Governing on a fixed budget

Increases to council rates (the cost of local government) are capped by the NSW State Government. I don’t fully understand the details of how this works but from what I can infer it basically means that councils can’t increase their income from rates and charges by more than a certain percentage above the previous year. That percentage being proscribed by the NSW Government and typically being a little above inflation. The following document discusses the situation from the perspective of local government:-

http://www.lgsa.org.au/resources/documents/rate_determination_model0703_291105.pdf

An extract from page 3 of the document follows:-

Sections 498, 499, 506 and 507 provide the Minister for Local Government the ability to control the income of NSW Councils. The limit on general rates is set by percentage increase and Councils are notified by advice in a Circular distributed by the Department of Local Government. The policy is described in Circular 01-29 issued by the Department of Local Government on 9 April 2001.

Rate pegging or limiting the growth in revenue from rates has had a long history in New South Wales originally operating in a limited form between 1901 and 1952. It was then reintroduced under the Premiership of The Honourable Neville Wran MLA in 1977. Its introduction was seen as a response to the economic conditions of the time including spiralling cost-push inflation. However, its history of use in New South Wales has no parallel in any other State.

Page 19 includes the full text of the current legislation which I won’t quote here. Whilst one can no doubt argue over the details it seems pretty clear that councils have managed to survive and even thrive in NSW in spite of income restrictions being in place for 83 of the last 108 years.

In this context it is amusing to hear the howls coming from councilors in New Zealand where the New Zealand Local Government Minister (Rodney Hide from the ACT Party) is seeking to install similar constraints. Although in fact the constraints proposed by Rodney Hide are far more democratic because they will involve automatic increases in line with inflation and unlimited increases if approved in a local referendum. I wish New Zealand well in taming the ambitions of local government councilors via a democratic straight jacket.

Of course this is all small beer compared to the possiblity of similar constraints being imposed on central government. Colorado in the USA has similar such income constraits imposed on their state government by constitutional means in what are refered to as TABOR laws. Past form suggests that Rodney Hide and the ACT Party see imposition of this type of straight jacket on the income of the New Zealand national government as part of their end game strategy. If they succeed then I’ll seriously reflect on the merits of moving to New Zealand.

See also:-

http://blog.libertarian.org.au/2009/03/21/kiwis-focus-on-supply-side/

One thought on “Governing on a fixed budget

  1. Hi Terje, good post. A Productivity Commission study into local government revenue raising last year found that the NSW rate pegging system ‘dampened the revenue raised from rates in New South Wales relative to other States.’ However the NSW rate pegging system is far from comprehensive, as it obviously does not include non-rate revenue sources in its net.
    Great that you mentioned TABOR. It certainly appears to be the most comprehensive tax-and-expenditure limitation framework across the US states, but even then there are some issues that may compromise its full effectiveness (for example, surrounding education spending mandates).

    The opponents make two basic claims against TELs and other fiscal rules limiting tax-spending growth. (a) As you suggest in the NZ case with the councillors, TELs will limit governments’ flexibility to tax-and-spend. Obviously, such objections are laughable particularly when the principals (the citizen-voters) demand such limitations on the activities of public sector agents. (b) TELs don’t work in practice. Clearly, it is important to get the details of TELs right, and some governments around the world fare better than others on the detail. Nonetheless, the studies I have come across do show that TELs typically succeed in reducing the growth of the public sector.

    I think that TELs are important, and should be explored in the Australian context with vigour, though I note the point once made by the great Milton Friedman’s that they are not a panacea and much attention must be given by classical liberals/libertarians to cutting total government expenditure.

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