The Economy Hub: Do regions get a fair share of tax?

Are the regions getting a fair share of the tax take?

New Zealand First leader Winston Peters this week proposed diverting 25 per cent of the government's royalties from water, oil and mineral extraction - and the GST paid by tourists - to the region in which they spent their money.

Peters argued that the regions were generating an large proportion of the country's wealth but weren't getting a fair share in return.

Regional economies are going strong again as commodity prices rebound and the housing boom spreads around the country, said Westpac senior economist Satish Ranchhod.

This week's Westpac-McDermott Miller regional economic confidence survey showed confidence improving while in Auckland and Canterbury it declined.

Nelson, Marlborough and the West Coast were the most optimistic regions. There was also a strong lift in confidence in the Bay of Plenty and the Gisborne and Hawke's Bay regions.

When you break it down to GDP per capita then economic activity in New Zealand was actually pretty evenly spread between rural and urban areas, Ranchhod said.

"And if you look take look at regional funding from the crown its also pretty evenly spread, once you account for population," he said.

"There is a strong argument for infrastructure spending in a areas like Auckland where the population is growing and also to infrastructure spending to support growing industries like tourism but this isn't isolated to the regions, its a nationwide problem."

It was important to define the problem and identify clearly where the infrastructure spending gaps were, said NZIER senior economist Christian Leung.

"You could argue that some local councils are facing a gap when it comes to infrastructure but to isolate that specifically for tourism is much harder."

Then there were other implementation issues like deciding on boundaries, and what gets counted as tourism spend.

"For example, airfares, a lot of tourists go through Auckland , would that mean a lot of that funding get directed to Auckland rather than the regions."

The cyclical nature of New Zealand's economy could also create issues with a regional funding model, Ranchhod said.

"At times when an economies doing well they can get a big boost from GST spending but when that economy turns down for some reason [they] can find themselves in some tough times. That's particularly true for regional economies where a lot of activity is linked to external conditions that its hard to effect with policy."

But Peters' policy idea has an unlikely champion in economic think-tank the NZ Initiative. Typically at odds with Peters on the immigration debate (NZ Initiative argues immigration generates a net economic again) the think -tank has been advocating for reform of the tax system to put more revenue directly into the hands of local government.

A delegation of Initiative members visited Switzerland last month to look at the success of its local tax funding model.

Initiative executive director Oliver Hartwich argues putting more tax revenue in the hands of local communities drives more rational economic decision making.

The Swiss model avoids many of the implementation issues that trying to isolate tourism or industry specific tax by allowing local bodies to tax directly and across the board.

Local councils would then have more responsibility for schools, hospitals and even policing.

Finance Minister Steven Joyce said this week that Peters' proposals would take between $1 to $3 billion out of the crown's accounts.

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