Returning GST on rates to councils would cost $1.1b

New analysis from Infometrics, first released to Infometrics clients last week, shows that returning the GST charged on local council rates back to councils would cost the government $1.1b. This amount of money would then be available for local councils to help fund the services and investments being made across the country.

“Various conversations have occurred, and continue to occur, about the local government funding system, but so far there hasn’t been enough analysis to help inform public discussion on the topic,” says Infometrics Chief Executive and Principal Economist Brad Olsen. “Our analysis provides a breakdown of the potential value of GST charged on rates for each council in the country, how it would add to current levels of funding and spending, and the effect on central government finances too.”

Infometrics analysis shows that, in 2022, central government collected around $1.1b in GST from rates. That figure ranged from $317m from Auckland rates, to around $100k on the Chatham Islands. “In total, 29 of the 78 councils across New Zealand would receive more than $10m if GST on rates was returned to councils,” says Mr Olsen.

“Rates should still be charged GST, as councils are providing goods and services for local residents, ratepayers, and others. But given constant discussion about the need to fund local government differently, perhaps GST on rates should be collected and then returned to local councils,” says Mr Olsen.

“Nevertheless, central government finances are under pressure too. Our analysis quantifies that part of the equation too, finding that the GST collected on rates is around 4.2% of GST collected, and was worth 0.9% of total government revenue in 2022,” says Mr Olsen.

Local Government New Zealand President Sam Broughton said that despite council’s ever-increasing responsibilities, local government’s share of overall tax revenue has remained at 2% of GDP for the last 50 years.

“It’s no secret that the funding system for local government is broken. Relying so heavily on rates is unsustainable,” says Sam Broughton.

“We need a range of levers to address the funding and financing challenges in front of us. Returning GST on rates would be an excellent place to start. We’ve also put an accommodation levy, GST sharing on new builds, mineral royalties, and congestion charging on the table,” says Sam Broughton.

The analysis, including a breakdown for every council in New Zealand, can be viewed on the Infometrics website.