Wed Jul 17

The government wants to give local bodies more power – that should include the power to tax

Written by Jonathan Barrett, Associate Professor in Commercial Law and Taxation, Te Herenga Waka — Victoria University of Wellington

Where should real political power and authority reside in New Zealand? Since last year’s election, that’s been the central question behind a number of significant policy reversals.

Water infrastructure, health, tertiary education and tax have all been affected by the political and philosophical tensions between competing models of local and central decision making.

Put simply, the previous Labour government tended to favour centralising authority, while the current National-led coalition is more sympathetic to forms of “localism”, or delegation of power from central to local government.

Whether one agrees with one side or the other on any specific issue – one main polytechnic provider or numerous local institutions, say – both administrations were trying to place decision making at what they saw as an appropriate level.

What is lacking, however, is agreement on some guiding principles to help choose the best solutions for different challenges. History and international experience can show a way forward.

Money must follow responsibility

Local Government New Zealand, which represents the country’s councils, has long proposed localism. In fact, it is hosting a conference – Superlocal24: bringing localism to life ^[1] – next month.

The New Zealand Initiative think-tank agrees, and in 2017 hosted Christopher Luxon – before he entered politics – on a visit to Switzerland ^[2] to look at whether the Swiss model of cantons (confederated states) could provide a template for local government in New Zealand.

But the canton system has developed from the 13th century and arose from language and cultural differences, as well as accidents of geography and history. It cannot easily be transplanted.

Nevertheless, New Zealand shares its unitary (non-federal) system with more than 85% of United Nations member countries. Many have far greater power distributions, including taxing rights, at local levels.

Denmark (which Luxon has also visited) is one such country, and provides a more plausible model of power sharing between central and local government. Unlike Switzerland, Denmark’s move to more localised governance started in the 1970s with an aim of delivering better quality public services.

Sub-national forms of government now raise about 36% of total revenues ^[3]. And while devolution is not guaranteed by Denmark’s 1849 constitution, current arrangements seem well-established and resistant to radical change. Significantly, the power to tax has followed this devolution of decision-making responsibilities.

Danish capital Copenhagen: sub-national government in Denmark raises 36% of the nation’s total tax revenue. Getty Images

Risks of localism

The notion that decisions should be made at the most appropriate level of government is known as “subsidiarity” and is a founding principle of the European Union.

Italy’s Lombardy region provides the best-known example ^[4], with decisions commonly made at the lowest level of government and then shared with non-governmental organisations, the church and families.

(This form of subsidiarity is perhaps too closely aligned with Catholic doctrine to have universal appeal.)

By contrast, UK governments – including Northern Ireland, Scotland and Wales – are highly centralised. But the previous Conservative government entered into devolution arrangements with some major English regions.

Taxing powers were not passed down, however. Areas such as metropolitan Manchester, which were dependent on government grants, needed to implement austerity measures handed down from central government.

Grants to local authorities reduced by 40% in real terms ^[5] between 2010 and 2020, from £46.5 billion to £28 billion in today’s prices.

In 2024, Birmingham, the UK’s second largest city, declared itself bankrupt and has resorted to penny-pinching initiatives ^[6] such as two-weekly rubbish collection and dimming street lights.

Policy reversals

In New Zealand, political decisions are invariably made at national, regional or local government levels. But this has seen power shift between them as central governments have come and gone.

The establishment of 21 district health boards in 2001, for example, was an attempt to create appropriately sized health organisations to match population needs rather than simply reflect established council regions.

But the previous Labour-led government abolished these because it thought standardised services could be better provided through national health bodies Te Whatu Ora and Te Aka Whai Ora. The current government is now undoing that.

The Three Waters scheme was also based on perceptions of how regions and districts could be best served. It would have created four water services providers rather than the current 67. It too has been abandoned.

Replacement models that give local authorities more autonomy are now being devised. But localism isn’t necessarily the catch-all solution. The level of government at which decisions should be made will differ and needs proper consideration.

5 guiding principles

Rather than seeing these issues as binary and in need of either local or central solutions, New Zealand needs a more flexible approach. For want of a better word, we need “optimalism” – in other words, the optimal solution to suit the circumstances. This would be based on five broad principles:

1. Money must follow responsibilities: local government only raises about 4% of New Zealand’s tax revenue, hardly enough to fund greater responsibilities.

2. One size doesn’t fit all: delegating more decision-making powers, including taxing rights, to major metropolitan areas may be sensible, but it might not work for every territorial local authority.

3. It should be depoliticised: without cross-party agreement on funding allocation, tax sharing or regional taxes, localism in practice could represent a poisoned chalice for local government.

4. Some decisions require higher authority: as well as shifting some powers to a local level, some decisions may be better made at a regional, national or even trans-Tasman level.

5. The Crown must negotiate with Māori: optimal levels of decision-making may give greater autonomy to larger iwi (tribes) but could further marginalise smaller ones without central government support.