Senate Economics References Committee
Appendix 4: Main sources of revenue for local government
The Australian Bureau of Statistics (ABS) estimates that local government will receive $17.9 billion in revenue in 2002-2003.1 The three major sources are:
- rates on property ($6.9 billion)
- receipts from the sales of goods and services ($5.7 billion)
- funding from other spheres of government ($2.2 billion)
1. Cat. No. 5501.0.55.001 Government Financial Estimates, All Australia Electronic Delivery - 2002-03 (Table 11. All Australia, Operating Statement - Local Government Sector)
Local government property rates
As the only source of general taxation revenue the major function of property rates is to finance local government for the provision of services to local communities, many of which should be considered public goods (e.g. local roads, street cleaning, drainage infrastructure, parks, libraries and environmental health) that should not be financed solely through direct user charging.
Property rates have always been a traditional local government tax (in most developed nations because of the need for government to finance services to property (e.g roads, drainage and water). The provision of such amenities improved the value of the land, as a result rates are often calculated on the value of a property (improved or unimproved).
Property rates are the most visible tax regularly paid by Australians. Many other taxes are either embedded in the consumption of a good or service, or deducted in the course of earning wages (income tax). This visibility increases the accountability of local government in regard to expenditures resourced from property rates.
There is no doubt that property rates are a stable tax base for local government. However, property rates do not grow in real terms, which is a major concern for local government. Between 1966 and 2002, total rate collections by local government fell by 27% in real terms,2 as is clearly shown in Chart 1.
Chart 1: Total rate collections by local government - Change in real terms June 1967 to June 20033
2. Local government total rates as collected by the ABS . Real calculations utilise the Non Farm GDP deflator.
3. The two large increases in 1983 and 1991 are explained by periods of slow economic growth which the deflator is lower, the nominal increase in total rates collected for those years were consistent with previous years.
Receipts from the sales of goods and services
A growing and important revenue source for local government comes from the sale of goods and services. Table 2 shows local government user charges as a share of operational spending (including allowance for the depreciation of assets). This provides an indication of the local sector's "cost recovery ratios". These are significantly higher than the other two spheres of government.
The majority of the revenue in this category are from service charges for services that are provided by local government, such as domestic waste removal and water supply.
| Sector | 1998-99 | 1999-2000 | 2000-01 | 2001-02 | 2002-03 |
|---|---|---|---|---|---|
| Local government | 37.0% | 35.7% | 36.0% | 35.8% | 35.8% |
| All spheres of government | 16.1% | 15.3% | 15.5% | 15.2% | 15.0% |
4. Cat. No. 5501.0.55.001 Government Financial Estimates, All Australia Electronic Delivery - 2002 Table 1. All Australia, Operating Statement - General Government
Total user charges for the local sector have increased over time. Wider adoption of "user pays" pricing of services as a result of continual microeconomic reform within the sector has seen a higher share of local sector revenues coming from fees and charges. Many services operate on a self-funding basis independent of local sector taxation revenues.
Funding from other spheres of government
Local government receives funding from the Commonwealth, the states and the Government of the Northern Territory. The Commonwealth, however, is the major provider of funding, through the provision of:
- specific purpose payments (SPP's)
- financial assistance grants (FAGS)
SPP's are payments relating to particular functional activities (e.g. health and education). SPP's made direct to local government, amounted to $332.1 million in 2002-03.5 The main payments in this category relate to the `Roads to Recovery' program, child care programs administered by local governments on behalf of the Commonwealth and funding for aged and disabled persons' homes and hostels.
5. Federal financial relations 2002-03
FAGS have been provided to local government since 1974-75. Under current arrangements, the Commonwealth provides FAGS to local government in the form of general purpose assistance and untied local road funding. This assistance is paid to the states and the Government of the Northern Territory as an SPP on the condition that all of the funds are passed on to local government. FAGS are untied, and can be spent by local government on any purpose. Distribution within jurisdictions is determined by the State Local Government Grants Commission (SLGGC)
FAGS are provided under the Local Government (Financial Assistance) Act 1995 (the Act). The Act provides for the Treasurer to determine the annual increase in FAGS through an escalation factor with reference to population growth and the consumer price index (CPI). Local government is estimated to receive $ 1,447.5 million in FAG's in 2002-03.
