Local councils in New Zealand are facing a significant fiscal mismatch where the immediate costs of population growth fall on ratepayers, whereas the financial benefits flow to central government in Wellington.
Upgrading trunk infrastructure—including arterial pipes, roads, and sewage capacity—requires immediate funding. However, the rates payments from new housing arrive slowly, leaving a gap in funding for essential services like schools and stormwater management.
Meanwhile, the real-time revenues generated by growth, such as company tax, PAYE, and GST on new spending, go directly to the central government. This creates a system where Wellington captures the short-term gains while councils and ratepayers bear the short-term costs.
The Case for GST-Sharing
To address this, the New Zealand Initiative’s 2013 report, Free to Build, proposed a Housing Encouragement Grant. This would provide councils with a direct fiscal reward benchmarked to the estimated GST on each new home.
As an example, under 2013 rates, a $400,000 house-and-land package would have resulted in a $60,000 payment to the consenting council. Proponents argue that a simple, formula-based system is harder to game and provides a clear incentive for councils to approve development.
This approach is inspired by the Swiss model, where local growth leads to local revenue because cantons and communes levy their own income taxes. While New Zealand cannot replicate this exactly—as a local income tax in a monopoly like Auckland would lack competitive pressure—GST-sharing serves as a proxy.
Political Momentum and Potential Impact
The concept of GST-sharing has moved from a fringe idea to a central political discussion. The ACT party introduced it as a member’s bill, and the 2023 National-ACT coalition agreement committed both parties to investigate the proposal.
Housing Minister Chris Bishop has similarly floated the idea as part of his housing agenda. Although the coalition government’s first two Budgets did not deliver the policy, there are indications it may appear in the third.
The potential financial impact is substantial. Local Government New Zealand estimates that sharing 50% of GST from 2024 building consents could have generated $1.3 billion for councils, which may have been enough to cover their entire rates increases for that year.
Integrating Incentives and Frameworks
Similar logic has been applied to other industries, such as New Zealand First leader Winston Peters’ proposal to share mining royalties with the regions that bear the costs of extraction.
However, GST-sharing is not a complete solution on its own. For three decades, the Resource Management Act (RMA) has made development costly and uncertain. The government’s Planning Bill is intended to replace the RMA.
For housing supply to improve, both levers must work together: the Planning Bill must provide the legal room for development, while GST-sharing provides the financial reason for councils to say yes.
A final decision on whether these changes will be implemented may be revealed on May 28.
Frequently Asked Questions
Why do councils often resist new housing developments?
Councils face immediate costs to upgrade trunk infrastructure, such as roads and sewage capacity, while the resulting rates payments from new housing arrive slowly. This creates a financial burden on current ratepayers.
How would the proposed GST-sharing system work?
It would involve a Housing Encouragement Grant where councils receive a payment benchmarked to the estimated GST of each new home, providing a direct fiscal reward for approving consents.
What is the difference between the GST-sharing proposal and the Planning Bill?
GST-sharing provides the financial incentive for councils to approve growth, while the Planning Bill aims to replace the Resource Management Act (RMA) to remove the planning barriers that create development slow and uncertain.
Do you believe financial incentives are the most effective way to encourage local councils to increase housing supply?
