Background on Local Government Funding

In the past two decades there has been a fourfold increase in spending by local government in nominal terms (7.3 per cent per annum compound growth rate) with total outlays increasing from $8.2 billion in 1994-95 to $33.6 billion in 2014-15.

There has also been a significant shift in the proportion of local government outlays expended in the various functional categories employed by the Australian Bureau of Statistics (ABS), with the most notable changes in Housing and Community Amenities expenditure which saw a rise from 18.5 per cent to 24 per cent in the 10 years to 2014-15 (The McKell Institute, 2016).

Over time the roles and responsibilities of local governments have increased as a result of increasing community demand, cost shifting and the need to address market failure

Over time the roles and responsibilities of local governments have increased as a result of increasing community demand, cost shifting and the need to address market failure (particularly in rural areas where it is commonly not financially viable for the private sector to provide essential goods and services such as aged care or childcare).

While the roles and responsibilities of local government have grown significantly over time, its revenue base has not.

Revenue sources

Local government revenue comes from three main sources – taxation (rates, which makes up about 38 per cent of total revenue), user charges/sales of goods and services (27 per cent of total revenue) and grants from federal and state/territory governments (11 per cent of total revenue)[1]. For some rural and remote councils where own-source revenue-raising capacity is limited, grants can account for more than 50 per cent of council revenue.

A fourth source, categorised as ‘miscellaneous’ by the ABS, consists of revenue raised through the likes of investment interest, dividend interest, income from public enterprise and fines, and assistance through the Natural Disaster Relief and Recovery Arrangements.

Revenue capacity

Councils across Australia are now facing insufficient revenue capacity to maintain their road networks to the original design standards, let alone upgrade them to modern lane widths, safety standards or load-bearing capacities.

On top of this they are faced with funding improvements for higher-productivity freight vehicles, higher traffic volumes, and congestion etc. These impositions require wider and stronger roads and significantly larger intersections and filter lanes – requirements which were never envisaged in 1996.

Many rural areas need horizontal equity support because of declining populations with those councils having limited capacity to raise more revenue from their communities.

In high growth area councils, the provision or upgrading of community and recreation facilities is not keeping pace with population growth.

In other local government areas, community and recreation facilities are now old and not keeping pace with demographic and population changes and rising community expectations. Replacements to modern standards and provision of additional or alternate facilities are unfunded, often relying on grant funding to be upgraded, replaced or built.

Financial Assistance Grants

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 per cent of personal income tax revenue. This was subsequently reduced by the Hawke Government to 1 per cent of total Commonwealth tax revenue (CTR).

The current federal funding arrangement, known as the Financial Assistance Grants, have been in place for more than 40 years but the most recent iteration of the program is provided under the Commonwealth Local Government (Financial Assistance) Act 1995 which came into effect in 1996. At this time FAGs were equal to 1 per cent of CTR. The Commonwealth clearly thought that this level of funding support was appropriate to achieve specific outcomes being sought by the Commonwealth in partnership with local government (and other entities). Some other funding programs to assist with road safety blackspots and regional development were also available at this time to meet specific Commonwealth objectives.

Up until 2000, both states and local government received a Financial Assistance Grant which was 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 Financial Assistance Grants, the grants as a proportion of CTR have been steadily declining.

Despite an annual growth rate in Australia’s gross domestic product of an average of 3.47 per cent from 1960 until 2017, and growth in population of 6 million people since 1996, Financial Assistance Grants have declined by around 43 per cent in relative terms, and now amount to approximately 0.55 per cent of CTR.

The quantum of the Financial Assistance Grants is indexed annually in line with changes in population and the Consumer Price Index (the Act also provides discretion to the Treasurer to alter this annual indexation). In 2014 the Abbott Government budget repair strategy froze indexation of the grants. This was estimated to cost local communities more than $600 million in services and infrastructure over three years, with the biggest impact felt by councils in regional and remote Australia.

The 2017 Federal Budget restored indexation.