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Bills Digest No. 166  1999-2000
Local Government (Financial Assistance) Amendment Bill 2000

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Passage History

Date Introduced: 11 May 2000

House: House of Representatives

Portfolio: Regional Services, Territories and Local Government

Commencement: On the day when it receives the Royal Assent

Purpose

To give effect to the Government's undertaking to retain responsibility for the payment of general purpose assistance to local government, and to maintain the level of such assistance in real per capita terms.

Background

The Commonwealth has provided general-purpose assistance 'through' the States⁽¹⁾ to local government since 1974-75.⁽²⁾ Currently, local government assistance takes the forms of financial assistance grants and untied road funding. However, the bases for the level and distribution of assistance have changed through time.

For 1974-75 and 1975-76, the Commonwealth Grants Commission (CGC) assessed the size and distribution of grants, and the then Labor government accepted the Commission's recommendations. The main principle the CGC used for inter-council distribution was horizontal fiscal equalisation.⁽³⁾ In 1976, the Fraser government passed the Local Government (Personal Income Tax Sharing) Act. Under this Act, local government was entitled to a specified percentage of net personal income tax revenue received in the previous year. The percentage local government received varied through time. The distribution of this revenue was based on horizontal equalisation principles. In May 1984, the then Government established the National Inquiry into Local Government Finance (chaired by Professor Peter Self) to review local government tax sharing arrangements. After considering the Report, the Hawke government abandoned the tax-sharing arrangements of the Fraser Government and introduced the Local Government (Financial Assistance) Act 1986. The key feature of this Act was that growth of local government general revenue funding was tied to growth in general purpose funding to the States.⁽⁴⁾

Local government financial assistance grants

This linkage was retained in the Local Government (Financial Assistance) Act 1995, the legislation under which the Commonwealth now provides assistance to local government. This Act provides for local government financial assistance grants and road funds (discussed below) to be increased each year in accordance with an escalation factor. The Treasurer determines this factor in line with the underlying movement in general revenue assistance to the States. The escalation factor reflects the percentage increase in State financial assistance grants in the current year. The State financial assistance grants in turn reflect indexation for population growth and the change in the consumer price index. This has had the effect of maintaining local government assistance in real per capita terms. The inter-State distribution of local government financial assistance grants is on an equal per capita basis.

From 1 July 2000, the Commonwealth will cease paying financial assistance grants to the States and will replace them with the revenue from the goods and services tax (GST). Consequently, the link between local government assistance and general revenue assistance to the States will be severed.

Local road funding and 'identified road grants'

Until 1991-92, the States on-passed to local governments a substantial amount of Specific Purpose assistance. The main component was for local roads. The October 1990 Special Premiers' Conference agreed to 'untie' local road funding and, in 1991-92, this funding was absorbed into local government general revenue assistance. While conditions no longer apply to road grants, they continue to be separately identified as 'identified road grants' because road grants are distributed differently to local government financial assistance grants. States Grants Commissions determine the intra-State distributions of both financial assistance grants and road funds on the basis of fiscal equalisation. Local government road funding is now distributed among the States on the basis of criteria established under the Australian Land Transport Development Act 1988.

The Howard Government, as part of its reforms to the taxation system, proposed that the States and the Northern Territory assume responsibility for providing general purpose assistance to local government. At the 9 April 1999 Premiers' Conference, Heads of Government signed an Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations which provided, among other things, that the States would assume responsibility for funding local government. To ensure that funding was adequate, the States undertook to maintain growth in local government general purpose assistance on a real per capita basis and meet existing Commonwealth conditions on the payment of assistance.

Local governments generally opposed transferring responsibility from the Commonwealth. Their main concern was that they would incur a reduction in funding. In particular, local governments were concerned that State governments would renege on the undertaking with the Commonwealth and, should that happen, the Commonwealth would not support local government. Another concern was that local government funding would fall behind funding of other sections of the community: while indexation for population growth and inflation places a 'floor' under assistance, indexation does not provide any real growth.⁽⁵⁾ Local governments were also concerned they would be further disadvantaged financially by the GST.⁽⁶⁾

Following the Senate's rejection of the initial GST legislation, the Government negotiated a revised package with the Australian Democrats. Under the terms of the agreement that was reached on 31 May 1999, the Government agreed that the Commonwealth would retain responsibility for the payment of financial assistance grants to local government. The Local Government (Financial Assistance) Amendment Bill 2000 is the outcome of that process.

The Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations was revised to take account of the changes to the GST agreed between the Government and the Australian Democrats. Clause 17 of the revised Agreement provides, in part, that:

This clause was inserted so that government would be subject to the same requirements as other organisations and bodies. Clause 18 of the revised Agreement provides

This clause was inserted to ensure that local governments cannot benefit from Commonwealth assistance if they have not complied with Clause 17.

Main Provisions

As noted, local government general revenue assistance is linked to movements in general revenue assistance to the States. Section 8 of the Local Government (Financial Assistance) Act 1995 contains this link. Item 4 substitutes new paragraph 8(1)(a) and a formula whereby local government grants are indexed by population movements and the consumer price index, thus continuing the practice of maintaining local government grants in real per capita terms. Item 5 adds a new paragraph 8(1)(c), which gives the Treasurer discretion to increase the grants as calculated by the formula.

Item 17 of the Bill gives effect to clause 18 of the revised Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, that is, to require the States and the Northern Territory to withhold from any local government body any voluntary GST payments that the body should have but has not made [new paragraph 15(aa)]. Amounts withheld are to be returned to the Commonwealth.

Concluding Comments

In essence the Bill proposes the continuation of existing practice whereby local government general purpose assistance is indexed to population and inflation. But from the perspective of local government, the Bill does nothing to overcome the problem of no real 'growth' in the level of assistance. Nor does the Bill deal with the anachronism of the continued distinction between financial assistance grants and road funds. This contrasts with the situation with State identified road grants which were fully distributed in 1997-98 on the basis of the relativities underlying State financial assistance grants.⁽⁷⁾

Endnotes

1. Local government authorities are established under State Acts. The Commonwealth pays local government assistance to the States as a Specific Purpose Payment on condition that the States pass the funds on to local government.

2. Since 1979-80, the Commonwealth has made payments to local governments 'through' the Northern Territory. Since 1988-89, the ACT government has been responsible for State-like and municipal functions, and has received payments in respects of general purpose assistance for local government functions analogous to those paid to local governments through the States.

3. In the context of distributing Commonwealth grants to the States, the Commonwealth Grants Commission has defined horizontal fiscal equalisation as: 'State governments should receive funding from the Commonwealth such that, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each would have the capacity to provide services at the same standard'. Commonwealth Grants Commission, Report on General Revenue Grant Relativities 1999, Volume I, Main Report, p. 4.

4. General purpose assistance to the States was defined as the sum of their financial assistance grants, identified health grants and general purpose capital assistance grants.

5. In recognition of this, local government now seeks a guaranteed real terms share equivalent to one per cent of Commonwealth general taxation revenue. See Australian Local Government Association, National Agenda for Australian Local Government 1999.

6. See for example, Australian Local Government Association, 'GST: Government walking away from commitment, says Local Government', 4 March 1999.

7. For a discussion of this issue, see Department of the Parliamentary Library, 'Commonwealth Road Funding Since 1990', Research Paper No. 13, 1999-2000.

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ISSN 1328-8091
© Commonwealth of Australia 2000

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Published by the Department of the Parliamentary Library, 2000.

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