Is it time for a conversation about Local Government's fair share?

It is undeniable that local governments deal with a vertical fiscal imbalance, relying heavily on grants from State and Federal Governments to fulfil crucial functions within their community. What is perhaps less apparent is that local governments also confront a vertical democratic imbalance, requiring approval from the State and, at times, the Federal Government for some of their actions, including their ability to raise funds.

Local government in NSW plays a significant role in the welfare of their local community and economy, employing approximately 60,000 employees to care for more than $177 billion of community assets. They look after approximately 90 per cent of the state’s roads and bridges, more than 350 libraries, 400 public swimming and ocean pools and 600 museums, galleries, theatres and art centres in the state. 

Local government in NSW also spends more than $12 billion a year, of which around $2.2 billion is caring for the environment, looking after more than four million tonnes of waste, managing recycling, stormwater and protecting the state's native flora and fauna. 

However, local government cannot determine their own income and constantly have their financial sustainability undermined by rate-pegging. These rates fail to keep up with the increasing cost of employment, inflation and an ongoing practice of cost-shifting. Local government is being asked to deliver significantly more to the community with a lot less resources, all while dealing with growing criticism on issues that, most of the time, they have limited control over.

The 2022-23 rate pegging variation was between 0.7 per cent excluding population growth factors and a maximum of 5.0 per cent with the population growth factor. This was the lowest rate-pegging in two decades, which resulted in an estimated $80 million shortfall. It came at a time when local government was recovering from a host of natural disasters, including droughts, bushfires, COVID-19 and floods, as well as dealing with the skills and labour shortage, global supply chain disruption and escalating cost of goods and services. 

While significantly higher, in 2023-24, the rate peg was between 3.7 per cent and up to 6.8 per cent with the population factor. Arguably, these rates are still not keeping up with the pressures facing local government and are still considerably lower than the amount required. 

These rate pegs are based on the Local Government Cost Index (LGCI), which reflects the change in prices of a fixed 'basket' of goods and services that are purchased by councils, with the 2023-24 rates being based on 2021-22 LGCI of 3.5 per cent. While the Independent Pricing and Regulatory Tribunal (IPART)  expected the Emergency Services Levy increase to be fully funded by the government in 2023-24, it wasn’t. 

This cost shift alone consumed the equivalent of 89 per cent of the Hay Shire Council , 94 per cent of Bourke Shire Council, 119 per cent of Tenterfield Council, 75 per cent of Hornsby Council and 29 per cent of Campbelltown City Council approved rate rise. Collectively, the Emergency Services Levy increase has decreased Local Government funding in NSW by $77 million in 2023-24. 

There are many issues with the current methodology, and no shortage of people calling for the amendment or removal of rate pegging. While the review of the IPART rate peg methodology, including the LGCI that is currently being undertaken, is a welcome start, it remains to be seen as an effective solution. 

The structural financial issues facing Local Government cannot be solved by increasing rates, otherwise rates may become unaffordable. Before Local Governments shift their increasing costs to the ratepayers, two questions should be asked: should these services be covered under a different type of taxation? And are Local Governments getting a share of that money?  

It is imperative we acknowledge the myriad of taxes collected by State and Federal Governments, which bear a direct or indirect connection to the functions of Local Government. While I appreciate the complexity of the taxation landscape with its well-established principles and ideologies, it is undeniably crucial to initiate a conversation that transcends the mere discussion of increasing rates to cover cost-shifting and instead focuses on providing local government with a just share of other tax revenues.

According to the Centre of Policy Studies (2022) research, the share of tax collected in NSW directly related properties (based on 2017-18) is 25 per cent council rates, 49 per cent stamp duties, 21 per cent land tax and four per cent emergency service levy. In the 2020-21 financial year, the total operating income for Local Government in NSW was $16.2 billion, of which there was around $3.5 billion in grants from the State and Federal Governments. That year, the NSW State Government collected $9.379 billion in stamp duty. That amount continues to grow significantly year on year. 

It is incumbent upon all levels of government to embark on a more profound and mature conversation about the service that Local Government should provide. The dialogue should centre around establishing a fair and equitable funding model that considers the diverse needs of local government entities, ensuring they receive the support they require for these essential functions. The Australian Local Government Association's call for a minimum of one per cent of Commonwealth taxation revenue is commendable and marks a promising starting point for the dialogue. Is it time also for a fresh start for Local Government in New South Wales? Can we also be a part of tax integrity and fairness in New South Wales?