Commonwealth General Purpose Financial Assistance to Local
Government
Richard Webb
Economics, Commerce and Industrial Relations Group
6 February 2001
Contents
Glossary
Major Issues
Introduction
History of General Purpose Assistance
Tax Sharing Arrangements
Hawke Government
Self Report and the 1986 Act
Commonwealth Grants Commission Report on the Interstate
Distribution of Grants
Untying of Local Road Funds and Identified Roads Grants
Review of the 1986 Act
Local Government (Financial Assistance) Act 1995
A New Tax System
Issues in Commonwealth Assistance
Level of Assistance
Interstate Distribution of Grants
Financial Assistance Grants
Identified Road Grants
Minimum Grant
Intrastate Fiscal Equalisation and Grants Commission
Methodologies
Burden Shifting
Conclusions
Endnotes
Appendix 1
Appendix 2
Glossary
Financial assistance grants:
payments that local government can use for any purpose. Financial
assistance grants are distributed among the States on an equal per
capita basis.
Fiscal equalisation: with
respect to the States, (full horizontal) fiscal equalisation is the
provision of financial assistance which, as assessed by the
Commonwealth Grants Commission, is designed to provide a State with
the capacity to provide services at a standard comparable with
those of the other States but without requiring that State to
impose a greater burden of taxation. As applied to local
government, fiscal equalisation seeks to ensure that each local
government in a State can function, by reasonable effort, at a
standard not lower than the average standard of other local
governments in the State. Fiscal equalisation takes account of
differences in local governments' expenditure requirements and
capacity to raise revenue.
General purpose assistance: the
term used to describe jointly financial assistance grants and
identified road grants.
Grants: non-repayable,
non-interest bearing assistance.
Identified road grants: untied
grants to local government. Identified road grants were previously
paid as specific purpose payments under the Australian Land
Transport Development Act 1988 and distributed among the
States on the basis of criteria established under this Act. The
payments were untied with effect from 1 July 1991. Identified road
grants are distributed among the States in the same proportions
that existed when the grants were untied in 1991-92. (See also
specific purpose payments and untied grants).
Local government: a body
established under State legislation, which delegates various
functions to that body. Local government thus forms part of and is
an extension of the State government sector. Also includes a body
declared to be a local governing body under the Local
Government (Financial Assistance) Act 1995.
Specific purpose payments:
payments for policy purposes related to particular functional
activities, for example, health and education. Specific purpose
payments are made under section 96 of the Constitution, which
states that the Parliament may grant financial assistance to any
State on such terms and conditions as may be specified. (See also
untied grants).
Untied grants: payments to
which no conditions on use are attached. (See also specific purpose
payments).
Major Issues
Local government is a small but important part
of the public sector, being responsible for providing a wide range
of services. The ability of local government to provide services
depends partly on Commonwealth general purpose financial
assistance, which takes the forms of financial assistance grants
and grants for local roads known as identified road grants. In
1997-98, such assistance accounted for around 12 per cent of local
government revenue.
How the Commonwealth determines the level of
assistance and how it is distributed among local governments are,
however, not widely understood. This paper seeks to help
Parliamentarians improve their understanding of how current
arrangements have evolved and of their limitations. The paper also
provides background to the review by the Commonwealth Grants
Commission of the Local Government (Financial Assistance) Act
1995, which governs the provision of general purpose
assistance.(1) The paper's main focus is, however, on
two issues that the review's terms of reference specifically
exclude, namely, the interstate distribution of grants and level of
the grants. The paper also discusses specific purpose payments made
under the Roads to Recovery Act 2000 because they are also
spent on local roads. The paper does not discuss other specific
purpose payments made directly to local government for purposes
such as child care programs that local governments administer on
behalf of the Commonwealth and funding for aged and disabled
persons' homes and hostels.
The Commonwealth has been providing general
purpose assistance to local government since it first provided
assistance in 1974-75. Local governments can use financial
assistance grants for any purpose. While, in theory, local
governments can spend identified road grants for any purpose, in
practice, the grants are spent on roads. The Commonwealth pays
financial assistance and identified road grants 'through' the
States; that is, on condition that the States pass the funds to
local government. Grants made under the roads to recovery program
are specific purpose payments. State Grants Commissions determine
the allocation of funds among local governments within their
respective States.
General purpose assistance has been declining as
a proportion of gross domestic product (GDP) since at least
1991-92. In the absence of action to change the situation, this
trend will continue. The Local Government (Financial
Assistance) Act 1995 provides for the level of financial
assistance grants and identified road grants to be increased
annually in accordance with rates of population growth in each
jurisdiction and changes in the consumer price index. This formula
maintains the per capita value of assistance in real terms and
places a 'floor' under the level of assistance. But the formula
does not provide growth in the real level of assistance. Since GDP
has grown faster, the level of general purpose assistance has
fallen as a proportion of GDP. The Australian Local Government
Association-the body that represents local government at the
national level-argues that the level of general purpose assistance
should be increased and set at one per cent of total Commonwealth
taxation receipts. In 1999-2000, application of this proposal would
have resulted in assistance of $1.525 billion compared with actual
assistance of $1.265 billion. Under this proposal, the level of
grants would, however, fluctuate with economic activity and
discretionary changes to taxation levels, and hence increase
uncertainty as to the level of funding to local government.
The injection of roads to recovery funds will,
however, increase substantially spending on local roads. In
2000-01, the Commonwealth began to provide grants under the
Roads to Recovery Act 2000 for the construction, upgrading
and maintenance of roads. The Commonwealth pays roads to recovery
grants directly to local governments. The payment of $1.2 billion
over five years under the roads to recovery program will boost
spending on local roads substantially. In annual average terms, the
program is equivalent to additional local government road spending
of $240 million, or 59 per cent of the $406.9 million allocated to
identified road grants in the 2000-01 Budget. Roads to recovery
grants are paid directly to local governments.
It could be argued that the funds allocated to
roads to recovery could be better used to increase financial
assistance grants on the grounds that local governments are best
placed to determine their priorities and can spend financial
assistance grants in accordance with those priorities. But the
Australian Local Government Association favours the continued
separation of identified road grants from financial assistance
grants on the grounds that combining the two would see large
changes in the distribution of the funding among the States, and
lead to volatility in the grants provided to local governments.
Moreover, local governments spend more on local roads (in excess of
$2.5 billion annually) than is funded by identified road grants
(estimated at $407 million in 2000-01) so that much of any
additional funds in the form of financial assistance grants would
be likely to be spent on roads.
The interstate distribution of general purpose
grants to local government differs from that which would exist if
the basis of distribution were fiscal equalisation. In this
respect, Commonwealth assistance to local government differs from
assistance to the States where the Commonwealth Grants Commission,
in allocating revenue from the goods and services tax among the
States, aims to achieve fiscal equalisation. The interstate
distribution of financial assistance grants, which is on an equal
per capita basis, is inconsistent with fiscal equalisation, and the
Commonwealth Grants Commission concluded in a 1991 report that it
would not be appropriate to continue indefinitely this method of
distribution because it departs from fiscal equalisation. But the
Commonwealth Grants Commission also observed that distributing
financial assistance grants on a fiscal equalisation basis would be
disruptive since this would entail redistributions of funds among
the States and local governments. The interstate distribution of
identified road grants is also unlikely to be consistent with
fiscal equalisation. Identified road grants are distributed on the
shares that existed when the grants were untied in 1991-92 and is
thus increasingly anachronistic.
The Government decided against using these
shares for the roads to recovery program. The interstate
distribution of roads to recovery grants, which takes account of
road length, population and other factors, is also unlikely to be
consistent with fiscal equalisation. While the resulting interstate
distribution is similar to the distribution of identified road
grants, Victoria, Queensland and South Australia benefit relative
to the allocation of identified road grants.
Political considerations seem to militate
against changing the distribution of general purpose assistance
among the States. A major change in the basis of distribution, such
as a move to fiscal equalisation, would entail disruption, with
some States-and hence some local governments-losing funds and
others gaining.
The Local Government (Financial Assistance)
Act 1995 requires the State Grants Commissions to allocate
financial assistance grants and identified road grants among local
governments on the basis of agreed national principles. The
objective of the principles is to ensure that the Commissions
distribute grants on a nationally consistent basis. The main
principle is fiscal equalisation, which seeks to improve the equity
of grant outcomes. But it is questionable to what extent
equalisation is being achieved. The State Grants Commissions do not
use consistent methodologies to determine the intrastate allocation
of grants. Moreover, it is questionable whether some of the
methodologies meet the objective of fiscal equalisation. Further,
the national principles seem to be internally inconsistent. In
particular, the principle allowing local governments to receive
minimum grants seems to be contrary to fiscal equalisation.
Introduction
The Commonwealth has been providing general
purpose assistance to local government since it first provided
assistance in 1974-75. Under existing arrangements, general purpose
assistance takes the forms of financial assistance grants and
untied road funding known as 'identified road grants'. Legislative
authority for financial assistance grants and identified road
grants(2) is contained in the Local Government
(Financial Assistance) Act 1995. Local governments can use
financial assistance grants for any purpose. In theory, local
governments can also spend identified road grants for any purpose
but, in practice, the grants are spent on roads.
Financial assistance grants are distributed
among the States on an equal per capita basis. Identified road
funds are, in effect, distributed on the basis of criteria
established under the Australian Land Transport Development Act
1988 (see discussion below under untying of local road funds
and identified road grants). The Local Government (Financial
Assistance) Act 1995 requires the State Grants Commissions to
allocate financial assistance grants and identified road grants
among local governments on the basis of 'national principles'. The
main purpose of these principles is to ensure that the Commissions
distribute grants on a nationally consistent basis.
This paper traces the evolution of Commonwealth
general purpose assistance to local government and discusses
related issues including:
-
- the level of assistance
-
- the interstate allocation of assistance
-
- the treatment of identified road grants
-
- the application of the national principles
-
- State Grant Commission methodologies, and
-
- the extent to which actual grant allocations are consistent
with fiscal equalisation.
Beginning in 2000-01, the Commonwealth began to
make specific purpose payments under the Roads to Recovery Act
2000 for the construction, upgrading and maintenance of roads.
The paper also discusses these grants because they are also spent
on local roads. The paper does not discuss other specific purpose
payments made directly to local government for 'policy' purposes
(see Box 1).
Box 1: Specific Purpose Payments Made
Directly to Local Government Authorities
The Commonwealth pays current and capital
specific purpose payments directly to local governments for
purposes such as health and education. Examples of current payments
are funds for the provision of residential and community-care
services for the frail aged and services for people with
disabilities. Examples of capital payments are funds for
constructing community child care centres. The 2000-01 Budget
allocated $1323.9 million towards general purpose assistance
compared with specific purpose payments made directly to local
governments of $125.5 million.(3)
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History
of General Purpose
Assistance(4)
As noted, the Commonwealth first provided
general purpose assistance to local government in 1974-75 in line
with the Labor Party's policy of providing assistance to local
government to promote equality among regions, and to ensure
adequate services and the development of resources at local and
regional levels. The Grants Commission Act 1973 authorised
the Commonwealth Minister to approve the establishment of regional
organisations to represent local governments located in the region,
and laid down procedures for the organisations to apply for
financial assistance. The Act further provided for the Commonwealth
Grants Commission to inquire into and report on applications. In
the event, the Government distributed the grants among local
governments in each State in accordance with the Commission's
recommendations. In the following two years, the Commission
assessed the applications and the Government again accepted the
Commission's recommendations.
Tax Sharing Arrangements
In 1975, the Liberal - National Country Party
coalition adopted the provision of assistance to local government
as part of its federalism policy. The arrangements the Whitlam
Government had put in place changed with the election of the Fraser
Government and its 'new Federalism' policy of sharing personal
income tax revenue among the Commonwealth, State and local
governments. Under the provisions of the Local Government
(Personal Income Tax Sharing) Act 1976, local government
received in 1976-77 the equivalent of 1.52 per cent of net personal
income tax collections in the previous year. In November 1977, the
Prime Minister, the Hon. Malcolm Fraser MP, announced the
Government's intention to increase this proportion to two per cent
over the following three years. In the event, the proportion was
increased to 1.75 per cent in 1979-80 and to two per cent in
1980-81. The method of allocation of grants among the States was
changed from the full equalisation to a method based partly on per
capita grants (the so-called minimum grant) and partly on
equalisation.(5) Responsibility for determining the
intrastate distribution of grants of the part-equalisation
component was passed to the newly-created local government Grants
Commissions established by the States. The sharing of personal
income tax receipts continued through to 1984-85.
Hawke Government
The Hawke Government dropped these arrangements,
arguing that the economy could not afford tax sharing with the
States and local government. Instead, the Government increased
local government assistance in 1985-86 by the change in the
consumer price index and an additional two per cent growth factor
over the 1984-85 level. The distribution among the States remained
the same as that specified in the Local Government (Personal
Income Tax Sharing) Act 1976.
Self Report and the 1986 Act
On 10 May 1984, the Government announced the
establishment of a Committee of Inquiry into Local Government
chaired by Professor Peter Self. The Committee's terms of reference
were wide-ranging including the level and form of Commonwealth
funding. The Committee presented its report on 29 October
1985.(6) In April 1986, the Government announced that it
had accepted the thrust of the report and that arrangements for the
provision of assistance would change from 1986-87 onwards. The new
arrangements closely followed the Inquiry's
recommendations.(7) Key features of the new
arrangements, contained in the Local Government (Financial
Assistance) Act 1986, were:
-
- financial assistance grants replaced personal income tax
sharing
-
- in 1986-87, grants were to be increased by the greater of
either the 1985-86 level of assistance adjusted for inflation (that
is, a 'real terms' guarantee) or the percentage change in general
purpose payments to the States
-
- for 1987-88, the level of assistance was to be determined by
the same means as for 1986-87 but using 1986-87 payments as the
base
-
- in following years, the level of assistance to local government
would be linked to the level of assistance to the States, whereby
the annual level of local government assistance would be determined
by increasing the amount paid in the previous year by the
percentage change in general purpose payments to the
States(8)
-
- the distribution of assistance among the States was to be
phased from existing arrangements-which were still partly based on
the recommendations of the Commonwealth Grants Commission made in
1977-to an equal per capita basis by 1989-90
-
- the State Grants Commissions were to determine the intrastate
distribution of grants according to principles, formulated by each
State, that took fiscal equalisation into account
-
- all local governments would be entitled to a minimum grant
based on population,(9) and
-
- provision was made for informal local government bodies, such
as Aboriginal communities in remote areas, to receive grants.
Local government benefited from the 'real terms'
guarantee in 1986-87 and 1987-88 because grants to the States fell
in real terms in those years, but suffered cuts in real terms in
1988-89, 1989-90 and 1990-91 when real State general purpose
funding fell.
The interstate distribution of local government
assistance in 1988-89 reflected the transition to equal per capita
grants. In 1989-90, grants were distributed on an equal per capita
basis.
Commonwealth Grants Commission Report on
the Interstate Distribution of Grants
Despite the decision to allocate grants on an
equal per capita basis, the 1989 Premiers' Conference agreed that
the Commonwealth Grants Commission should report on the interstate
distribution of general purpose grants to local government. The
Commission's two main tasks were to comment on the desirability of
adopting full fiscal equalisation (as distinct from the
part-equalisation under the Fraser Government noted above) and to
calculate what the distribution of grants would be if full fiscal
equalisation were adopted. The Commission's report was released in
March 1991.(10) The Commission supported, in principle,
the adoption of fiscal equalisation:
In principle, we believe it would not be
appropriate to continue indefinitely an interstate distribution of
general purpose assistance for local government on a basis (equal
per capita) which departs so markedly from fiscal
equalisation.(11)
But the Commission recommended against using the
per capita relativities that it had assessed for allocating
assistance for local government among the States in 1991-92 because
of data and methodology deficiencies.(12)
The Premiers' Conference of 31 May 1991
considered the Commission's report. Given the Commission's
concerns, the Commonwealth announced in May 1992 that grants would
continue to be distributed on an equal per capita basis. Hence
grants have continued to be distributed on this basis since
1989-90.
Untying of Local Road Funds and
Identified Roads Grants
Until 1990-91, the Commonwealth provided
specific purpose grants to local government for local roads under
the Australian Land Transport Development Act 1988. The
grants were distributed on the basis of criteria in this Act. The
October 1990 Special Premiers' Conference agreed that road funds
would be untied with effect from 1 July 1991; that is, the
conditions applying to road grants would be abolished and local
government could spend the funds for any purpose. The untied grants
are called identified road grants.(13)
In June 1991, the Local Government
(Financial Assistance) Act 1986 was amended to allow road
funding to be added to financial assistance grants from 1995-96 and
hence distributed on a per capita basis. But this would have been
to the detriment of Western Australia, Tasmania, the ACT, the
Northern Territory and Queensland.(14) The 1995
Premiers' Conference therefore decided that local road funds would
continue to be distributed on the basis of the criteria in the
Australian Land Transport Development Act
1988.(15) The effect of this decision has been to
freeze the interstate distribution of identified road grants at the
historical shares that applied in 1991-92 when grants were
untied.
Review of the 1986 Act
In June 1993, local government Ministers agreed
to a review of funding arrangements to ensure an efficient and
effective use of resources under the Local Government
(Financial Assistance) Act 1986 given the level of funding and
distribution of funds among the States. The Australian Urban and
Regional Development Review undertook the study.(16) The
review's findings included:
-
- there had been a shift in the share of funding to rural
councils in all States and the Northern Territory except
Victoria
-
- State Grants Commissions were following two models of fiscal
equalisation: in one, an increasing share of funds was allocated to
local governments with increasing populations whereas in the other
model, the reverse was true
-
- in most States, an increasing share of assistance went to local
governments with the greatest socio-economic disadvantage
-
- the need for a uniform national reporting framework was
urgent
-
- absorbing local road funding into financial assistance grants
and hence distributing road funding on an equal per capita basis
would be disruptive and was not recommended, and
-
- additional measures to encourage efficiency in local government
should be implemented.
Local Government (Financial Assistance)
Act 1995
Following consideration of the review and
consultations with State and local governments, the Commonwealth
undertook further reforms, which were contained in the Local
Government (Financial Assistance) Act 1995. This Act retained
most of the features of the 1986 Act. The main change was the
requirement that national principles replace the arrangements
whereby each State formulated principles. The main objective of the
national principles (see Box 2) was to establish a more nationally
consistent and transparent basis for the way State Grants
Commissions determine the intrastate allocation of funds.
Box 2: National Principles Relating to the
Allocation of Grants
1. The national principles relating to the allocation of general
purpose grants are:
(i) Horizontal equalisation. General purpose
grants will be allocated to local governing bodies, as far as
practicable, on a full horizontal equalisation basis as defined by
the Act. This is a basis that ensures that each local governing
body in the State/Territory is able to function, by reasonable
effort, at a standard not lower than the average standard of other
local governing bodies in the State/Territory. It takes account of
differences in the expenditure required by those local governing
bodies in the performance of their functions and in the capacity of
those local governing bodies to raise revenue.
(ii) Effort neutrality. An effort or policy
neutral approach will be used in assessing the expenditure
requirements and revenue-raising capacity of each governing body.
This means as far as practicable, that policies of individual local
governing bodies in terms of expenditure and revenue effort will
not affect grant determination.
(iii) Minimum grant. The minimum general
purpose grant allocation for a local governing body in a year will
be not less than the amount to which the local governing body would
be entitled if 30 per cent of the total amount of general purpose
grants to which the State/Territory is entitled under section 9 of
the Act in respect of the year were allocated among local governing
bodies in the State/Territory on a per capita basis.
(iv) Other grant support. Other relevant grant
support provided to local governing bodies to meet any of the
expenditure needs assessed should be taken into account using an
inclusion approach.
(v) Aboriginal peoples and Torres Strait
Islanders. Financial assistance shall be allocated to
councils in a way which recognises the needs of Aboriginal peoples
and Torres Strait Islanders within their boundaries.
2. The national principle relating to the allocation of the
identified road component of the general purpose grants is:
Identified road component. The grants should be
allocated to local governing bodies as far as practicable on the
basis of the relative needs of each local governing body for roads
expenditure and to preserve its road assets. In assessing road
needs, relevant considerations include length, type and usage of
roads in each local governing area.
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Other changes to the 1986 Act included:
-
- recognition of the need for local government to be efficient
and effective
-
- recognition of the need to improve the provision of services to
Aboriginal and Torres Strait Islander communities
-
- the requirement that the Commonwealth Minister with portfolio
responsibility for administering Commonwealth financial assistance
to local government, report annually to Parliament on the operation
of the 1995 Act, and
-
- the requirement that a review of the 1995 Act be carried out by
30 June 2001.
With respect to the review, on 1 June 2000, the
Minister for Finance and Administration the Hon. John Fahey MP
directed the Commonwealth Grants Commission to review the operation
of the 1995 Act. The terms of reference are set out in Appendix
1.
The 25 March 1994 Premiers' Conference decided
that financial assistance grants paid to the States would be
maintained in real per capita terms over the next three years. This
decision affected local government grants because the 1995 Act
provided for local government general purpose assistance to be
increased annually by an escalation factor that reflected the
underlying movement in general revenue assistance paid to the
States. The escalation factor for State grants reflected indexation
for population growth and the consumer price index. The consequence
of the Conference decision was to maintain the level of grants in
real per capita terms and place a 'floor' under the value of
assistance.
A New Tax System
As part of A New Tax System (ANTS), the
Howard Government proposed that the States assume responsibility
for providing financial assistance grants to local government from
1 July 2000.(17) Payments were to be made under the
terms of the Intergovernmental Agreement on the Reform of
Commonwealth-State Financial Relations, which heads of
government signed at the 1999 Premiers' Conference. But under the
agreement between the Government and the Australian Democrats to
modify the goods and services tax (GST) and implement a package of
other proposals, the Government agreed to retain responsibility for
assisting local government.(18)
The Howard Government's decision to replace
financial assistance grants-and revenue replacement
payments-(19)to the States with revenue from the GST
from 1 July 2000 severed the link between grants to the States and
grants to local government established in the 1986 Act. The
Government therefore introduced the Local Government (Financial
Assistance) Amendment Act 2000. The main purpose of this Act
was to maintain the level of assistance to local government in real
per capita terms.(20) Thus in 2000-01, the increase in
general purpose assistance will be based on an escalation factor
based on population growth and the increase in the consumer price
index but excluding the estimated effect of the tax reform measures
in The New Tax System.(21)
Local governments can claim input tax credits
for the GST. It seems likely that local government will, overall,
obtain savings from the implementation of the
GST.(22)
Issues in
Commonwealth Assistance
The Commonwealth Grants Commission's discussion
paper, prepared for the review of the Local Government
(Financial Assistance) Act 1995, lists 15 issues on which it
has specifically sought views (see Appendix 2). The following
examines some of these and other issues in Commonwealth assistance
to local government.
Level of Assistance
In 1997-98, Commonwealth general purpose
assistance accounted for around 12 per cent of local government
revenue.(23) The terms of reference for the review state
that it will not address the quantum of funds available under the
Act. Nonetheless, local governments see the level of assistance as
a major issue. The amounts of assistance since 1991-92 when road
grants were untied are shown in Table 1.
Table 1: Commonwealth assistance to
local government since 1991-92 ($m)
Year
|
Financial assistance grants
|
Identified roads grants
|
Total grants
|
Gross domestic product
|
Total grants as share of GDP
(%)
|
1991-92
|
715.0
|
303.2
|
1 018.1
|
405 795
|
0.251
|
1992-93
|
730.1
|
319.0
|
1 049.1
|
426 708
|
0.246
|
1993-94
|
737.2
|
322.1
|
1 059.3
|
449 416
|
0.236
|
1994-95
|
756.5
|
330.5
|
1 087.0
|
473 180
|
0.230
|
1995-96
|
806.8
|
358.0
|
1 164.7
|
507 096
|
0.230
|
1996-97
|
833.7
|
369.9
|
1 203.6
|
532 401
|
0.226
|
1997-98
|
832.9
|
369.6
|
1 202.4
|
564 580
|
0.213
|
1998-99
|
854.2
|
379.0
|
1 233.2
|
595 716
|
0.207
|
1999-00
|
880.6
|
390.7
|
1 271.3
|
632 391
|
0.201
|
Est2000-01
|
914.8
|
405.9
|
1 320.8
|
na
|
na
|
Est: estimate
Sources: National Office of Local
Government(24) Submission to the Commonwealth Grants
Commission Inquiry into the Local Government (Financial
Assistance) Act 1995, p. 45. Reserve Bank statistical series
table G10.
Table 1 also shows that assistance has fallen as
a proportion of GDP since 1991-92. The main reason is that the
indexation arrangements have not provided growth in the real level
assistance even though the economy is growing. As noted, indexing
assistance for population growth and the consumer price index has
maintained assistance in real per capita terms and in effect placed
a 'floor' under the value of assistance. But the indexed value of
assistance has not risen as fast as real GDP.
The Australian Local Government Association
argues that assistance should be increased and fixed at one per
cent of total Commonwealth taxation receipts.(25) In
1999-2000, application of this proposal would have resulted in
assistance of $1.525 billion compared with actual assistance of
$1.265 billion.(26) However, under this proposal, the
level of grants would depend on the level of economic activity and
discretionary changes to taxation rates.
The payment of $1.2 billion over five years
under the roads to recovery program (discussed below under roads to
recovery) will boost spending on local roads substantially. In
annual average terms, the program is equivalent to additional road
spending of $240 million, or 59 per cent of the $406.9 million
allocated to identified road grants in the 2000-01 Budget. In
contrast, the level of financial assistance grants will continue to
fall relative to GDP in the absence of measures to boost funding.
Further, it could be argued that the funds allocated to roads to
recovery could be better used to increase financial assistance
grants on the grounds that local governments are best placed to
determine their priorities and can spend financial assistance
grants as they wish.(27)
Interstate Distribution of
Grants
The terms of reference for the review also state
that the review will not address the interstate distribution of
grants. However, the bases on which grants are distributed raise a
number of issues, particularly their consistency with fiscal
equalisation.
Financial Assistance
Grants
As noted, financial assistance grants have been
distributed among the States on an equal per capita basis since
1989-90, and the Commonwealth Grants Commission concluded that it
would not be appropriate to continue indefinitely this method of
distribution as it departs from fiscal equalisation. This raises
the question of whether the basis of distribution should be changed
to one that results in fiscal equalisation.
A number of factors would have to be taken into
account when considering moving from an equal per capita basis. The
Commonwealth Grants Commission noted that these considerations
included:
(i) The per capita basis of distribution is
simple and predictable. An equalisation basis would be much more
complex and would deliver less predictable outcomes, particularly
in the early years.
(ii) A change to an equalisation system would
entail extra administrative costs for both the Commonwealth and the
States. These costs have to be considered in relation to the
relatively small size of the pool.
(iii) A move to an equalisation basis would be
very disruptive to local authorities in New South Wales and
Victoria.(28)
Identified Road
Grants
As noted, the interstate distribution of
identified road grants is still based on the shares that prevailed
when the grants were untied in 1991-92 and is thus increasingly
anachronistic. Moreover, this distribution is likely to be
inconsistent with the fiscal equalisation principle since the
distribution was based on the criteria in the Australian Land
Transport Development Act 1988. The national principle
requiring local government Grants Commissions to take account of
road needs and asset preservation further moves the distribution of
identified road grants away from a distribution based on fiscal
equalisation.
Another issue is whether identified road grants
should continue to be identified separately or combined with
financial assistance grants. As noted, the proposal that identified
road grants be absorbed into financial assistance grants with
effect from 1995-96, and distributed among the States on an equal
per capita basis, was rejected. No timetable has subsequently been
proposed to absorb identified road grants into financial assistance
grants.
Views on the desirability of combining the two
grants differ. On the one hand, the National Office of Local
Government, for example, believes that:
... local road infrastructure warrants separate
identification because of the importance placed on it by local
communities particularly in regional and rural Australia as well as
the States and the Northern Territory and the Commonwealth
Government.(29)
The Australian Local Government Association also
does not favour combining the two pools:
... combination of the two pools would see large
changes in the distribution of the funding between the States. This
would lead to volatility in the grants provided to local governing
bodies. Separation of the funds is symbolic and continues to
demonstrate a Commonwealth commitment towards road
funding.(30)
Moreover, local governments spend more on local
roads (in excess of $2.5 billion annually) than is funded by
identified road grants (estimated at $407 million in 2000-01) so
that much of any additional funds in the form of financial
assistance grants would be likely to be spent on roads.
On the other hand, the South Australian
Government favours combining the funds and allocating them on a per
capita basis on the grounds that South Australia is disadvantaged
under existing arrangements.(31)
Roads to Recovery Grants
The Commonwealth began providing grants under
the Roads to Recovery Act 2000 for the construction,
upgrading and maintenance of roads in 2000-01. Roads to recovery
grants are paid directly to local governments. As noted, the
program will boost spending on local roads substantially. Roads to
recovery grants are paid directly to local governments.
The Government decided against using the shares
used to distribute identified road grants for the roads to recovery
program. But the distribution of roads to recovery grants is
similar, in the case of the most populous jurisdictions, to the
distribution of identified road grants because both are based on
similar methodologies. The distribution of roads to recovery
grants-which is based on 50 per cent road length and 50 per cent
population 'adjusted to achieve some equity and
fairness'(32)-is also unlikely to be consistent with
fiscal equalisation.
The differences between the proposed roads to
recovery distribution and the distribution of identified road
grants are shown in Table 2.
Table 2: Distribution of roads to
recovery and identified roads grants
State
|
Roads to Recovery (%)
|
Identified road grants (%)
|
NSW
|
28.3
|
29.0
|
VIC
|
20.8
|
20.6
|
QLD
|
20.8
|
18.7
|
WA
|
15.0
|
15.2
|
SA
|
8.3
|
5.5
|
TAS
|
3.3
|
5.3
|
NT
|
1.6
|
2.3
|
ACT
|
1.6
|
3.2
|
Sources: The Prime Minister Hon John Howard MP
and the Hon John Anderson MP, Deputy Prime Minister and Minister
for Transport and Regional Services, joint press release, 27
November 2000. Budget paper No. 3, 2000-01.
Table 2 shows that Victoria, Queensland and
South Australia gain under the roads to recovery program compared
with the distribution of identified road grants.
Minimum Grant
Section 6(2) of the Local Government
(Financial Assistance) Act 1995 provides that each local
government is entitled to receive a minimum grant. This section
provides that the Minister, in formulating national principles,
must ensure that the allocation of funds is made, as far a
practicable, on a fiscal equalisation basis. But the Minister also
must ensure that a local government in a State must not receive
less than the amount that the local government would receive if 30%
of the amount to which the State is entitled were allocated among
local governments in the State on a per capita basis.
The purpose of the minimum grant is to
compensate local government for the narrowness of the tax base,
namely, municipal rates. The minimum grant also provides a measure
of funding certainty. The number of local governments receiving the
minimum grant rose from 35 in 1995-96 to 67 in 1999-2000, while the
proportion receiving the grant rose from 19 per cent in 1997-98 to
30 per cent in 1999-2000.(33)
Views differ on the desirability of retaining
the minimum grant. The Australian Local Government Association
argues that the grant should be retained because it recognises the
existence of vertical fiscal imbalance between the taxing and
spending powers of the Commonwealth and local government and
because it provides funding stability.(34) On the other
hand, the National Office of Local Government believes that the
grant requirement is no longer appropriate on the grounds that it
improves the financial capacity of relatively wealthy local
governments to the detriment of poorer local governments. The
National Office of Local Government therefore recommends that the
minimum grant provision be removed.(35)
Intrastate Fiscal Equalisation and
Grants Commission Methodologies
The principle of fiscal equalisation underlies
the intrastate distribution of grants, and is contained in the
Local Government (Financial Assistance) Act 1995 and the
national principles. Section 3 of the Local Government
(Financial Assistance) Act 1995 defines fiscal equalisation as
that allocation of funds that:
(a) ensures that each local governing body in a
State is able to function, by reasonable effort, at a standard not
lower than the average standard of other local governing bodies in
the State; and
(b) takes account of differences in the
expenditure required to be incurred by local governing bodies in
the performance of their functions and in their capacity to raise
revenue.
But it is questionable to what extent
equalisation is being achieved. The State Grants Commissions do not
use consistent methodologies to determine the intrastate allocation
of grants. Moreover, it is questionable whether some of the
methodologies meet the objective of fiscal equalisation:
The Act does not appear to be meeting its goal
in promoting consistency in the grant distribution methodologies
employed by the State and Territory Grants
Commissions.(36)
It would be unreasonable not to expect grant
outcomes to reflect the unique situation of each State and
Territories' Local Government structure. However, it appears that
the differences in grant outcomes are not solely explained by these
State and Territory differences and reflect aspects of State and
Territory Grants Commissions methodologies which according to the
Local Government National Report are difficult to defend and not
consistent with the objective of horizontal
equalisation.(37)
The National Office of Local Government
therefore advocates that:
The Commonwealth Grants Commission assess the
feasibility of developing, in consultation with State and Territory
Local Grants Commissions, a standard framework that could be
adopted by all State and Territory Grants Commissions to guide them
in their application of the National Principles and their general
purpose and local road grants methodologies. This standard
framework would seek to promote, as far as is practical, greater
consistency in methodologies between State and Territory Grants
Commissions and greater consistency in the application of the
National Principles.(38)
Burden Shifting
Since the provision of Commonwealth assistance
is not linked to specific performance requirements, local
governments have an incentive to seek higher levels of funding from
the Commonwealth. On the other hand, the fall in Commonwealth
assistance relative to GDP may have encouraged local governments to
rely more on own-source revenue and raise efficiency. As the
National Office of Local Government observed:
The provision of financial support may have a
negative impact on the financial capacity of Local Government over
the longer term. In the absence of financial assistance grants
Local Government may have been more inclined to investigate other
revenue sources and pursue efficiency gains through resource
sharing, amalgamations and improved financial and work practices.
The 1994 Review found that where there was a significant reduction
in financial assistance grants, councils typically focussed on rate
substitution in the first few years and later focussed on greater
efficiencies and rationalisation of services in order to keep
annual rate increases in line with community expectations. This
negative impact is likely to be small.(39)
The provision of Commonwealth assistance also
provides State governments with an incentive to limit their grants
to local government. The 1985 review of the Local Government
(Personal Income Tax Sharing) Act 1976 found that some
reduction in State assistance was associated with Commonwealth
assistance but that it was difficult to attribute the reduction to
increased Commonwealth assistance.(40) Whether or to
what extent 'burden shifting' from the States to the Commonwealth
now occurs is unclear.
Conclusions
Successive Commonwealth governments have been
content to maintain the level of assistance to local government in
real per capita terms and so allow assistance to fall relative to
GDP. Reversal of this fall would require a change to the method of
determining the level of assistance.
It seems unlikely that the interstate
distribution of general purpose assistance will be changed soon.
The distribution was debated in 1999 during the negotiations
between the States and the Commonwealth over the ANTS package but
nothing was resolved.(41) Moreover, political
considerations seem to militate against changing the methods of
distribution as the Federal Minister for Regional Services,
Territories and Local Government, Senator the Hon. Ian Macdonald,
pointed out to a meeting of the Local Government Association of
Queensland:
... the political reality is this: that there is
no purpose in the Federal Government re-examining interstate
distribution until the States and the Territories can agree on a
common approach or until the peak body of Local Government in
Australia - the Australian Local Government Association, to which
you all belong, can put forward a whole of Local Government
submission to the Federal Government. And until you can get the
States to agree, until you can get Local Government to agree, the
political reality is that there is no purpose in the Federal
Government re-examining that issue.(42)
A major change to the basis of distribution,
such as a move to fiscal equalisation, would entail disruption,
with some States-and hence some local governments-losing funds and
others gaining.
Scope exists for improvement in areas such as
greater consistency in the methodologies the State Grants
Commissions use. The review of the 1995 Act now being conducted by
the Commonwealth Grants Commission will contain recommendations for
such improvements. The final report is to be presented to the
Minister for Finance and Administration late in June 2001.
Endnotes
-
- The Commonwealth Grants Commission has released a draft report,
which is available at http://www.cgc.gov.au/Local%20Gov%20Pages/draft_report.htm
- There is some confusion in the use of terminology. The
terminology in this paper is that used in Commonwealth Budget Paper
No. 3 where 'general purpose' assistance encompasses financial
assistance grants and identified road grants. However, the term
general purpose grants is often applied to financial assistance
grants. The Commonwealth Grants Commission uses financial
assistance grants to encompass general purpose and identified road
grants.
- Commonwealth of Australia, Budget Paper No.
3, 2000-01, pp. 25 and 115.
- For a more comprehensive history, see Department of Transport
and Regional Services, National Office of Local Government,
'Submission to the Commonwealth Grants Commission Inquiry into the
Local Government (Financial Assistance) Act 1995',
at:
http://www.cgc.gov.au/Local%20Gov%20Pages/national_office_of_local_government.htm
Appendix 2, 28 July 2000.
- Each State was required to allocate a minimum of 30 per cent of
grants among local government on a basis which took account of each
local authority's population, with the proviso that the States may
also take account of size and population density, as well as any
other matter agreed between the Commonwealth and the State
concerned. The balance of assistance was to be allocated having
regard to each authority's financial needs as assessed by the State
Grants Commissions. Following representations by Tasmania, the
issue of the percentage distribution among the States was referred
to the Commonwealth Grants Commission. In its Special Report on
Financial Assistance for Local Government, the Commission
recommended that the distribution be changed slightly. The Premiers
accepted this recommendation at the Premiers' Conference held on 1
July 1977.
- National Inquiry into Local Government Finance,
Report, AGPS, 1985.
- P. Self, 'The Federal Government's Role in Local Government
Finance', in G. Brennan, ed., Local Government Finance,
Centre for Research on Federal Financial Relations, Australian
National University, Occasional Paper No. 41, p. 9,
Canberra, 1987.
- Defined as the sum of financial assistance grants, identified
health grants and general purpose capital assistance.
- The Act provided that no local authority would receive an
amount less than the amount it would receive if 30 per cent of the
State's grant were allocated on an equal per capita basis.
- Commonwealth Grants Commission, 'Report on the Interstate
Distribution of General Purpose Grants for Local Government 1991',
AGPS, 1991.
- ibid. p. xxv.
- ibid. p. xxii.
- The term 'identified' is used because they are separately
identified from financial assistance grants, which are allocated
among the States on a different basis from road grants.
- Budget Paper No. 3, 1995-96, p. 33.
- In essence, these criteria were designed to reflect relative
road needs.
- Australian Urban and Regional Development Review, 'Financing
Local Government. A Review of the Local Government (Financial
Assistance) Act 1986', Discussion Paper #1, February 1994,
and Local Government Funding Methodologies, November 1994.
- As noted, constitutional responsibility for establishing local
government lies with the States. Indeed, the Constitution does not
mention local government even though local government existed long
before Federation. All State and Territory jurisdictions have
passed legislation establishing local governments except the
Australian Capital Territory (ACT), which has both State-like and
local government functions. The ACT has received assistance for
local government functions since 1988-89.
- Prime Minister, 'Changes to the goods and services tax', Media
Release, 31 May 1999.
- In 1997, the Commonwealth imposed surcharges on the excise on
tobacco, alcohol and petroleum after the High Court cast doubt on
the constitutional validity of all State franchise fees. The
Commonwealth returned the surcharge revenue to the States as
revenue replacement payments. These payments ceased on 30 June 2000
with the introduction of the GST.
- For the Bills Digest, see http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD166.htm
- This is consistent with the decision that the consumer price
index estimate, excluding the effect of tax reform, be used for
indexation purposes for most Commonwealth expenses including
specific purpose payments. Automatic escalation of grants is not
guaranteed since the 1995 Act provides the Commonwealth with
discretion to adjust the escalation factor to suit its budgetary or
other circumstances.
- Arthur Andersen, 'Impact of GST on Local Government', Report
prepared for the Victorian Department of Infrastructure and
Department of Treasury and Finance, August 1999.
- Department of Transport and Regional Services, 'Submission to
the Commonwealth Grants Commission Inquiry into the Local
Government (Financial Assistance) Act 1995', p. 15.
- The National Office of Local Government is the unit in the
Department of Transport and Regional Services responsible for,
among other things, providing the Minister for Regional Services,
Territories and Local Government with advice on matters relating to
local government.
- Australian Local Government Association, 'Initial Submission to
the Commonwealth Grants Commission's Discussion Paper CG 2000/1',
p. 8. Available at:
http://www.cgc.gov.au/australian_local_government_association.htm
- Based on total taxation revenue of $152.457 billion. See
Commonwealth Treasury, 'Final Budget Outcome 1999-2000', pp. 22 and
53.
- This argument is an example of the 'choice' model, which holds
that local government better reflects community wishes than
centralised government. The Government's decision on roads to
recovery is an example of the 'agency' model, in which local
government is seen as the vehicle for implementing central
government decisions.
- Commonwealth Grants Commission, op. cit., p. xxv.
- Department of Transport and Regional Services, op. cit., p. 35.
- Australian Local Government Association, op. cit., p.21.
- South Australian Government submission to the Commonwealth
Grants Commission Review of the Commonwealth Local Government
(Financial Assistance) Act 1995, p. 16.
- Senator the Hon. Ian Macdonald, Minister for Regional Services,
Territories and Local Government, Senate additional estimates
hearings, 1 December 2000, at RRA&T 153.
- Department of Transport and Regional Services, op. cit., p. 32.
- Australian Local Government Association, op. cit., p.17.
- Department of Transport and Regional Services, op. cit., p. 7.
- ibid. p. 26.
- ibid. p. 34.
- ibid. p. 6.
- ibid. p. 16.
- ibid. p. 29.
- Senator Hon I. Macdonald, Minister for Regional Services,
Territories and Local Government, 'Address to the Local Government
Association of Queensland Annual Conference', 27 July 2000,
http://www.dotrs.gov.au/media/macdon/speeches/ms13_2000.htm
- ibid.
Appendix
1
Terms of Reference for the Review of the
Local Government (Financial Assistance) Act
1995
The review under Section 17 of the Local
Government (Financial Assistance) Act 1995 will examine and
report on:
(a) the effectiveness of the current
arrangements under the Act to achieve the
purposes of the Act and the goals in providing
the grants that are referred to in
Section 3 of the Act;
(b) the appropriateness of the current National
Principles and, in particular, the
retention of or variations of the minimum grant
for the general purpose
component in Section 6 of the Act;
(c) the consistency with the National Principles
of the methodology and policies used
by each of the State and Territory Grants
Commissions in distributing funds to
councils;
(d) As required by Section 17 of the Act, the
review shall also examine and report on:
(i) the effectiveness of the arrangements under
this Act in relation to ensuring
that the allocation of funds for local
government purposes is made on a full
horizontal equalisation basis as mentioned in
paragraph 6(2)(a); and
(ii) the impact of the Act on the raising of
revenue by local governing bodies and
on the assistance provided by the States to
local governing bodies; and
(iii) the implications of any changes in the
functions or responsibilities of local
government bodies; and
(iv) the eligibility for assistance under this
Act of bodies declared by the Minister
under Section 4 to be local government
bodies.
The Review will not address the interstate
distribution of the general purpose and local road grants or the
quantum of funds available under the Act.
Appendix
2
Issues Raised in the Commonwealth Grants
Commission Discussion Paper on the Review of the Local
Government (Financial Assistance) Act 1995
(i) Are the objectives of the Commonwealth in
providing assistance to local government fulfilled through the
operations of the Local Government Grants Commission in your State?
Are there other objectives that should be considered?
(ii) Are the National Principles (the guidelines
for the distribution of Commonwealth financial assistance to local
government) fulfilled through the operations of the Local
Government Grants Commission in your State? Are there other
principles that should be considered?
(iii) Is equalisation still a relevant objective
of the Commonwealth in relation to financial assistance for local
government, and why?
(iv) What is the purpose of the minimum grant?
Is the concept of a minimum grant still relevant to the
distribution of funds, and why? What would happen if it were
changed?
(v) Are the current arrangements surrounding the
allocation of Commonwealth assistance sufficiently transparent? Are
the National Principles sufficiently understood?
(vi) Do you understand how grants are calculated
by your State Grants Commission? What do you consider are the
shortcomings/strengths of your State Grants Commission's allocation
method? What additional information should your State Grants
Commission provide?
(vii) How important is stability in the size of
grant funding for councils as an attribute of the grant
distribution system?
(viii) To what extent do the methods of your
State's Local Government Grants Commission take account of the
special circumstances of indigenous communities?
(ix) Should consideration be given to combining
the general purpose and roads funding pools?
(x) What has been the impact of the Commonwealth
assistance on the level of State assistance to local
government?
(xi) What has been the impact of the
Commonwealth assistance on the efforts made by local government to
raise revenue from its own sources?
(xii) What Commonwealth and State assistance for
specific purposes is provided for local governments? Is the
assistance based on an assessment of individual submissions or a
broad assessment of the needs of local governments in a field?
(xiii) What limitations are imposed on local
government revenue bases, eg rate-capping and other (limiting)
State legislation?
(xiv) What major changes have there been since
the Act was passed in 1995 in the distribution of service provision
responsibilities or revenue capacities between the Commonwealth,
State and local spheres of government? Are any other changes under
active consideration?
(xv) To what extent do the administrative
arrangements imposed by the Act need re-examination or
amendment?