The Rates Dilemma – why a zero rates increase may not be the answer
The impact of Covid-19 on New Zealand’s economy has been swift and devastating. In a matter of weeks, thousands of jobs across the country have been lost and more losses are expected to come.
Businesses of all shapes and sizes in Waipā are struggling financially and so are residents. While the full consequences of Covid-19 are yet to be realised one thing is very clear, over the next 18 months, Waipā’s economy will be significantly impacted.
It would be understandable that many are calling for zero rates increases. But is short-term relief the answer? It’s more complex than you may think.
Zero-rates increase not the answer.
The Covid-19 crisis struck right as councils across the country were making announcements on rates for the next financial year.
In February, Waipā District Council proposed a district average 4.2 per cent increase for 2020/21, which Council is currently consulting on with residents.
Council’s forecast increase was similar to many other councils, driven largely by capital works programmes in their plans - critical to cater for rapidly growing communities.
Waipā District Council mayor Jim Mylchreest said major projects such as the three waters programme, Cambridge growth cells and Cambridge Pool were some of the notable projects included in the annual plan.
“A zero rates increase at the very least would involve stripping away or pushing back the majority of these much needed projects, which is a massive risk with ageing infrastructure.
“To achieve a zero rates increase in the current climate however, much more than just major projects would need to be stripped from the budget because of loss in revenue.”
A looming financial deficit.
Only half of Council’s revenue comes from rates. The rest is made up of development contributions, fees and charges and funding from Government agencies.
With future growth being curtailed and a drop in revenue from fees and charges, Council has already seen a significant decrease in the remaining 50 per cent of its revenue stream.
In the draft 2020/21 Annual Plan, around $114 million was the cost forecast for Council to deliver essential services including water services, recycling, roading infrastructure and parks and reserves maintenance, to Waipā residents.
Of that cost, around $29 million was to be spent on community services and facilities, $22 million on roads and footpaths, $13 million on water treatment and supply and $11 million on waste water treatment and disposal.
“To achieve a zero rates increase, we would have to look at making reductions in levels of service. This could mean poorer quality roads and footpaths, infrastructure that is less resilient because it is not being renewed, more leaves in gutters, less-frequent recycling collections, and fewer open spaces for the community to enjoy, just as a few examples.”
What are the options?
Council could continue with its forecast rate increase which would better enable its capital works programme to go ahead and essential services to continue to operate at a similar level.
Or it could reduce the rates increase, which together with reduced fees and charges income would push some projects back and force Council to cut its operating costs. This would include reducing the amount it spends on maintaining facilities such as its town halls, parks, reserves and playgrounds.
That would relieve the pressure for the coming year, but likely delay works in following years where residents would see the impacts on rates again.
Alternatively Council could borrow money. However, Council must keep the proportion of borrowing in line with its income so there is a cap, and it could only borrow to build things not to cover its running costs.
Any money borrowed must also be repaid and would inevitably result in a rates increase to do just that.
A balancing act.
When economies are in recession, both Government and Local Government spending on capital programmes are major drivers of recovery. They create jobs, necessary infrastructure for growth and future revenue.
Deciding which projects should proceed and which should be put on hold is a balancing act.
“We need to look at which projects are absolutely necessary, such as waters infrastructure, and which could be delayed without causing future hardship for the district.
“We also need to keep in mind which projects would yield the highest number of jobs and provide the greatest boost to the economy,” Mylchreest said.
“It is our job to think about the current needs of the community while also catering for economic recovery. Boosting the economy would get us out of a recession faster but we are also very aware that families may not be able to pay their rates.”
The Government’s call for ‘shovel-ready’ projects to stimulate jobs and economic recovery will help.
Projects such as the waters strategy, Te Ara Wai, Southern Links, the expressway, Cambridge growth cells and a possible sub-regional waste water treatment plant to service Cambridge are all examples of projects that could qualify.
In a joint application between Hamilton City Council, Waikato District Council, Waikato Regional Council and Waipā District Council, more than 23 shovel-ready projects were pitched to the Government plus a further nine packages of work focusing on medium to longer-term opportunities.
But not all of those projects will get funding.
Where to from here.
Council is reviewing its revenue, operational expenditure, capital expenditure and its annual budget. Submissions on the draft annual plan will be considered by Council’s Strategic Planning and Policy committee on May 26 before going to Council for adoption on 30 June, 2020.
“Priority will be afforded to the delivery of essential services and the maintenance and operation of current infrastructure - it’s about looking after what we have got,” Mylchreest said.
“We can’t be short sighted in our decision making. We need to adopt a long term approach, and think about what is going to best serve our communities now and in future. It would be a major mistake to rush and then find ourselves in bigger trouble down the line.”
For updates on Council decisions head to www.waipadc.govt.nz.