Rates Rises (a perennial favourite)

The Taxpayers Union and the Ratepayers Alliance have done their annual roundup of council rates and, predictably, have complained about the higher-than-inflation council rates rises. Like most people these groups seem to hope that they can get a fabulous basket of public goods for a lower and lower price. Ratepayers do get a chance every year to say what they would like cut from the budget but very few ever offer a suggestion. So, general complaining about the level of rates rises is common but it is rare to hear a suggestion that the community tolerate bumpier roads or longer grass on playing fields in return for lower rates. (To be fair councils make it next to impossible for the public to understand what their choices actually are).

The easiest way to get costs (and possibly rates) down is to stop providing services. Councils would save a fortune if they closed their libraries. Disclaimer: I personally would fight against closing libraries but it is an example of the hard choices that need to be made if you are serious about rates.

The hope of many critics is that councils are somehow wasteful in their expenditure and that they could produce the same basket of goods with less inputs. The most common criticism I hear is that councils are over-staffed. While that's probably true in the same way that all large, complex organisations end up overstaffed, consider that a 5% cut in a council salary bill would only lop off about 0.5% from the rates bill. Odd though that seems, most councils only spend about 20% of their expenditure on staff salaries and the remaining 80% on purchases. While being appropriately staffed is a good discipline it's not really where the money is in territorial authorities.

Council purchases include energy, insurance, office supplies and IT, communications, advertising etc. So, the normal purchases any business would have. But the vast bulk of the purchased items is contracted construction and maintenance of roads, water infrastructure, buildings, parks and reserves, and sports grounds. Most households are familiar with what feels like astronomical rises in energy and insurance costs but what about civil construction costs? Statistics NZ helpfully track input costs like civil construction so it is possible to put together a chart like the following:

For ten years after the reorganisation of local government rates and construction/maintenance costs seem to have moved in line with CPI. Since about 2000 they have diverged significantly. What is probably a council's largest input cost has more than doubled compared to CPI in the last 18 years. Consumer price levels generally set the ratepayers expectations about what the rates rise ought to be but the civil construction price levels dictate what it actually costs a council to provide the infrastructure and related services.

I have no explanation for why this has happened. I note that it has occurred since it became commonplace for councils to divest themselves of their works departments and put all outside work out to tender. And tendering is not as competitive as you might think since public sector tendering rules tend to lock many smaller players out.

Whatever the reason, it's no surprise that people are grumbling about rates. An inquiry into why civil construction prices have risen so significantly would be useful. Until then it's hard choices like close the libraries if you want lower rates.