Comment: For rural councils with smaller populations and towns, already facing big challenges with aging infrastructure and broken balance sheets, the next year or two will demand much of their local representatives, writes Federated Farmers' Nigel Billings.

Late last year Federated Farmers published its annual comparison of council rate rises with the consumer price index. It wasn't pretty for ratepayers.

A footnote pointed out that in the last 20 years local authority rates had risen on a percentage basis by more than alcohol and tobacco prices, which are subject to regular and heavy tax increases to discourage consumption.

Even without the Covid-19 pandemic, more pain was in store for ratepayers. As councils started to roll out their annual budgets just prior to lockdown some were forecasting rates increases above 10 per cent. The reasons on offer included rising construction costs and the need to comply with standards and regulations - on water in particular - imposed by the Crown. The exhaustion of all revenue streams other than rates was a common refrain.

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These increases were already controversial prior to the level 4 lockdown and its drastic economic effect. Since then pressure on councils to keep rate increases to zero has grown, leaving them in the invidious position of wanting to do more for their communities without the means to do so. Councils, as ever, wait in the hope of Crown investment and support.

Nigel Billings. Photo / Supplied
Nigel Billings. Photo / Supplied

Added to that, a cratering on the revenue side of local authority finances is a certainty. Big reductions in income from fees and charges are forecast along with increases in delayed and unpaid rates.

Councils reliant on commercial rates from service industries such as retail and tourism will find the going particularly tough. Scenarios of annualised lost revenue for district councils range up to 25 per cent in a worst case; who or what will make up the difference is a question yet unanswered.

Altogether a mighty difficult decision-making scenario emerges for the local sector. The natural inclination for any government is to spend in a crisis like this, to stimulate local economies and assist communities back to their feet. Local government is, however, largely cut out of the picture on this and is relying on the Crown's agenda and the funds it makes available, such as the enhanced infrastructure funding currently on offer.

Councils are used to jumping through hoops to get support from government, but they must be beyond frustrated with this situation. The limitations of property value rates as their tax base and the inability of the Crown over the years to reform this leaves them largely on the sidelines as far as proactively responding to this crisis.

Ratepayers will demand they perform their core functions efficiently and little else with less cash than ever, and as reality hits home at Treasury, central government money will become increasingly harder to get. Groups such as farmers and retirees, with a great deal of their capital tied up in property, won't be eager to pay more than they already do and will be watching council budgets closely.

Sadly, it is a health crisis with a hefty economic cost that brings the hopelessness of local government's financial situation to light. Bound to a narrow tax base set against property values, local government's role seems largely consigned to service provision, as has been their traditional bailiwick, and recovering from the financial hit they are about to take.

For rural councils with smaller populations and towns, already facing big challenges with aging infrastructure and broken balance sheets, the next year or two will demand much of their local representatives. Many had pinned their hopes on tourism as a way of reviving local economies and invested in destination marketing programs that will need dramatic revision and they will desperately need to help if central government plows ahead with water and climate change reforms as they are likely to do.

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Late last year the Productivity Commission ran a top to toe review of local funding and came to the main conclusion that property value rates are fit for purpose, brushing aside arguments that modern local government needs more than landowners as a revenue base. The Covid-19 pandemic and its aftermath highlights the central problem with the Commission's finding – that rates are out of date and the tax base too narrow and distorted for councils to effectively act as anything more than a core service provider.

There's still time for government to look at implementing some of the more specific recommendations to come from the Commission's review. They found, for example, principled reasons for the Crown to share the cost of regulations it requires councils to implement and share some of the tax revenue from tourism – and that revenue will return - to help with growth.

That would offer some comfort to a local sector that must be feeling like a poor cousin right now.