Current Financial Challenges

The financial sustainability of local governments and their ability to provide essential services and infrastructure in their communities is impacted by barriers such as rate-capping and cost-shifting.

Rate capping

Councils have the power to levy rates, a form of property tax, in order to fund and deliver essential community infrastructure and services in line with community demand.

In some jurisdictions the state government has introduced rate-capping (or rate-pegging). The arrangement has been in place since 1977 in New South Wales and was re-introduced in Victoria in 2016. The South Australian Government’s attempt to introduce rate capping in 2018 was unsuccessful.

Research on the outcomes of rate-capping in NSW has found no evidence to support any claim that rate-capping enhances municipal efficiency.

Research on the outcomes of rate-capping in NSW has found no evidence to support any claim that rate-capping enhances municipal efficiency. It does however place a significant burden on councils when it comes to their ability to raise revenues in line with their communities’ increasing demand for services and amenities.

The connection between rate-capping and national funding issues is clear. If state governments institute rate-capping, then the proportion of rates in council revenues will either drop further, leading to a deepening demand on state and Commonwealth grants and other revenues, or councils will have to trim back infrastructure spending and service provision. Unintended consequences include excessive cuts in expenditure on infrastructure leading to mounting asset renewal and maintenance backlogs, as well as the potential shift of the cost to the next generation. Rate-capping also has consequences for productivity and liveability, which cumulatively will impact on the nation’s productivity and wellbeing.

ALGA will continue to advocate that rate-capping and pegging place an artificial block on councils being able to respond to their communities needs and future priorities, leaving them vulnerable not only to the political whims of state governments, but also to additional financial pressures at a time when they can least afford it.

Cost-shifting

An ongoing issue of concern for local government is the transfer of responsibility for service provision – or being called upon to provide a service when the state or Federal Government withdraws. This is more commonly referred to as cost-shifting.

The issue was considered serious enough in 2002 to lead to the House of Representatives Standing Committee on Economics, Finance and Public Administration undertaking work to discuss the financial position of local government, as well as the drivers affecting that position. The final report, Rates and Taxes: A Fair Share for Responsible Local Government, was tabled in October 2003.

In April 2006, the Inter-governmental Agreement Establishing Principles Guiding Inter-governmental Relations on Local Government Matters (IGA) was signed by all levels of government (with ALGA signing on behalf of local government). The principles in the IGA highlighted the need for better communication to ensure that government is more effective, efficient and transparent. The IGA expired in 2011 and despite assurances from the then Government, this had not been renewed. ALGA continues to advocate for a re-negotiation and renewal of this IGA.

Financial sustainability

In 2006, ALGA commissioned PriceWaterhouseCoopers (PWC) to examine the broader issue of the long-term financial sustainability of local government given the challenges faced by many councils in providing a growing range of services including some that extend beyond their traditional role.

PWC found that there was an estimated shortfall of $14.5 billion in infrastructure renewal work. A key reason for this shortfall is not only community expectations, but also the ongoing impacts of cost-shifting. Despite the report being more than ten years old, the issues raised in the report are still relevant today as councils divert funding from long-term infrastructure projects to vital short-term human services, while at the same time being increasingly squeezed by additional fiscal pressures (including the 2014-17 freeze on Financial Assistance Grants).