One commentator has suggested the Magic money tree is in practice an increase in road user charges so that the transport industry meets the total cost it imposes on the roading network. That’s a classic inflation driver; the road transport industry will pass the additional costs on to users and this means potentially significant increases in the cost of food and other consumables. No magic here; just alarm bells for politicians.

Then there is child poverty and the sustainability of the benefit system (not to mention a labour market which, in our major cities, includes significant numbers of employed people who now form a group known as the ‘working poor’ as their salaries are insufficient to meet their reasonable necessary outgoings). More billions if New Zealand is to tackle solving child poverty, and restoring our commitment to ensuring that everyone who lives here has affordable access to an acceptable range of basic services.

So, who needs the Magic money tree more? Almost certainly central government despite continuing assertions that government will be able to maintain services and meet the expectations of the population - statements of that kind simply do not stand up to rigourous analysis. That is not to blame politicians however; over the past few decades New Zealanders have become more and more averse to paying the taxes needed to deliver the services they want. Politicians for the most part are caught between the rock of declining service standards and increasing investment requirements on the one hand and a hard place of electoral resistance on the other.

There is no better illustration of how far we’ve gone down this track than the fact that the next election is likely to produce a coalition between two parties both of whom either explicitly or by inference will be campaigning on reducing taxes - and almost certainly either keeping completely quiet about the implications for the quality of public services, or trotting out the old mantra that all we need to do is improve the efficiency of public services to get the outcomes we want.

We are all of us parties to a collective delusion that somehow we can magically restore the quality of facilities and services we want without having to make any sacrifice to do so. Sadly, the Magic money tree has only ever existed in our collective imaginations.