Finance Minister Grant Robertson has instructed the Productivity Commission to figure out why New Zealand councils' costs are so high and what can be done to raise revenue.

But he has already ruled out one of the more significant recommendations a similar inquiry suggested 10 years ago.

On Tuesday, the Commission released the terms of reference for an inquiry into local government funding and financing arrangements.

The inquiry was part of the New Zealand First/Labour Coalition agreement which committed to holding an Inquiry “A decade after Shand” to investigate the drivers of local government costs and its revenue base.

The Shand Inquiry of 2007 – led by former Wellington Councillor David Shand – recommended a share of local GST be channelled into a contestable infrastructure fund.

But Robertson is not keen on that idea.

“I have said I’m not keen on GST to do that because once you start to do that, it undermines the tax base,” he told media on Tuesday.

He did, however, leave the door open for further regional taxes.

“In Auckland, we have seen a fuel tax; there is a proposal in Queenstown around a bed tax. What we have to look at is what are the best vehicles that we can provide people.”

He also used a Special Purpose Vehicle – an off-Government balance sheet entity created for a specific purpose – as an example of another way councils could raise money.

In the terms of reference for the inquiry, Robertson says the cost pressures for councils have “grown significantly” since the Shand Inquiry.

In June 2016, councils owned $112 billion worth of fixed assets, employed more than 25,000 full-time equivalent staff and had annual operating expenditure of $9.3 billion.

Operating income was $8.9 billion.

Meanwhile, council debt has continued to expand with many of New Zealand’s larger councils up against their debt limits.

“Rate increases, limits on borrowing and increased expenditure demands, particularly for infrastructure – creates the need for an independent inquiry into cost pressures, decision making and affordability,” Robertson says in the document.

Speaking to media, the Finance Minister says now is an “opportune time to say ‘what are the drivers of those costs and how do we make sure that we give local Government the tools it needs to be able to finance what it needs to do.’”

What is the scope?

Robertson has asked the Productivity Commission to look at how much impact population growth is having on certain areas, as well as the costs of climate change on local authorities.

It will also look at rates affordability now and into the future and options for funding and financing tools to serve demand for investments.

Whether changes are needed to the regulatory arrangements overseeing local authority funding and financing will also be looked at as part of the inquiry.

But Robertson says mechanisms for rating of Maori freehold and Crown land are out of the inquiry’s scope.

As is a valuation system and practices and any “substantial privatisations.”

The Commission is scheduled to present the final report to the Government by November 30 next year.