Is local government financially prudent?
The New Zealand Government contends that local government lacks financial prudence. A study by the New Zealand Institute of Economic Research (NZIER) crystallized the Government’s argument in the following key points:
- rates have increased much faster than general inflation
- local government labour costs have risen rapidly
- local government expenditure has risen as a proportion of the economy
- local government capital expenditure has risen rapidly
- local government debt has quadrupled over the past decade and is projected to rise further.
Western Australian local governments will find most of these arguments totally familiar.
However, NZIER found that while some of the trends were real, they did not constitute evidence of fiscal irresponsibility. They found that while rates have risen, they “remain contained relative to the rating base – the value of property – and some measures of income.” Furthermore they found that “capital expenditure, debt and interest cover are all at prudent levels”.
Yes but a problem was needed for the solution
In the grand tradition of policy-based evidence making, the NZ Government was able to combine individual examples of poor financial management with the trend data to paint a picture of a sector that was spiraling out of control.
In response, Local Government Minister Chris Tremain devised new financial regulations to “tighten financial reporting, lift transparency and encourage excellence in local government”.
The new regulations require Councils to report against a set of benchmarks around three key elements of financial prudence:
- Affordability: measured through rates and debt information
- Sustainability: measured through a balanced budget, expenditure on essential services, and debt servicing
- Predictability: measured through cash flow from operations and debt control information
And if you can’t beat ’em, join ’em
The new regulations have been welcomed by Local Government New Zealand. The media statement by the President indicated that the new measures would help local government demonstrate its prudent financial stewardship.
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