Local government has a history going back more than 175 years in Australia, which is longer than the existence of any state government. A key question that the Federal Governments has sought to address through funding local government is how to best ensure that councils are able to provide local services and infrastructure.
The modern era of federal funding for local government began in the 1970s with the Whitlam Government recognising that rapid changes in responsibilities faced by councils required direct support from the Commonwealth. This led to the creation of personal income transfers under the Fraser Government at a rate of 2% of personal income tax revenue. This was subsequently reduced by the Hawke Government to 1% of total Commonwealth tax revenue (CTR).
The current arrangement, comprising a general purpose payment and an identified local road grant making up the Financial Assistance Grants (FAGs), was established in 1991. While the current indexation process was put in place in 1994 and some changes were brought about under the Local Government (Financial Assistance) Act 1995, the system for local government Commonwealth funding has remained relatively unchanged for more than twenty years.
Up until 2000, both states and local government each received a Financial Assistance Grant and were indexed on the same basis, but the introduction of the GST in that year saw the states receiving a GST grant, linked to the GST tax revenue. Local government's arrangements remained unchanged. While GST revenue continues to increase at a higher rate than FAGs, FAGs as a proportion of CTR have been declining to its lowest rates. In fact, by the time the Federal Government’s freeze on the indexation of FAGs ends in 2017, it will constitute just half of the proportion of CTR than it did in 1996.
Analysis by the Productivity Commission in 2008 showed that local government generates 90% of its revenue from its own sources, including rates and service charges. This is in contrast to state governments that obtain only about 50% of their revenue from their collection mechanisms.
Local government, throughout its history, has demonstrated its flexibility and creativity as well being a largely self-reliant partner.