Covid-19 coronavirus: Councils warned rates freezes could cripple economic recovery

Councils are grappling with the financial response to the Covid-19 pandemic. Photo / File.

Councils across the country are being warned against freezing rates because the move could cripple the economic recovery from Covid-19.

Many local authorities are being forced to make what are essentially emergency budgets for upcoming annual plans.

The pandemic has landed at a time when the consequences of underinvestment in critical infrastructure, such as the three waters and transport, have started to become a real headache for councils.

Just a couple of months ago rates hikes were being proposed to address these issues, now there are growing calls to keep rates down or not increase them at all.

While ratepayers may like the idea of a rates freeze, Infometrics senior economist Brad Olsen has warned it could "cripple economic recovery".

That's because many councils would have to borrow money to achieve a zero per cent rates increase this coming year.

But that comes at a cost and rates would have to be higher the following year to offset that debt.

For example, Wellington City Council's rates freeze option forecasts a rates hike of 17 per cent in the 2021/22 year.

Significant rates increases like that would land just as people were getting back on their feet, Olsen said.

"I think it's counterproductive to be shifting that onto future generations, it's better to take the pain all at once."

Infometrics senior economist Brad Olsen has warned rates freezes could "cripple economic recovery". Photo /Jess Wong.

Olsen said a rates deferment would be a better way to ease the burden on those with cash flow problems because they had lost their jobs or were working reduced hours.

"A deferment is a much better way to make sure there is a larger amount of money that's available to households to hold on to at the moment and, when we do start to hit that recovery phrase, they can start contributing back again."

Just like central government, local government has a key role to play in times of economic downturn.

When the private sector stops spending, local government needs to keep spending to keep the economy going and provide stimulus back into local communities.

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For every road a council builds or service it provides, there are households benefiting financially, allowing that money to be spent in the economy again.

Hutt City Council mayor Campbell Barry and chief executive Jo Miller have also raised concerns about rates in a letter to the Government.

It was sent to Finance Minister Grant Robertson and Local Government Minister Nanaia Mahuta on Tuesday.

"We write to you as we are particularly concerned about the pressure councils face to adopt zero rates increases and rates freezes. In our view, this is likely to cause a range of unintended outcomes and perverse incentives," the letter read.

Barry and Miller warned that aggressively reducing rates and cutting expenditure would incentivise councils to reduce activity and defer important work across infrastructure challenges like the three waters, transport and housing.

They also expressed concern projects which would have a stimulus effect and support economic recovery, would also be deferred.

The Taxpayers' Union has launched a petition for a nationwide rates freeze in response to the Covid-19 pandemic, saying rates hikes at a time of economic turmoil would increase financial stress on households and undermine the Government's relief strategy.

"Households and businesses are cutting costs and it is only fair that councils do the same — we must all cut our cloth to fit the new economic reality."

The Property Council is also pushing for councils to freeze or minimise rates increases to alleviate pressure on ratepayers over the next few months.

It has written to all local authorities, recommending councils postpone proposed rate increases until the 2021-31 Long Term Plan and keep rates in line with the rate of inflation for 2020/21.

In advice issued to councils last week, the Covid-19 Local Government Response Unit said it was aware of the pressure to immediately respond to the pandemic with a zero rates increase.

"However, councils are urged to carefully consider any major financial decisions to avoid situations that could hinder response and future recovery efforts."

• Covid19.govt.nz: The Government's official Covid-19 advisory website

It said councils had some room to carefully consider their actions with central government investing heavily to reduce the financial impact on individuals and businesses.

"It is important that councils are thinking about the need to support local economic activity with recognising the financial stress and uncertainty that ratepayers are facing along with the need to invest in the essential infrastructure and services needed for health and safety in both the short and long term."