Tuesday, December 20, 2011

Up the river without a paddle

Ko au te awa, ko te awa ko au I am the river, the river is me.

National's one seat victory at New Zealand's latest general election was portrayed by the opposition Labour Party as being all about asset sales. Knowing that the policy was far from popular Labour went all out to focus on the issue rather than the personality of its hapless leader Phil Goff. Indeed it was clear what Labour was against, even if voters were less able to say what exactly it was for. The net result was a drubbing as Labour's supporters stayed home in droves.

While the generally underpaid (and consequently left-leaning) media have focused on the rise of David Shearer to Labour leader the more important news has been John Key's assignment of Ministerial warrants. Not surprisingly Peter Dunne and the Maori Party leaders Pita Sharples and Tariana Turia have returned to their old desks. The ACT newbie John Banks passes "Go" and collects Minister for Regulatory Reform and Small Business, which will, no doubt suit him well. But the strange omission in this story is the appointment of Dr Nick Smith as Minister for the Environment, Minister for Local Government and Minister for Climate Change - arguably the most important roles in this parliamentary term.

Why is that?

Well, not to put too fine a point on it, New Zealand's system of local government and environmental management is fundamentally fucked. Not only that, the reason it is fucked is also tied to the reason New Zealand drifts both economically and in terms of its environmental stewardship.

How so? Because the role of regional government as guardians of the environment is proving to be utterly toothless in the face of district authorities playing open-handed misere when faced with their failure to meet their obligations under the environmental plans laid down by their regional overlords. Local government is not only good at stymying development it is also failing in its role as environmental guardian. A key indicator is the state of our rivers.

A glance at a map shows regional government in New Zealand is basically organised around rivers. The role of regional government under the 1991 Resource Management Act is to basically to manage our rivers. What the report from the Ministry for the Environment shows is that for the entire period of this legislation ('89-07) river water quality has not significantly improved at all.

Regional government also sets policy on other natural resources such as noise, coastal areas, geothermal energy, soil, waste and discharges to the air. The problem is that it is the role of District Councils to meet the demands of these policies, particularly with respect to water pollution while at the same time delivering the services ratepayers demand. Unfortunately what is happening is that District Councils are simply ignoring the constraints placed on them by Regional Council. The result is that one rate-payer funded body has to threaten to take another rate-payer funded body to court. While Horizons has at least raised this spectre others simply protest meekly and roll over because they know the District Council simply hasn't got the money to live up to its obligations.

Some are suggesting that the problem can be solved by kicking it upstairs. That is by setting national standards on water quality. That is, instead of being in breach of Regional plans, District Councils can be in breach of national standards instead. How will this make one iota of difference? The only difference is a moral difference in shaming between regional plans and national standards.

National unified the Auckland local government system from seven city councils and one regional council into a single unitary body in 2010. The main driver for that was Auckland's transport chaos, caused by councils that couldn't coordinate let alone agree. Indeed it seemed the only thing they could ever agree on was that everything was central Government's fault. Now we have a single authority so it can't disagree with itself. However so far all this seems to have achieved is what it's critics said it would: A plan which is mostly for the old Auckland city at the expense of the outlying cities which are experiencing the most growth. Thanks to the self-imposed Metropolitan Urban Limit we also know that New Zealand will continue a policy of deliberate (house price)  inflation generated by its largest city.

While this will increase the rateable value of Auckland land ( further alienating those incapable of affording it) and no doubt allow Auckland to borrow and spend its way into financial disaster (it's track-record for rational planning and development not being particularly stellar) the impact on the rest of the country will be to increase the draw of capital into our largest city. Where once the prospects for growth in Christchurch balanced Auckland's blackhole like draw over the pivot of Wellington's bureacratic expansion, now both are giving way. Land prices in Auckland are once again rising faster than any other capital market return this country can offer.

Meanwhile in provincial and rural New Zealand local councils struggle to meet even their basic commitments. Not blessed with rapidly escalating land values and struggling with needing to balance the demands of vociferous farmers, along with the increasingly impossible demands for environmental protection from largely urbanised consumers, councils are simply giving up. Work doesn't get done, people get depressed and leave before they are found responsible. Local government roading - the largest part of any provincial budget limps along while central government pours most of its funds into Roads Of National Significance which radiate out from Auckland. That isn't to say that Auckland doesn't need to be better roads integrated with Hamilton and Tauranga (at least) but there is a real risk that we are betting the farm on the import city.

What is clear is that local government simply can't afford to do, what it needs to do, with rates money alone. Worse, like Auckland, it isn't incentivised to grow through careful infrastructural investment, it is incentivised to restrict land and boost land prices as a means to improving revenue. In other words not only is the revenue from rates insufficient, it also provides a very poor market signal.

The real solution is simple: Implement a standard capital gains charge, and a capital transfer charge, across all assets, including homes; abandon rates; and hand all income tax over to local government.

Yes it's scary. But think about it. Instead of being in the business of cashing in on selling inflated land assets to the latest Charlie off the boat New Zealand's most important bureaucrats (local government officials) would be incentivised to encourage people to make more income. There is no faster way to make things happen than by giving people the right incentives. Local government would invest to, borrow, and develop to create income, jobs and hope for its people. Instead of dirt-poor local government being the bad guardians of the environment, central government would be the somewhat more hefty guardians of the environment and in a position to make local government pay (because they would have something to pay with). The incentives would line up.

Unfortunately its not within Dr Smith's scope or purview. His role will be to bully local government officials instead. He will stand on his engineering doctorate and tell them that up must be down, because he says it is. And always willing to write reports and strategies that please, local government will write reports that say up is down and down is up for another 15 years. And the quality of New Zealand life and it's river water will remain pretty much the same.

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