Local government, a test bed for Direct Democracy.

Local government spending has been in the headlines lately, but this is nothing new. I remember back in 2003 being one of the many

Aucklanders who were part of the ARC rates revolt against huge rate hikes.

There has also been much debate and anger over Dunedin's proposed new Carisbrook stadium, which the City Council is expected to pay $85m towards. One ratepayer was so incensed he even nailed a rates revolt declaration to the front door of the City Council building and over 1300 people marched down the main street. There could be calls for a rates boycott if the stadium goes ahead.

Most recently Local Government Minister Rodney Hide has highlighted the ARC's loss of $1.79m on the Beckham football match and has called for a more conservative approach to spending.

The opposite side of the coin is the Wanganui City Council, where Mayor Michael Laws has taken a totally different approach. In May 2005 the Council initiated their first referendum. Each person listed on the Wanganui electoral roll was given the opportunity to prioritise three projects out of fourteen capital funding proposals, via the post. A staggering 54% of voters returned forms. The average turnout throughout New Zealand for local body elections was only 41%. Then in 2008 they gave ratepayers the option to choose three different rating scenarios for 2009 and 2010. The rates increase brackets included 2-3%, 4-5%, and 7-8%, with Laws saying, “In each option, we will make it clear what projects or council services are included, and which are excluded or council services reduced."

Now contrast that to the dictatorial style of most City Councils when it comes to spending ratepayer’s hard earned money with ever increasing rates. One has to ask the question if it is time to use local government as a test bed for direct democracy, as an adjunct to representative democracy, so that ratepayers have more say in where and how their money is spent.

Professor John Matsusaka (Direct Democracy Works, 2005), from the University of Southern California says, “Not only is direct democracy firmly established in the United States, but it is spreading across the world. The spread of direct democracy is fueled in part by the revolution in communications technology, which has given ordinary citizens unprecedented access to information and heightened the desire to participate directly in policy decisions.”

Although some may argue that the referendum process has paralysed the California budget, Professor Matsusaka (2003) has disproved this. Many also point to California's Proposition thirteen in 1978, saying the people are not equipped to make responsible decisions on matters of taxation and government spending. However they fail to tell both sides of the story, by conveniently forgetting that property taxes had risen steadily for a period of five years, even though the Californian government had amassed a surplus of over five billion dollars at the time. California's Proposition nine would also have halved State income taxes, but was defeated by a majority of two to one.

Studies have also shown that the effect of mandatory referendums on spending decisions in Swiss cantons has reduced government spending by nineteen percent.(Lars & Matsusaka, 2003). When spending is reduced then rates can be reduced. The trouble is that without any checks and balances, City Councils have a propensity to overspend. The Beckham football match costing $1.79m a classic example. This is where a special case of moral hazard called the principle-agent problem comes in to the equation. This is where the City Council (agent) acts on behalf of ratepayers (principal), however the City Council usually has more information about their actions or intentions than the ratepayers do. This is because the ratepayers usually cannot perfectly monitor the City Council. The City Council may have an incentive to act inappropriately (from the viewpoint of the ratepayers) if both interests are not aligned. The trouble is that City Councils can not be perfectly monitored by ratepayers and even when they do not agree with the City Council, there is next to nothing they can do. With the threat of a binding referendum hanging over the Councils heads, elected representatives quickly become more in tune with what those who elected them want.

Another aspect of direct democracy is the Recall. In October 2003 California, the 5th largest economy in the world, collected enough signatures to trigger a State wide binding referendum to recall Governor Gray Davis. The referendum was successful and he was replaced with Arnold Schwarzenegger.

If ratepayers aren’t happy with the job their politicians are doing then they should be able to do something about it expediently. There needs to be checks and balances. Binding Referendums and the Recall can give ratepayers that option.

We are at a point in New Zealand politics where voters no longer trust their politicians to make every decision for them. Certainly they look to politicians for leadership and most often voters are happy to let them get on with their job, but that does not mean they agree with everything politicians want to do. If the Minister for Local Government really wants to make a difference then his first duty must be to enact these options.