NSW Premier Mike Baird will eliminate 40 of the state’s local councils in what could well turn out to be the most dangerous risk of his political career.

Government News understands that Sydney’s Metropolitan councils will be hacked from 43 to 25 and regional councils reduced from 109 to 87 as the government forces through its merger agenda.

As well, changes to the council rates system will have some ratepayers up in arms as the NSW government moves to set rates according to property values, rather than on the value of unimproved land.

It is a stunning gamble, given that some of the staunchest opposition to the Premier’s plans has been on Sydney’s North Shore and Northern Beaches: traditional Liberal heartland which includes councils like Woollahra, Pittwater, Mosman, North Sydney, Lane Cove and Hunters Hill, as well as the Premier’s own electorate of Manly.

The impact of the Fit for the Future process has already been felt at federal level. When Liberal Trent Zimmerman won Joe Hockey’s North Sydney seat earlier this month there was a 13 per cent swing against his party, which he blamed partly on his government’s forced council mergers.

Save our Councils Coalition (SOCC) founder member and Mosman councillor Tom Sherlock said state government’s that had forced council amalgamations in the past had all lost subsequent elections.

“I think that basically they deserved to lose those elections,” Mr Sherlock said.

“When the state government – even if it has good intentions – when it’s not listening or engaging with the community, which is their basic job, then they have failed as community leaders. They have failed as politicians.”

With the NSW election not until 2019 Mr Baird will be hoping that voters’ memories are short.

He said the NSW government had not explained why the mergers should continue or provided sufficient evidence that they were beneficial.

Only a handful of NSW councils initially stepped forward and agreed to merger following the 2013 Independent Local Government Review, including Randwick and Waverley; Burwood, Auburn and Canada Bay; Young and Boorowa and Cootomundra and Harden Shire Councils.

More councils – the exact number is not known – submitted merger proposals after the Independent Pricing and Regulatory Tribunal (IPART) report where 87 councils were declared ‘not fit’ and pressurised to submit a merger proposal or forfeit financial incentives and influence in a new council. This tranche included Inner West Sydney councils Marrickville, Ashfield and Leichhardt,  originally the subject of a possible six-council merger in the 2013 review, a move which the government appears to be retreating from.

Other changes likely to occur include having an odd number of councillors to avoid deadlocked votes and new powers to allow the minister to appoint a financial controller to councils that are struggling financially.

But it is not yet a done deal. The government does not have the numbers in the Upper House. It seems likely that the Boundaries Commission will be reconvened, rather than a wholesale sacking of councils.

The Commission would then have to hold a public inquiry which could drag the process on for multiple months. The inquiry would need to consider issues such as the financial advantages of merging, community views, the impact of change, local representation, service provision and the impact on council staff and employment.

The bid to dramatically cull the number of councils in NSW is being dovetailed by a push by the Premier to bolster the state’s already healthy balance sheet by cashing in on Sydney’s apartment construction boom and shifting the basis of rates collection from the value of land to what appears to be the overall value of property inclusive of dwellings.

According to reports, the NSW ratings system will be concurrently reviewed by IPART at the same time as the merger process is undertaken, opening the door to a wholesale shake-up of how councils are allowed to collect revenue.

The shift to rope-in the presently untapped value strata dwellings and multi-unit developments could give merged councils access to substantially more money as mega-developments around transport corridors come online.

The option is likely to appeal most to densely populated metropolitan councils because it would alleviate financial stressed caused by the present system of rate capping that is electorally popular but loathed by local governments for the financial constraints it puts on them.

Although it is still unclear whether rate-capping would go – another big political risk – a shift to capture the overall property value of individual multi-unit dwellings creates a clear incentive for financially stressed councils to allow far more apartment builds within their boundaries to create an ongoing revenue stream.

The ‘flat-tax’ incentive is almost certainly being prepared as a financial sweetener for councils across Sydney that are set to be blitzed by a massive redevelopment push to heavily build out areas close to existing or soon to be developed transport infrastructure – like the Parramatta Light Rail and the Sydney Metro – where the State government has already instigated a ‘value capture’ system to siphon off property value windfalls to pay for transport infrastructure.

However developers are already warning that a tax of $200 per square metre for gross floor space will push up the price of a two bedroom unit by around $20,000 and increase the cost of housing.

A real fear is the new slug could inhibit some more creative and spacious developments in favour of heavy cramming to maximise yields on risky big capital outlays.

At a broader level, the concerted shift to increase the tax take from the Sydney property market is likely to raise the eyebrows of some economists and analysts because it would necessarily up the State’s revenue dependency on an asset class that some banks have previously cautioned is nearing bubble-like proportions.

A real scenario known to have been modelled by some analysts is what would happen to Australia’s metropolitan property market in the event of a new economic shock coming out of China or the US.

In the meantime, the race by investors, developers and the NSW government to tap the rivers of cash flowing into the Sydney strata market continues in earnest.