Assessing Local Government Revenue Raising Capacity
This research report was released on 17 April 2008.
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- Key points
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- The ratio of rates revenue (the only tax instrument of councils) to GDP decreased from 1.0 per cent to 0.9 per cent between 1990-91 and 2005-06.
Local governments in urban areas are predominantly funded from their own sources of revenue, particularly rates, fees and charges. For most rural and remote councils, grants are also a substantial source of their revenue.
The revenue-raising capacity of local governments depends partly on their fiscal capacity, which differs by class of local government.
- The fiscal capacity of a council is best measured as the aggregate after-tax income of its community.
Urban developed councils tend to draw lightly of their fiscal capacities. Remote and rural councils tend to draw more heavily on their fiscal capacities.
Analysis of the relative potential of local governments to increase their own-source revenue indicates that councils are raising about 88 per cent of their hypothetical benchmarks, on average across Australia. This should not be taken to imply that local governments should increase the revenue they raise.
- Whether councils can realise this hypothetical benchmark will depend on their individual circumstances and the willingness of their communities to pay.
Most councils could do more to help themselves, but a small number will remain highly dependent on grants, despite high levels of revenue-raising effort.
State governments impose legislative and regulatory constraints on the raising of revenue by local governments that affect the ways in which councils raise revenue, but the overall impact on revenue-raising capacity is unclear.
- However, in New South Wales, rate pegging and only partial reimbursement of concessions appear to dampen revenue raised by councils in that State.
The application of a set of principles to guide the revenue-raising and expenditure decisions of councils can assist them in improving the well being of their communities.
John Salerian (Assistant Commissioner) 03 9653 2190
Assessing Local Government's Revenue Raising Capacity
Local governments in Australia perform an important role through their provision of infrastructure, service delivery, and planning and regulatory activities. Amidst calls by local governments for increased funding from the Australian and State governments, most councils appear to have some capacity to raise more revenue themselves, contingent on the preferences and expectations of their communities, according to a final report released by the Productivity Commission.
The report — Assessing Local Government Revenue-Raising Capacity — responds to a request by the Australian Government to examine the capacity of local government to raise own-source revenue.
'Most local governments are funded mainly from their own sources of revenue, although government grants also are a substantial source of revenue, particularly in rural and remote locations', said Commissioner Judith Sloan.
'On average, councils raise about 88 per cent of their hypothetical revenue-raising capacity, although there are large differences across councils. The impact of raising additional own-source revenue would vary across classes of councils. A modest increase by urban councils would be less difficult than for rural and remote councils where a higher proportion of community income is already drawn upon. For this reason, many rural and remote (especially Indigenous local governing bodies) will continue to depend more on grants than their urban counterparts', said Commissioner Sloan.
The report also indicates that State government legislative and regulatory factors limit the ways in which councils raise revenue. The overall impact on revenue is unclear, except for New South Wales. The combined impact of rate-pegging and partial reimbursement of concessions in New South Wales clearly constrains revenue raising by councils in that state. There is a case for all State governments to undertake periodic reviews of their policies and programs that impact on the revenue-raising of local governments.
The Commission also sets out some principles to guide the revenue raising (and expenditure) decisions of local government. Councils could improve their effectiveness in determining the services local communities want and how to fund them, through the wider and more rigorous application of these principles. In this way, local governments could more effectively promote the well-being of their communities.
John Salerian (Assistant Commissioner) 03 9653 2190
Leonora Nicol (Media, Publications and Web) 02 6240 3239 / 0417 665 443
Cover, Copyright, Opportunity for further comment, Terms of reference, Contents, Abbreviations and explanations, Glossary, Overview
Chapter 1 About this study
1.1 What has the Commission been asked to do?
1.2 How has the Commission approached its task?
1.3 Guide to the report
Chapter 2 Local government in Australia
2.1 An introduction to local government
2.2 Roles and functions of local governments
2.3 Revenue sources of local government
Chapter 3 Revenue and expenditure across local governments
3.1 Sources of local government data and their limitations
3.2 Revenue raised across local governments
3.3 Composition of own-source revenue
3.4 Expenditure of local governments
Chapter 4 Defining revenue-raising capacity
4.1 Fiscal capacity
4.2 Willingness to pay
4.3 Comparisons of the relative potential to raise revenue
Chapter 5 Comparisons of revenue-raising capacity
5.1 Fiscal capacity
5.2 Revenue-raising effort
5.3 Factors affecting revenue raised by local governments
5.4 Analytical results
5.5 The scope to raise additional own-source revenue
5.6 Financial impacts of increased revenue raising
5.7 Policy implications
Chapter 6 The effects of legislative and regulatory factors
6.1 Constraints on rates
6.2 Constraints on fees, charges and contributions
Chapter 7 Impacts on individuals and businesses
7.1 Issues about assessing the impacts
7.2 Previous studies of the distributional impacts of rates
7.3 Indicators of the impacts
7.4 Total rates incidence
7.5 Residential rates incidence
7.6 Business rates incidence
7.7 Impact of fees and charges
Chapter 8 Principles for revenue raising
8.1 Principles to guide effective revenue raising
8.2 Application of the principles
Appendix A Submissions, visits and roundtables
Appendix B Local government revenue-raising powers
B.1 Rates and property charges
B.2 Fees and charges
B.3 Other revenue
B.5 Defining local governing bodies
Appendix C Data and modelling
C.1 Data sources
C.2 Assembling the data set
C.3 Estimating the income of local government areas
C.4 Approach to estimating the factors affecting revenue and the relative potential to increase revenue
C.5 Factors affecting revenue raised
C.6 Relative potential to increase revenue
Appendix D Australian Classification of Local Governments
Appendix E Effective property rates
E.1 Indicators of effective property rates
E.2 Effective property rates
Appendix F Indigenous local governing bodies
F.1 Indigenous Australians and local governing bodies
F.2 Revenue raising in ILGBs
F.3 Factors affecting revenue-raising capacity
F.4 Local governing bodies - case studies
Appendix G Residential rates incidence in the City of Charles Sturt
G.1 Data sources
G.2 Estimates of residential rates incidence
Appendix H Referee reports on modelling
H.1 Report from Peter Abelson
H.2 Report from Joe Hirschberg