As the Housing Bubble (and indeed the property bubble in general)  
spread around the world, councils found development contributions a  
useful way to increase their revenues. While the great cities of the  
world, and many small towns as well, had funded their development out  
of rates and normal charges for services, a tax on equity became  
highly attractive to local government, especially as their own  
policies were inflating the value of the assets.

Traditional law had always required developers to fund any works which  
their own developments required. But such development levies depended  
on there being a genuine nexus between the development and the public  
works. If a new residential development required an upgrading of an  
intersection then the developer had to carry out the upgrade or pay  
council to do the necessary work - in whole or in part.

But development contributions, as legalised by the reforms to the  
Local Government Act allowed councils to charge all developers (i.e.  
anyone who decided to create a new lot, build a new house or  
apartment, or  build a new factory, block of shops or other commercial  
premises) to pay a levy per unit, or per lot, to compensate Council  
for the costs the users of such developments would impose on the  
community in the future.

The whole scheme depended on the assumption that newcomers and new  
businesses impose costs on the community rather than generate  
benefits. Central governments are quick to explain that suitable  
immigrants provide benefits not costs – but local governments were  
easily persuaded that immigrants into their territory imposed costs  
rather than benefits.

Similarly, some people suggest central government should "bail out"  
the Carter Holt Sawmill on the grounds that the closure of the mill  
and the loss of some 300 jobs will cause massive losses to the  
community. And yet, some distance down the road, a Council may well  
fine any company that chooses to open a similar mill, several hundred  
thousand dollars because of the costs the new enterprise will impose  
on roads, libraries, reserves, and anything else they can think of.

For example, if anyone decides to build a new twenty room motel in  
Mangawhai they will have to pay the Council $320,000 for causing the  
community so much trouble. The Council will insist on collecting the  
fine before they will allow the consent "to commence".

This economic nonsense prevailed as long as the property bubble kept  
inflating. Applicants were desperate to get their consents, and  
because Councils spun out the process over years rather than weeks   
the property had normally inflated in value sufficiently to allow the  
land owner to borrow the money from their financiers on the back of  
the added security. And the financiers were happy to oblige.

But now the property bubble has burst and the development  
contributions bubble is deflating too.

At a time like this, why would anyone even think about building a  
major new motel, shopping centre, or factory if their proposal  
attracts a "fine" of a several hundred thousand dollars, right up  
front. Like any fine this contribution adds nothing to the real value  
of the building or development.

And why would a financier lend the money? More importantly, now the  
bubbles have burst, the land value is almost certainly falling, so the  
security is diminishing by the day.

The Centre knows of many projects, spread around the country, which  
are being aborted or abandoned because the looming development  
contributions cannot be financed and there is no cash to hand.

Most political parties contesting the election are putting their minds  
to ways and means of stimulating economic growth and development.
But their best efforts will be in vain if local government sees  
entrepreneurship as a costly burden which must be penalised.

If we want to build our way out of depression we should surely stop  
fining the builders.

Some councils will grasp this reality and abandon these punitive taxes  
on growth and development. Others will resist on the grounds that they  
need the money. But after a while they will realise that they are not  
receiving any money from anyone. Once many of their staff are laid off  
we can assume that those who remain will accept that you do not trade  
your way through a recession by increasing your charges.

It is a pity that many Councils have set annual budgets based on  
development contributions, which in turn are based on an ever- 
inflating property bubble generating ever inflating revenues. Sadly  
when bubbles collapse the cash drought makes no distinction between  
public and private agencies.

The party is over and the hangover has begun.

It's time to take the cure.