The double tax hitting ratepayers in the pocket, another rate cut looms and concrete data shows hard times roll on – Inside Economics

Auckland could benefit from the Swiss model of tax sharing.

Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up for the weekly newsletter, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.

Should the Government share tax revenue with councils?

Q: The Government is quick to blame local government for failing to manage its costs and responsibilities.

Why is it that local bodies do not receive a share of the GST spent in their area?

Local government spends a lot of money providing the services to enable businesses to generate tax dollars.

Why not return a portion of this to local government? At the very least, removing a tax on a tax by not charging GST on rates would help councils to keep rates down.

Is there an explanation as to why this can’t or won’t happen?

Steve Browne

A: Thanks Steve, a couple of good questions there.

I wrote on Sunday about the dire state of Auckland’s economy. Perhaps your suggestion would offer a way forward.

The idea of letting councils have a share of GST has been pitched before. In particular, the New Zealand Initiative (the economic think tank) has been a champion of the idea for several years.

The New Zealand Initiative is a strong advocate for more devolved government, giving local councils more say in decision-making and funding them to do it.

It has even highlighted the merits of the Swiss model of tax sharing.

Switzerland operates as a confederation with three levels of government – federal, cantonal (state), and communal (local).

The Government, the federal level, collects income and corporate taxes but is constitutionally required to share a portion with cantons and communes.

Currently, cantons receive about 17% of direct federal tax revenue and they often pass some of this down to their communes.

In a research paper published in 2019, the New Zealand Initiative’s Bryce Wilkinson and Patrick Carvalho argued that local councils bear most of the new development costs, while tax revenue windfalls from the developments flow directly to central government in the form of increased income and GST collections.

They advocate for central government to pay local councils for every new house completed within a specified period.

“The payments could be benchmarked on the goods and services tax (GST) charged on residential building (excluding land value), or be a fixed sum,” they said.

“Under the GST model, if each of the 9400 residential building consents issued in Auckland in 2015 resulted in construction, and each home had a build value of $200,000, Auckland ... Council would have netted $282 million.”

The idea has gained some serious traction with the coalition Government, which has agreed in theory to look into some kind of GST sharing.

As to your other question about paying GST on rates, well, it’s a relevant one, but perhaps not for the reason you might have hoped.

From what I can see, any suggestion that the Government would give up the GST on rates would likely see it returned to the council rather than to ratepayers directly.

But the Government probably won’t even go that far, given that it is desperate for revenue at the moment.

It looks more like it will limit things to considering returning some of the tax collected on new residential builds to help with infrastructure costs.

So, why not?

I guess if I have a reservation about devolving power and tax revenue to local councils, it is that they haven’t exactly covered themselves in glory when it comes to financial management in the past few decades.

I’ve never had a great deal of faith in central Government to get things done, and if anything, I’m probably more sceptical about the standard of governance at a local level.

Smaller councils in particular are vulnerable to the vagaries of low levels of participation in democracy (that’s a nice way to say they sometimes elect weirdos and nut jobs).

What happens if we divert tax funding to local councils for infrastructure, but they vote for an unrealistic blue-sky project that bankrupts them?

I suspect the Government will still be expected to come to the rescue.

I worry that New Zealand doesn’t have the level of sophistication in local body politics that Switzerland does.

These fears may be unfounded. I’m pretty sure the New Zealand Initiative would argue that the low standard of local government simply reflects the low level of influence it has in the grand scheme of things.

Perhaps if we funded local government to do more of our governing, the standard would rise.

It’s probably a moot point, though. The answer to your question as to why this idea isn’t taken more seriously is probably simply down to politics.

If we can trust central government politicians, from all ends of the spectrum, on one thing, it’s that they are not going to be keen to legislate away their own power.

Reserve Bank to deliver verdict on economic recovery

Next Wednesday, we’ll get the first full Monetary Policy Statement from the Reserve Bank (RBNZ) we’ve had since May.

In July – when the RBNZ hit pause on cuts – it was just the shorter Monetary Policy Review, which doesn’t include a full set of forecasts.

The market, and almost all the local economists, are picking that we’ll get a 25-basis-point rate cut, taking the Official Cash Rate (OCR) to 3%.

But a lot has changed since May, so most of the interest is likely to be in the new forecast rate track that the RBNZ produces.

Evidence that the economic recovery stalled in the second quarter has been pretty strong. We’ve seen the BNZ/BusinessNZ Performance of Manufacturing and Performance of Services Index slip back into negative (contractionary) territory.

Employment growth has stalled, particularly in the big cities, where unemployment is running much higher than the national average.

BNZ head of research Stephen Toplis has taken an early look at what we might expect from the RBNZ next week.

“Our expectation is that the bank will print a rate track not dissimilar to what it printed back in May, namely with a decent chance of a cut to 2.75%,” Toplis said.

“We can see the argument for taking a more cautious approach, especially if the committee feels it does not want to push an incoming new governor into a corner.”

“Equally, an admission that even more work than a 2.75% low might be required is plausible. While 2.75% is our central forecast for the low, we think the odds of 2.5% are marginally higher than a 3% stall.”

But Westpac chief economist Kelly Eckhold took a slightly more upbeat tone in his latest Economic Overview.

Eckhold is still forecasting the RBNZ to pause again, after next Wednesday’s cut, leaving the OCR at 3% for an extended period.

“The near-term economic outlook has weakened slightly since May,” he said.

“Uncertainty associated with the trade war, ongoing cost-of-living pressures and the still slow pass-through of past OCR cuts into household budgets have been weighing on activity.”

But so far, the tariff damage to the global economy had not been as bad as expected.

And while the pass-through of interest rate reductions had been gradual to date, they would provide “a sizeable boost to households’ disposable incomes and demand more generally over the next six to 12 months”.

Here’s hoping ...

Hard times

More evidence of the big slowdown in the second quarter came through on Tuesday with the release of the latest concrete production statistics.

Concrete production is a pretty good barometer of the state of the construction sector, which we know has been struggling in the past few months.

The news from Stats NZ was not good.

In the June 2025 quarter, the actual volume of ready-mixed concrete produced was 891,909 cubic metres, down 10% compared with the June 2024 quarter.

That is a big fall. While the completion of big projects such as Auckland’s City Rail Link might have compounded the fall, it still likely represents a big slowdown in home building and commercial construction.

If you want to visualise the concrete deficit (about 99,000 cubic metres), artificial intelligence (AI) tells me it would be enough to cover Eden Park’s main rugby field to a depth of 14m. I’m not sure why Eden Park ... perhaps the AI thinks we should build a new waterfront stadium.

But anyway, it’s a lot of concrete to not get poured in just one quarter.

Annual ready-mixed concrete volumes continued the downward trend which has persisted since volumes peaked at 4.78 million cubic metres in September 2022. Annual volumes of 3.70 million cubic metres in June were 23% below that peak, and the lowest since September 2014.

Infometrics economist Matthew Allman noted that annual ready-mixed concrete volumes had continued on the downward trend that has persisted since volumes peaked at 4.78 million cubic metres in September 2022.

Annual volumes of 3.70 million cubic metres in June were now 23% below that peak and the lowest since September 2014.

The near-term outlook for construction activity remains soft, which will likely prevent a material change in the trend in concrete volumes over the next few quarters, Allman said.

Infrastructure activity provides some upside risk for concrete volumes, with the Government focused on progressing major projects heading into the 2026 election. Activity is more likely to show through in 2026 as there currently seems to be a mismatch between intentions and activity in the infrastructure sector.

More clues to come

We’ll see other high-frequency data on Friday, with new monthly numbers for electronic card spending, immigration and tourism (short-term visitors).

All of these will be highly relevant to Auckland’s economic recovery, given it is largely underpinned by population growth (driving the property sector) and the service sector.

FYI, “high frequency” just means the regular monthly numbers we get for second-tier economic data as opposed to the quarterly numbers we get for the biggies like GDP, inflation and unemployment.

All of this stuff will be relevant to the Reserve Bank as it tries to get a handle on the extent of the slowdown.

It will be fed into the RBNZ Nowcast, which is its version of the AI-driven, real-time GDP forecaster that has become popular (Massey University and Westpac have their own version).

The Nowcast model has New Zealand’s economy contracting again from mid to late June and it has been flatlining at about negative 0.3% ever since.

It’s not clear how much weight the RBNZ puts on this model, but at face value, it will only add to the case for further rate cuts this year.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to hisweekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.