While educating myself about the NZ blogsphere I stumbled across the TABOR concept, courtesy of Bomber Bradbury. In essence, TABOR is legislation that caps the size of government, by capping its revenues. It sounds similar to something Rodney Hide has advocated previously, but not recently, for local government. So lets assume its a plan in progress. Does it make sense?
My conclusion is that it could, if designed well.
My starting point is the idea that we all collectively invest in (i.e. pay) our government(s) and therefore we own/control our governments. TABOR is legislation would regulate the terms of this bargain between we kiwis as investor/owners of government, and our position as beneficiaries/victims of the system of government that results.
Viewed this way, the TABOR idea is similar to price-cap (CPI-X) regulation of natural monopolies, which also involves a bargain between investors and the general public, so lets start there. We can then use the logic of regulated private investment to get an idea of what we should and should not accept from regulated government.
Price (or sometimes revenue) caps are calculated so that the regulated firm has just enough cash to (a) cover essential operating costs and (b) earn a reasonable but not excessive return on capital. Prices are allowed to trend at the rate of CPI inflation minus some efficiency factor X to account for reasonble differences in (unavoidable) cost changes between the regulated firm and the broader economy.
If the regulated firm can be more efficient (i.e. cut costs), it may continue to charge at the price cap and retain the benefit of any cost reductions. So it has an incentive to keep costs down. Then, every five years or so, the model is reset based on current information. The regulator considers and may mandate a one-time price adjustment (which could be down) and a new X factor, and the whole thing kicks off again for another 5 years.
Its an imperfect system for sure, but it has the great benefit of getting efficiency and discipline into what could otherwise be a recipe for rampant profiteering (which has happened) or outrageous waste (which can also happen).
In this utility regulation context we can think of the regulator as procuring services on behalf of the population. It is obviously in our interests for it to be done efficiently. And since the same applies to local government, maybe similar ideas could work.
After all, government is a natural monopoly. Democracy is the process of competition for the right to govern, but 2 governments at once is a recipe for civil war, which is not an efficient way to compete for power!
Although they are both natural monopolies, there are big differences between a government and a powerlines company. And those differences are very relevant to how you regulate them.
The most obvious ones that matter are service definition and service quality. Unless you can define what is to be provided, and in what quality, it makes no sense at all to regulate prices or revenues. Firms will just redefine/degrade the service to maintain profits without charging high prices.
So if you cap local government rates, you might just get really crappy service. Some would say we already have that, but it could be worse and we need to make sure it isn’t.
Also, investors expect to get their money back. One aspect of the Colorado experiment that would not be tolerated by private investors is the ratchet effect referred to in Wikipedia, whereby if revenues fall due to recession they stay down. I can’t see any reason to have a ratchet.
Another issue relevant to local govt in NZ is that central govt keeps passing it obligations that are costly to manage. There would need to be an allowance built into any TABOR to allow (efficient) costs of this type to be passed on to ratepayers.
Still, if these issues were managed well, the concept could work. It will be interesting to see what (if anything) emerges.