The Productivity Commission will look at ways local government can raise funds without having to turn to ratepayers to pay the bills.
"Rates are rising faster than incomes so simply raising rates is not the solution," Local Government Minister Nanaia Mahuta said today.
"Local government is facing increasing costs for things like three waters, roading, housing, and tourism infrastructure as well as adapting to climate change. And some of the councils facing the biggest cost increases also have shrinking rating bases.
"The Government is asking the Productivity Commission to look at how local government can fund its activities most effectively and fairly," Mahuta said.
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Regional fuel taxes and tourist levies have been touted as ways councils could help pay for infrastructure and services. Public-private partnerships on big infrastructure projects could also be a solution.
Mahuta's Local Government (Community Well-being) Amendment Bill, which would give councils back the ability to collect contributions from developers to cover increased demand for community facilities such as libraries, sports grounds and swimming pools, had its first reading Parliament last month.
Terms of reference for the Productivity Commission inquiry are still being finalised. The inquiry is expected to start in August, and consult with local government and infrastructure sectors, with a final report due mid next year.