How to fix local government's broken revenue model

By intouch * posted 29-09-2016 09:05


The local government revenue model has been broken by a growing expenditure that far outstrips what citizens are willing to pay for services, according to the authors of a new report. 

Giving Governments the Reboot: Improving the Financial Sustainability of Local Governments found local government expenditure had increased 7.3% per annum for the past 20 years – a figure that may even be understated, given that many local governments were divested of their water and sewerage functions during this period.

Although the report recognises that a comprehensive, robust analysis of Australian local government is yet to be undertaken, it cites 2006 figures from the 2006 PwC National Financial Sustainability Study of Local Government, which concluded approximately 10% to 30% of Australia’s councils have sustainability issues. 

It also raises the case of Central Darling Shire, which was suspended in 2013 due to its bleak financial state, although it has since delivered surpluses under an administrator.

Australian Local Government Spending By Category, 1994-95 (Total Outlays $8.2 billion). 
Source: The McKell Institute, ABS 2016

The authors, Dr Joseph Drew and Associate Professor Roberta Ryan, made a series of 18 recommendations they believe will reboot local government's financial situation, covering financial assistance grants, local government borrowings, developer levies and rates.

The McKell Institute report took aim at rate capping, recommending that it be abandoned “as a matter of priority”, as it “erodes the link between revenue and expenditure”.

“This report finds that the taxation limits (i.e. rate capping) which now operate in New South Wales and Victoria have a number of harmful effects, as they lower levels of efficiency, lower rates of infrastructure renewals, increase debt and increase levels of inter-jurisdictional inequity,” the authors wrote. 

Drew and Ryan emphasise that the link between revenue and expenditure must be re-established. 

“At least part of this problem relates to citizens’ awareness and perceptions about how local government services are paid for,” they write.

“When citizens can perceive the link between the increase in local government services and the price which must be paid to fund that increase, then the current state of fiscal illusion will be tempered by citizens’ willingness to pay.”  

The authors also found there is a clear need to put in place more formal and rigorous education around finances and services for elected representatives and council staff.

Although the authors recognise that there is no one, easy solution to the ongoing financial sustainability of the sector – including amalgamations – they say things must change. 

"No government can absorb increases in expenditure in the order of 7.3% per annum; year after year; decade after decade. Nor will local government taxpayers be able to absorb increases to the local government taxation in the order of 7.3% per annum on the same basis," they write.

"Nor is it reasonable to believe that the solution is larger intergovernmental grants (no matter how desirable they might be): the federal government has its own budget issues, and the money from the federal government is ultimately paid for by much the same group of taxpayers who pay local government rates.

 The report concludes that a “holistic approach” is needed. 

For more information, see the full report.

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1 comment


06-10-2016 10:52

The below was submitted to IPWEA as a letter to the editor, and has been republished here with the permission of the author. 

I am an ex Local Government Engineering Manager who has sat through the formulation of too many Council budgets with increasing despair.

What I propose is a straight-forward solution.

It is noted that an administrator immediately put the Central Darling Shire into a surplus situation. Surprise! Surprise!

In Queensland it used to be required that Councils prepare a balanced general fund budget, that is the budget on which general rates are raised.

It also used to be required that each water and sewerage utility account budget be balanced separately that is the budgets on which separate charges for these utilities were based.

The latter was the first to go in Queensland as Councils lobbied the State Government which gave in and allowed utility charges to be increased so these funds could be raided to prop up the general fund.

In spite of the requirement for a balanced general fund Councillors, ever mindful of their electoral prospects, rorted the system to keep the general rate low.

To do that the budget intentionally underestimates disbursements so the general rate is kept lower than it needs to be.

The result is a deficit for the year, which is ignored, as the same rort is applied year after year with ever increasing deficits for what are supposed to be a balanced budgets.

Eventually the Council’s financial position is said to be unstainable.

All that means is that ratepayers, probably unknown to the majority, have not been paying their way.

The remedies are these.

Firstly, the guilty councillors and CEO should be prosecuted, that is the most important requirement.

Secondly, all budgets should by law be required to be balanced every year.

Thirdly, utility funds should be kept separately and the utilities charged for separately from the general fund budget.

Fourthly, auditors should be required to report two deficits in a row, and unless the circumstances are demonstrably unforseen, the Council automatically sacked and an Administrator appointed.

These are reasonable, no fuss requirements, that Councils and ratepayers ought to welcome.

Philip Breene