Bernard Hickey: Long-term payments the road to success

The Northern Gateway toll road was able to be built because drivers pay a little for each trip. Photo / Brett Phibbs

Auckland Council's report on its transport future is a stark reminder about how the low-inflation landscape is changing everything.

It has changed the politics of rates increases and it is forcing councils to look for other revenue-raising tools. It is putting pressure on a social contract once taken for granted - that today's ratepayers would pay to build an asset tomorrow's ratepayers would use.

For decades, any council needing to build crucial infrastructure would build it into its rates. A big enough project spread over a long time would add a little each year to rates.

Councils have stuck to this strategy for much of the past two decades despite the structural lowering of inflation. Council rates rose 61.7 per cent in the eight years to September while the Consumer Price Index rose 19.9 per cent.

This has now created a backlash, and in response, Mayor Len Brown slashed billions from plans for the next decade and lowered forecast rates increases from 4.9 per cent a year to 2.5-3.5 per cent.

This new low bar for rates increases was the one that the Independent Advisory Body had to limbo under in producing its Two Pathways report on funding Auckland's transport future, which aims to fill a $12 billion gap.

It came up with two options. One involved no increase from the current rates path, but a $2 charge on each week-day motorway trip.

The other option was a combination of a 0.9 per cent increase in the rates - 3.4-4.4 per cent a year and an extra 1.2 cents a litre regional fuel tax.

The problem for the council is that of its two options, one is a rates increase of three times the current inflation rate; the second is a rates increase of four times inflation.

In many ways, councils are now trapped in a vice of low-inflationary expectations.

This is a pity because rates increases are an effective, efficient and fair way of funding these big infrastructure projects.

Rates increases would see the richest beneficiaries of Auckland's growing infrastructure pay over an extended period for that infrastructure, which would benefit a much wider group of often poorer people over a long time.

The user-pays alternative would see a much wider group taxed whenever they drive in Auckland.

It's tempting to say the council should simply argue harder for rates increases and use its bully pulpit to shame Auckland's ratepayers, who have just won the biggest game of real estate Lotto in the history of New Zealand.

But trying to dismantle that vice of low inflation expectations may prove too hard for ratepayers now ingrained with user-pays.

One of the great success stories of the council scene has been the Local Government Funding Agency, which has borrowed for many smaller councils at much lower interest rates than they could get individually.

If this agency could start borrowing for 20 or 30 or even 50 years at low rates, the economics of these big projects begin to stack up, making tiny rates increases a more viable option.