Senate Economics References Committee
Appendix 6: Can local government help itself?
Local government continues to investigate improved own source revenue options. It has done this and there are limited options available to local government (which are continually looked at), these are:
- increasing the level of local government borrowings
- making optimum use of the rating base
- increasing the levels of user charging
- introduction of new taxes
- sharing taxation bases
For the most part, the local government sector runs a moderate net operating surplus, (this is usually) in order to internally fund capital spending.
Borrowing to fund capital spending has not been common practice for local governments across Australia, with the exception of Queensland (where local government has broader responsibilities such as the provision of water and sewerage necessitating higher levels of capital expenditure). Whilst borrowing for capital creation may be an economically and financially legitimate strategy, past years have seen an actual decline in this type of activity. This is mainly as a result of:
- pressure from other governments and citizens for the local sector to further reduce debt
- a lack of recurrent income producing assets to effectively pay for the cost of debt
- the adoption of "zero debt" objectives as part of local government financial planning
| State | Debt ($m) | Financial assets ($m) | Debt payback period (a) (years) | Interest paid ($m) | Interest cover (b) (times) |
|---|---|---|---|---|---|
| New South Wales | 1,464 | 3,774 | 0.9 | 118 | 5.5 |
| Victoria | 647 | 1,450 | 1.2 | 48 | -0.1 |
| Queensland | 3,025 | 1,688 | 1.8 | 218 | 4.6 |
| South Australia | 120 | 161 | 0.6 | 37 | 0.6 |
| Western Australia | 209 | 752 | 0.5 | 13 | 4.2 |
| Tasmania | 224 | 192 | 1.8 | 12 | 1.1 |
| Northern Territory | 16 | 44 | 0.3 | 2 | 6.5 |
| Australia | 5,705 | 8,061 | 1.2 | 448 | 3.9 |
1. Source: ABS, 5512.0, June 2001 and ABS, Government
Finance Statistics, unpublished
(a) Interest cover is measured by interest paid as a
multiple of the pre-interest net operating surplus,
indicating the number of times interest expense is covered
by the local sector's pre-interest (or 'primary') net
operating surplus.
(b) Debt payback period is measured by total debt as a
multiple of the pre-depreciation net operating surplus,
indicating the number of years it would take to pay off
debt from the net cash flow generated by operations.
Queensland and Tasmania are the only states where local sector debt exceeds the stock of financial assets. In other jurisdictions, debt is quite low (in comparison). In fact, the local government sectors in NSW and WA were substantial net creditors in 1999-00. However, local government is still a higher borrower (as a proportion of total financial assets), than the three spheres of government combined, as shown in Chart 1.
Chart 1: Government Borrowings as a Proportion of Total Financial Assets2
2. Cat. No. 5501.0.55.001 Government Financial Estimates, All Australia Electronic Delivery - 2002-03
Local governments property rates are subject to constant scrutiny (due to the clarity and the inability to evade them) and frequent review in Australia. Local governments will often take a practical approach to the setting of rates and will closely assess the communities capacity to pay, thus ensuring the tax is not excessively burdensome in its nature.
Local government's cost recovery ratio is also much higher than those for the Commonwealth and state and territory sectors. In the main, this reflects considerable variation in the responsibilities of the different spheres of government, with the local sector in a better position to recover costs for the services it delivers. This is shown in Table 6.
| Local | State | Commonwealth | All spheres | |
|---|---|---|---|---|
| Proportion | 34.6% | 9.6% | 2.2% | 8.9% |
There are limits on the extent to which local government can increase its cost recovery efforts without impacting on the equity in the provision of services to the local community.
Of course, maximum fiscal independence and efficiency would be achieved if local government had guaranteed access to a broader tax base. Local government has little scope in which to broaden its tax base. While, there are limited practical opportunities to providing local government with new taxes, often mentioned options include:
- poll taxes
- local income taxes
- local fuel taxes
The economic, social and political practicalities of these are poor, particularly in the highly centralised taxation environment of Australia.
