Full text of DOI:10.1111/1467-8500.00177

RESEARCH &EVALUATION
The Debate on Australian Federalism: Local
Government Financial Interrelationships with State
and Commonwealth Governments
Andrew Worthington
School of Economics and Finance
Brian Dollery
School of Economics
Queensland University of Technology
University of New England
The nascent debate on Australian federalism has hitherto focused almost entirely on
Commonwealth–state interrelationships to the virtual exclusion of local government. Since
Australian local government employs around 156,000 people and spends in excess of
$
10 billion this neglect is unfortunate. In an effort to at least partly remedy this oversight,
the present paper seeks to assess various unsettled questions in local government financial
relationships with both Commonwealth and state governments, especially the issue of
financial assistance grants and their efficiency consequences.
It is now widely accepted that good governance
The paper itself is divided into four main
of an advanced modern economy will typically sections. The first section examines the sources
involve some combination of local and central and composition of Australian local government
government decision-making, especially in finance. The second section investigates the
countries that cover vast geographic areas, like nature of financial assistance grants. The
Australia, Canada and the USA. Nevertheless, controversial question of the efficiency
considerable current interest has once again been consequences of grant distribution is addressed
directed at precisely how various public in the third section. The paper ends with some
responsibilities should be allocated between the brief concluding remarks.
different tiers of government in a federation. In
the USA, federalism is firmly back on the public
agenda (Donahue 1997). For instance, Inman
Sources and Composition
and Rubinfeld (1997) have recently proposed Local governments in Australia finance their
three alternative models to inform this debate, activities from a variety of sources. The main
namely ‘economic federalism’, ‘cooperative sources are: (i) taxes on property (or municipal
federalism’ and ‘democratic federalism’.
rates), (ii) fees and fines (referring to user
A similar embryonic debate is beginning to charges imposed for services rendered and fines
take shape in Australia (Galligan 1995). associated with regulatory functions), (iii) net
However, almost all the extant discussion has operating surplus of public trading enterprises
focused entirely on federal–state relationships (normally utilities), (iv) grants from the
to the virtual exclusion of local government Commonwealth or respective state government,
(
Sharman 1998). The present paper seeks to at and (v) interest received from council
least partly remedy this neglect in Inman and investments.
Rubinfeld’s (1997) ‘economic federalism’
Taxation by level of government in Australia
sphere by reviewing local government financial is outlined in Table 1. In terms of overall public
relationships in Australia and exploring various sector revenue-raising capacity in Australia, the
unresolved questions in this area.
Commonwealth raises approximately 75
Australian Journal of Public Administration • 59(4):25–35, December 2000
©
National Council of the Institute of Public Administration, Australia 2000. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK,
and 350 Main Street, Malden 02148, USA.

26
Worthington and Dollery
percent, the states around 21 percent, and local of revenue by specific source is unfortunately
government about 4 percent. Accordingly, in the not available. However, estimates indicate that
Australian federal system, own-source revenues municipal rates comprise some 90 percent of
as a percentage of own-purpose outlays (an taxes, fees and charges, with the remainder being
indicator of vertical fiscal imbalance) are 142 mainly garbage fees. Of the grants received,
percent for the Commonwealth, 50 percent for approximately 70 percent are financial assistance
the states, and 80 percent for local government. grants and specific purpose payments made by
As itemised in Table 2, the main sources of the Commonwealth, of which the larger portion
revenue for Australian local governments are are general purpose grants (some 57 percent) and
taxes, fees and fines (46.5 percent), followed identified local roads grants a further 25 percent.
by intergovernmental grants (17.4 percent) and
Nevertheless, there is considerable variation
sale of goods and services (22.9 percent). A in the composition of local government revenue
more accurate and comprehensive breakdown across the states and over time (AURDR 1994a).
Table 1: Taxation by Level of Government
Level
1990/91
1991/92
1992/93
1993/94
1994/95
1995/96
Commonwealth
93,413
87,530
(76.1)
22,572
(19.8)
4,703
(4.1)
88,830
(75.4)
24,093
(20.4)
4,968
(4.2)
93,328
(74.5)
26,787
(21.4)
5,145
(4.1)
105,092
(75.9)
28,144
(20.3)
5,265
115,486
(76.3)
30,360
(20.1)
5,428
(
78.5)
21,121
17.7)
4,480
3.8)
State/Territory
Local
(
(
(3.8)
(3.6)
Source: ABS 5506.0 Taxation Revenue, Australia.
Notes: Totals exclude direct taxes paid by state and territory government public trading enterprises
to the Commonwealth government; taxes are in $ millions, figures in brackets are the corresponding
percentage of total taxation.
Table 2: Local Government Revenue Sources, 1995/96
Revenue Source
NSW
Vic
Qld
SA
WA
Tas
NT
Total
Taxes, fees and fines
1,979
1,287
1,109
461
(58.3)
1
512
(46.0)
0
142
(46.3)
26
31
(43.1)
0
5,522
(46.5)
532
(
49.2)
80
(48.9) (37.6)
417
(0.0) (14.1)
Public trading
0
(
2.0)
(0.1)
(0.0)
(8.5)
(0.0)
(4.4)
Interest received
Grants received
175
4.3)
74
(2.8)
51
(1.7)
43
(5.4)
43
(3.9)
12
(3.9)
1
(1.4)
399
(3.4)
(
642
589
388
126
(15.9)
125
238
(21.4)
257
67
(21.8)
47
24
(33.3)
16
2,074
(17.4)
2720
(
15.6)
807
(22.4) (13.2)
680 788
(25.8) (26.7)
Sales of goods
and services
(20.0)
(15.8)
(23.1)
(15.3)
(22.2)
(22.9)
Other revenue
343
2
194
34
62
13
0
649
(
8.5)
(0.1)
(6.6)
(4.3)
(5.6)
(4.2)
(0.0)
(5.5)
Total
4,026
2,633
2,947
791
1,112
307
72
11,888
(100.0)
(
100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0)
Source: ABS 5512.0 Government Finance Statistics, Australia.
Notes: Revenues are in $ millions, figures in brackets are the corresponding percentage of total
revenues.
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Local Government Financial Relationships with State and Commonwealth Governments
27
For example, the proportion of revenue derived and the USA lies in the broader range of
from grants ranges from 33 percent in the revenue-raising instruments available to local
Northern Territory to just over 13 percent in government in the latter country. These include
Queensland, while taxes, fees and fines make personal income taxes (providing approximately
up 58 percent of local government revenue in 5 percent of own-source revenue), corporate
South Australia and just 38 percent in income taxes (1 percent), property taxes (74
Queensland. The AURDR (1994a:77) concluded percent) and taxes on consumption (20 percent).
that ‘if the data on rating support can be seen as
A similar situation holds in other federal
a guide to the degree of fiscal imbalance, then it OECD countries. For example, in Austria local
would appear that Queensland and Western government raises 34.7 percent of own-source
Australia have the greatest disparity within their revenue through personal income taxes, 5.5
respective states, and Victoria and South percent from corporate income taxes, 11.0 percent
Australia the least’.
from payroll taxation, 5.4 percent from property
In terms of international comparisons, taxes, and 34.5 percent from consumption and
several points can be raised. In the case of the other taxes. In Germany and Switzerland, personal
USA, the degree of vertical fiscal imbalance is income taxes are the primary own-source revenue,
reasonably similar to that in Australia, with local providing 66.5 and 76.5 percent of own-source
government raising about 70 to 80 percent of revenues respectively. However, in Canada local
its own requirements. However, the source of governments are equally dependent upon property
the imbalance is quite different, with the larger taxes (80 percent), despite having recourse to
portion of funding assistance being made by residual, mainly business, taxes (18 percent).
state rather than federal government. By
In terms of Australian local government
contrast, in Australia the balance is provided own-source revenue, several salient features can
almost exclusively by the federal government. be identified. First, when combined together the
The Commonwealth grant for 1997/98 is sources of revenue which can be assessed by
estimated to be some $1.2 billion — $0.372 local councils (including the use of loan funds)
billion for the purposes of local roads and $0.840 represent at least 80 percent of ordinary services
billion in financial assistance grants. In the USA, revenues for most Australian local governments.
only about 17 percent of grants to local Nevertheless, rates on property remain the
government are ‘block’ or general purpose dominant own-source revenue component of
grants, with the remainder being ‘categorical’ local government in Australia, providing some
or specific purpose grants. In addition, extensive 40 to 50 percent of total ordinary services
use is made in the USA of federal ‘mandates’ revenue (MCS 1996:4). Second, despite having
which dictate the actions of local governments recourse to only a relatively small number of
but provide no finance (AURDR 1994a:17). revenue sources, local government in Australia
However, the main difference between Australia is only responsible for a relatively narrow range
Table 3: National Grant Allocation, 1991–92 to 1997–98
General purpose
Local Roads
Total
1
1
1
1
1
1
991–92
993–94
994–95
995–96
996–97
997–98
714.969
737.203
756.446
806.748
833.693
840.112
303.174
322.065
330.471
357.977
369.034
372.782
1018.14
1059.268
1086.917
1164.725
1202.727
1212.894
Source: National Office of Local Government (1997) 1996–97 Report on the Operation of the
Local Government (Financial Assistance) Act 1995.
Notes: Grants to the Australian Capital Territory under the Act commenced in 1995–96; the 1997–
9
8 grant allocation is the estimated entitlement; figures are in $ millions.
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Worthington and Dollery
Table 4: Financial Assistance Grants as a Percentage of Rate Revenue by ACLG
Category
NSW
Vic
Qld
SA
WA
Tas
UCC
UDV/UDL
UDM
UDS
URV/URL
URM
URS
UFL
UFM/UFS
RAV/RAL
RAM
0.31
11.16
6.99
1.72
12.35
10.34
1.92
15.09
21.53
22.84
28.86
37.79
37.22
48.43
50.79
11.59
17.95
3.55
16.77
15.57
11.88
23.37
19.01
4.17
11.32
11.17
10.11
14.10
21.58
6.23
22.41
21.31
18.6
19.16
24.48
33.32
57.35
64.68
90.94
91.45
14.36
33.81
17.22
17.61
51.93
40.33
64.41
106.76
15.93
24.17
36.83
39.03
77.68
143.79
32.47
35.77
26.99
45.48
48.10
37.64
75.12
60.37
82.39
82.90
41.80
134.65
RAS
RTL
RTM/RTS/RTX
215.78
25.57
17.82
21.65
Overall
23.26
18.32
29.79
28.11
Source: Australian Urban and Regional Development Review (1994a) Financing Local
Government: A Review of the Local Government (Financial Assistance) Act.
Codes: (first two letters) UD — urban developed; UF — urban fringe; UR — urban regional; RA
—
rural agricultural; RT — rural remote; (third letter) C — capital city; V — very large; L —
large; M — medium; S — small; X — extra small.
Table 5: Specific Purpose Payments to Local Government, 1996–97
Title
NSW
Vic
Qld
SA
WA
Tas
NT
Total
Current payments
Home & community care
979
1093
92
148
406
113
-
2832
Aged/disabled homes
&
hostels
6415 12236 2339 2382
851 495 434
58660 75436 15206 1288 12394 7899 1894 172777
4367
-
437
-
45 29121
17 1796
Disability services
Children’s services
Indigenous employment
strategies
LGDP
Other current
-
38
892
-
98
274
-
822
141
-
79
283
-
-
200
20
-
116
-
19
524
-
1057
2440
-
Total current
67836 89632 19934 4101 17467 8565 2499 210033
Capital payments
Aged/disabled homes &
hostels
Disability services
Children’s services
Total capital
565
12
328
905
3908
11
216
4135
188
-
69
256
37
-
5
225
-
63
288
168
-
332
500
-
-
5090
23
1169
6282
156
156
43
Total payments
98740 93767 20191 4143 17755 9064 2654 216315
Source: Commonwealth of Australia (1997) Final Budget Outcome, 1996–97.
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Local Government Financial Relationships with State and Commonwealth Governments
29
of property-related functions. However, recent ments has steadily declined over time.
legislative reforms indicate that the emphasis in
Finally, in addition to financial assistance
Australian local government is increasingly grants, the Commonwealth has also been a
being shifted towards ‘service-related’ functions significant provider of funding for other services
and this is likely to see an increase in the use of such as childcare, aged, employment and other
‘
user-pay’ charges (MCS 1996; McNeill 1997). community welfare programs. Details are
Finally, quite apart from theoretical issues provided in Table 5 for fiscal year 1996–97. These
surrounding the use of property rates as a means specific purpose payments or SPPs totalled $216.3
of finance, the rate-based revenue-raising million in 1996–97 or more than 20 percent of
capacity of Australia local governments is total Commonwealth grants to local government
subject to considerable distortion. Many of these (excluding the roads component). The magnitude
issues involve artificial restrictions on revenue and composition of these payments directly
raising, such as rate capping and the overall rating reflects the modifications in Commonwealth/
methodology set down in the various states. local relations.
However, controversy also surrounds the manner
in which the various granting bodies distribute
funds in light of revenue-raising capacity, and this
Financial Assistance Grants
issue will be developed further below.
Under the Commonwealth of Australia
Several interesting points also arise Constitution Act 1900 (§81), the Common-
concerning the composition of intergovern- wealth is given powers to grant financial
mental grants in local government finance. First, assistance to any state for any purpose on such
as detailed in Table 4, the contribution of grants terms and conditions as Parliament thinks fit.
to total revenue sources varies not only across Nevertheless, Commonwealth assistance to local
states (as detailed in Table 2), but also across government did not effectively commence until
local government classifications within states. 1974–75 when untied grants were distributed
The contribution of (Commonwealth provided) on the basis of recommendations made by the
financial assistance grants to, say, large urban Commonwealth Grants Commission (CGC),
fringe areas, varies from under 18 percent of operating under the Grants Commission Act
own-source rate revenue in Tasmania to more (1973). This was the first instance when the
than 37 percent in Western Australia. Similarly, CGC was required to review local government
grants as a proportion of rate revenue within finances. Before this, its main role (and that
states vary significantly. For example, in NSW pursued since) had been the allocation between
grants to Sydney (as the capital city) sum to less states of Commonwealth general purpose
than 1 percent of rate revenue, but increase to grants. However, despite the allocation of local
more than 90 percent for small rural urban areas. government assistance being subsequently taken
This will be developed at length in the next up by separate state Grants Commissions, the
section.
basic principles and procedures of fund
Second, despite the common description of distribution were established at this time. These
Australian local government as a state included the allocation of funds on a ‘horizontal
responsibility, the vast majority of grants derive equalisation’ basis and the assessment of councils’
from the Commonwealth. In 1996/97 the ability to raise revenue solely on the basis of
Commonwealth provided general purpose and rateable property values.
local roads grant allocations of $833.7 and
In 1976 the Local Government (Personal
$
369.9 millions respectively. Moreover, since Income Tax Sharing) Act was passed. This
Commonwealth funding for local government provided for payments to the states of a specified
commenced in 1974–75, the Commonwealth percentage of Commonwealth personal income
has provided over 80 percent of total local tax revenue to be distributed in turn to local
government grant income through the provision government. The inter-state distribution
of financial assistance grants. In 1995–96 the principles were to allocate 30 percent to councils
Commonwealth provided over 97.4 percent of on a per capita basis, with the remainder made
government assistance to local government in on a horizontal equalisation basis. Subsequently,
Australia. Furthermore, the contribution of state these and other principles were enshrined in the
governments to sub-jurisdictional local govern- Local Government (Financial Assistance) Act
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Worthington and Dollery
1
1
986 following recommendations made by the of the National Principles (general purpose
985 National Inquiry into Local Government grants), the first three (horizontal equalisation,
Finance. The main features of this Act were: (i) effort neutrality and minimum grants) reiterated
distribution of grants among states (including the principles that existed in the current legislation.
Northern Territory) on a per capita basis; (ii) Additional principles related to the recognition
distribution within states (referred to as Financial of additional revenue used to meet expenditure
Assistance Grants or FAGs) to be determined by needs being included in assessment calculations,
State Local Government Grants Commissions and the needs of Aboriginal and Torres Strait
(
(
LGGCs) on the basis of horizontal equalisation; Islanders. Part B of the National Principles (roads
iii) a minimum grants entitlement for each component) stipulated that the identified roads
councils based on population; and (iv) provision component of FAGs should be made as far as
for informal local government bodies, such as practicable on the basis of the relative needs of
Aboriginal communities in remote areas, to each council. Relevant consideration for the
receive grants. The main effects of this Act were purpose of this principle included the length, type
effectively to sever the link between and usage of roads in each local governing area.
Commonwealth personal income tax revenues and
Methods used by Local Government Grants
Commissions
total payments to local government, and to
establish the 30 percent per capita grant allocation
as a ‘safety net’ for council revenues.
Despite the fact that the Commonwealth govern-
Additional reports into local government ment provides the funding, the actual allocation
finance and the methodologies used by the state and distribution of monies to local governments
LGGCs to distribute FAGs followed in 1994; is made through state-based LGGCs. The
namely, Financing Local Government: A Review principles applied by these LGGCs to grant
of the Local Government (Financial Assistance) allocation are largely based upon a common
Act 1986 and Local Government Funding legislative core: (i) allocation of funds on a full
Methodologies. The main finding of these reports horizontal equalisation basis; (ii) the functioning
was ‘that the seven different models operating of each local government at a standard not lower
were of little relevance in ensuring equity in grant than the average standard of other local
distribution or allowing for the monitoring of governing bodies in the state; (iii) the assessment
outcomes’ (NOLG 1997:59). Accordingly, the of revenue and expenditure needs and
revised Local Government (Financial disabilities; and (iv) effort neutrality. The most
Assistance) Act 1995 made a number of changes. important consideration here is that the
These included: (i) recognition of the importance allocation of grants is based on the LGGCs
of improving efficiency and effectiveness in objective assessment of local government needs
councils; (ii) recognition of the importance of and disabilities: both expenditure — the
improving local government services to Aboriginal differential costs, relative to standard, that a
andTorresStraitIslandercommunities;(iii)provision council needs to provide a standard level of
of a report to Parliament on the operation of the Act services — and revenue — the differential
and performance of councils; (iv) provision of revenues a council would raise if the
National Principles to provide additional criteria standardised revenue effort was applied to its
for the allocation of funds among councils; (v) revenue base. In the case of expenditure
inclusion of grants to the Australian Capital disabilities, factors usually taken into account
Territory for local government purposes.
include socioeconomic, demographic and
Closely associated with the framing of the new geographic attributes, while revenue disabilities
Act, followed an agreement by Commonwealth, are largely proxied by variance in rateable
state/territory ministers and the Australian Local property value. It is important to note that the
Government Association to a set of principles for horizontal equalisation principles under which
allocating general purpose and local road grants. these assessments are made generate
In part, these National Principles were intended ‘equalisation of the capacity to provide services,
to reflect existing and well-established distribution but not the equalisation of outcomes’ (AURDR
practices that were employed not only by most 1994a:25). Furthermore, despite the fact that the
state and territory LGGCs, but also those of the various LGGCs derive their existence from a
CGC. Of the five principles embodied in Part A common Act and the state governments have
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Local Government Financial Relationships with State and Commonwealth Governments
31
agreed to a set of shared national principles, methodology employed by the relevant LGGC.
considerable differences in the state metho- First, NSW, Victoria, South Australia and
dologies for funding assistance remain.
Tasmania all rely almost exclusively on the
valuation tax base to calculate revenue capacity.
How closely these methods approximate the
Revenue Capacity
For most states, differences in the expenditure underlying revenue raising capacity will
needs of councils and differences in revenue generally depend on the property valuation
capacity for revenues other than rates affect technique employed. For example, it is assumed
grants much less than differences in rate revenue that incomes in the community are most closely
capacity (NOLG 1997:98). However, consider- approximated by rental value (as in Tasmania),
able debate has arisen on the efficacy of the use followed by improved capital values (as in South
of rateable property values alone as a means of Australia), followed by unimproved values.
assessing local government revenue raising Second, even though all LGGCs take account
capacity (as against some other multiple of SPPs (in line with the National Principles
indicator) (NOLG 1997).
concerning other revenue sources) there is some
Several different rating bases are employed variation in the way in which these SPPs are
in the states. Local governments in NSW, recognised. For instance, in Tasmania grants are
Queensland and the Northern Territory averaged over three years, with only 80 percent
exclusively employ ‘unimproved’ property being taken into account, while in NSW, Victoria
values, either ‘land’ or ‘site’ based where land and Western Australia, various discounting
values are based on natural states, while site methods are applied.
values are for cleared areas exclusive of
In general, the debate on assessing the
buildings and other improvements. In Victoria revenue raising capacity in local government,
and South Australia, the basis of assessment is and more importantly, the methods by which
the improved (or capital) value of the property, grants are allocated to attain horizontal
whereas in Western Australia unimproved values equalisation on the revenue side, remains
are used for rural properties, and improved unresolved. On one hand, the Morton Report
values are used for urban properties. In (1996) concluded that, other than the efficacy
Tasmania, the basis of assessment is gross rental of different rating systems in proxying the true
value or assessed annual value. Substantial revenue raising capacity of local government,
differentials exist in the ability of local ‘LGGCs should use a combination of indicators
governments to generate revenue derive from in their assessment methodology’ (MCS
these differences (MCS 1996:15).
1996:45). Furthermore ‘revenue calculation
The assessment of revenue capacity in each should not be seen as a calculation of the
state, and consistency across state borders, will capacity to raise rates, but as a broader
also depend on any additional provisions calculation of capacity to raise revenue by
relating to revenue raising practice. The four whatever means a councils chooses’ (MCS
main considerations are: (i) the use of minimum 1996:39). This was supported by an earlier CGC
rates; (ii) pensioner remissions; (iii) differential report entitled Report on the Interstate
rates; and (iv) rate capping (NOLG 1997:100). Distribution of General Purpose Grants for
First, the main difference between states in Local Government (1991), which advocated the
minimum rate provisions is whether limits are assessment of revenue raising capacity on the
set on the proportion of total general rates to be basis of land value for commercial and industrial
raised from a flat charge per property. Second, land, household income for residential land, and
across the states discounts for rate remissions farm income for rural land. On the other hand,
also vary. Third, in all states and territories there it has been argued that LGGCs using aggregate
is considerable discretion in the use of property values will maintain consistency with
differential rates for residential, commercial, state practices and the fact that property rates
industrial property, etc. Finally, rate capping or are the dominant source of local government
pegging may impact upon the revenue capacity revenue. Both sides of the debate recognise the
of local governments across states.
data issues involved in making consistent
How much revenue assistance is given to comparisons between local government areas
local governments will also depend on the on any basis other than property values (NOLG
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32
Worthington and Dollery
1
997:101). However, the NOLG (1997:101) has component on this basis. For the remainder, 28.5
recently concluded that:
percent is distributed in proportion to bridge
deck areas (excluding culverts), and 5 percent
allocated to councils with an above average ratio
of unsealed roads to sealed roads.
[
A]nyone comparing the different methods
of assessing rating capacity used by
Commissions would find it difficult to escape
the conclusion that they are too various for
all to be consistent with equalisation.
In Queensland, 63 percent of the local roads
component is distributed on the basis of road
length, 37 percent on the basis of population.
Grants are limited to a maximum annual
reduction of 5 percent for any single council.
Roads Grants
The Commonwealth contributes to the funding For the general purpose component, roads are
of road construction and maintenance through distinguished by surface type (sealed, gravelled,
both the local roads and the general purpose formed and unformed) and relative disabilities
components of grants. However, neither part of calculated in reference to traffic volume,
the grant is tied, and councils generally spend topography and road type. For Western
significantly more on roads than the local roads Australia, 93 percent of the local roads
component of the grant received (NOLG 1997). component and all of the general purpose
In NSW some 25 percent of the local roads component are distributed on the basis of an
component is distributed to councils in the ‘asset preservation model’. This model takes into
Sydney, Newcastle and Wollongong areas, with account annual and recurrent maintenance costs
the remainder of the state receiving the balance. and the costs of end-of-life reconstruction. On
For the general purpose component, the NSW the other hand, South Australia distinguishes
LGGC distinguishes between urban local, sealed between metropolitan and non-metropolitan roads
rural and unsealed rural local roads. Disability for the local roads component. The general
factors for topography, climate, soils, materials, purpose component is distributed in an identical
drainage, traffic density and travel are taken into manner, except that roads are divided into six
account. Additional expenditure needs are categories. Finally, in the Northern Territory local
factored in for culverts and bridges. In Victoria roads are maintained through a roads trust. Funds
the local roads and general purpose component are distributed on ‘needs’ criteria from this trust
are distributed according to a ‘Mulholland asset on the basis of road lengths weighted by type.
preservation model’. This method distinguishes
Differences in the allocation of road grants
between road surfaces, and combines ratings for across states arise for four main reasons (NOLG
soil, traffic, climate, drainage, materials and 1997). First, some states distribute some part of
terrain to assess relevant needs. Tasmania also their grants solely on the basis of road length
allocates 66.5 percent of the local roads and population, like South Australia and NSW.
Table 6: General Administration Disability Factors, 1997
Themes
NSW
Vic
Qld
SA
WA
Tas
NT
Scale allowance
Yes
Yes
No
No
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Population growth or decline
Persons of non-English speaking
background
Yes
No
No
Yes
No
No
No
Duplication of facilities, scatter
of settlement
Isolation
Proportion of non-residents
Proportion of young people and
aged
Yes
Yes
No
No
No
No
Yes
Yes
No
Yes
No
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
No
No
No
No
No
No
No
No
Climatic influences
Source: NOLG (1997), 1996–97 Report on the Operation of the Local Government (Financial
Assistance) Act 1995.
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Local Government Financial Relationships with State and Commonwealth Governments
33
Other states, such as Western Australia, have negative disabilities are not calculated, so that
constructed sophisticated asset preservation the minimum weighting for the disability is zero.
models that take into account maintenance and Grants are then applied in proportion to assessed
eventual replacement. Second, most other states disability factors and standard per capita grants
factor additional disability factors into assessing for each category of expenditure.
expenditure needs. These needs may relate to
Across the various states, a great deal of
climate, topography, traffic volume, and so on. variation exists in the functions (or areas of
Third, a number of states, including Tasmania expenditure) assessed, the types of disability
and NSW, make allowances for the type of road factors taken into account, and the weighting
in the allocation. Finally, several states use applied to each factor in overall disability
different methods to allocate the local roads calculation. For example, 21 local government
component in the general purpose component, functions are assessed in NSW, 20 in Victoria,
although others do not.
18 in South Australia, 11 in Tasmania and only
in Western Australia.
9
General Purpose Grants
Although roads are the biggest category of
expenditure for many councils, the LGGC in
Efficiency and Grant Distribution
each state assesses between five and thirty To date, the Commonwealth has not required
classes of expenditure. For each class of the LGGCs to pay explicit attention in grant
expenditure, the LGGCs estimate how much allocation to the efficiency with which local
each council, in the circumstances in which it is councils operate. The reasons for this are threefold.
placed, would have to spend to provide services First, under the Local Government (Financial
of average standard. Estimates are guided by the Assistance) Act horizontal equalisation has been
objective assessment of expenditure ‘disabilities’ the major policy goal. Second, the phrase ‘by
(
or disability factors) in each class of reasonable effort’ in the legislation has largely
expenditure, corresponding to postulated been interpreted to refer solely to the rating effort
systemic influences on expenditure which are of councils, and does not take into account any
beyond a council’s control. Consistent with the matters concerning reasonable efforts to ensure
notion of effort neutrality, the LGGCs do not economic efficiency. Finally, the assumption of
compensate for cost differences which arise due ‘effort neutrality’ which relates to policy
to policy decisions of the council, management decisions by councils, has been interpreted to
performance, or accounting differences. For mean that councils should not be able to act in a
example, in Table 6 the disability factors for manner which affects their grant (AURDR
general administration expenditures in each state 1994a:13). Accordingly, grants to councils only
are detailed. Factors usually taken account of in reflect factors beyond their control, and therefore
assessing disabilities include the proportion of the LGGC grants process neither rewards nor
the population from low socioeconomic penalises councils with differing levels of
backgrounds, population growth and decline, efficiency.
and scale allowances. However, there is not a
great deal of consistency across the various state methodologies have influenced the efficiency of
LGGCs in the use of these factors. local councils, irrespective of their lack of
However, it has been argued that LGGC
The different disabilities are added to legislative mandate (AURDR 1994a). Both
estimate the overall cost disability in percentage positive and negative factors have been
terms. This multiplied by state average identified. On one hand, it has been argued that
expenditure per capita provides a measure of ‘by providing the highest per capita support to
‘
standardised expenditure’: that is, how much those councils with revenue raising difficulties
each council would have to spend to provide and expenditure needs in regard to size, sparcity,
the average level of service. The disabilities thus location and cost disabilities, [the grants system]
obtained may either be positive (a cost may not be conducive to an efficient allocation
disadvantage) implying a greater than average if resources’ (AURDR 1994a:55). Alternatively,
per capita cost of service provision, or negative it has been observed that ‘councils which are
(
a cost advantage) implying a lesser than average cost effective may be rewarded through unit cost
per capita cost of service provisions. Typically, adjustments up to the standard if their operations
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National Council of the Institute of Public Administration, Australia 2000

34
Worthington and Dollery
Table 7: Extent to which councils have been encouraged to be more efficient due to
LGGC method and formulae
NSW
Vic
Qld
SA
WA
Tas
Total
Large
Small
Not at all
Unsure
8.8
51.5
33.8
5.9
25.8
28.8
43.9
1.5
13.5
28.8
50.0
7.7
12.7
52.7
32.7
1.8
26.8
42.9
30.4
0.0
20.0
40.0
40.0
0.0
17.3
41.3
37.8
3.5
Source: AURDR (1994) National Survey of Councils
are cost effective’ (AURDR 1994a:14). In common with all federal systems of
However, the Grants Commission’s (1994: government, the Australian fiscal federalism is
6) argument that ‘the use of council’s characterised by fiscal imbalance. First, vertical
1
expenditure in the calculations [expenditure fiscal imbalances arise because different levels
disabilities] is limited to determining a state of government have differing capacities to raise
standard cost for each selected function’ ignores revenues to finance expenditure. As we have
the impact of several inefficient or efficient seen, the power of Australian local government
councils on grant outcomes. For example, to raise revenue is extremely attenuated. And
suppose that councils’ expenditure in a particular second, horizontal fiscal imbalances occur since
function is broadly efficient. In the case of different levels of government, including local
industry wide efficiency this would infer a lower government, experience divergent costs in the
standard cost for that function, irrespective of provision of public goods and do not have
factors beyond managerial control, thereby equivalent revenue-raising capacities. Whilst
putting strong pressure on councils to improve most federal countries have pursued formal or
efficiency to the state standard. Alternatively, if informal tax-sharing arrangements between
the industry standard is broadly inefficient, different levels of government, Australia has
thereby implying a higher standard expenditure established a policy of horizontal fiscal
cost, the incentive for councils to improve their equalisation and effort (or policy) neutrality,
inefficiency is removed. At the very least, these with the Commonwealth distributing grants to
both local and state government. Indeed, it has
been cogently argued that ‘Australia has
developed the most comprehensive, effective
and equitable system of fiscal equalisation in
the world’ (Matthews 1994:16).
factors may serve to institutionalise a given level
of efficiency in a given function over time.
Moreover, the fact that councils can internally
subsidise inefficient functions, combined with
the impact of the minimum per capita grant,
suggests that any purported financial penalties
may be limited.
On balance, evidence from the 1993
National Survey of Councils suggests that the
grants process used in Australia does influence
efficiency, in spite of being overtly effort neutral
However, despite the fact that the Common-
wealth government provides the funding, the
actual allocation and distribution of monies to
local governments is made through state-based
LGGCs. The principles applied by these LGGCs
to grant allocation are largely based upon a
common legislative core: (i) allocation of funds
on a full horizontal equalisation basis; (ii) the
functioning of each local government at a
standard not lower than the average standard of
other local governing bodies in the state; (iii)
the assessment of revenue and expenditure needs
and disabilities; and (iv) effort neutrality. The
most important consideration here is that the
allocation of grants is based on the LGGCs
(
AURDR 1994a). As shown in Table 7, 17.3
percent of all surveyed councils indicated that
LGGC methodologies had encouraged them to
be more efficient to a large extent, 41.3 percent
to a small extent, and 37.8 percent not at all.
Just 12 percent thought that efficiency was not
a criteria used by the LGGC in determining
grants.
Concluding Remarks
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National Council of the Institute of Public Administration, Australia 2000

Local Government Financial Relationships with State and Commonwealth Governments
35
objective assessment of local government needs
and disabilities and is technically independent
of policy-related council decisions, including
those relating to efficiency and effectiveness.
However, there is some anecdotal evidence to
suggest that LGGC methodologies do influence
council efficiency, and thereby compromise the
primacy of the horizontal equalisation objective.
South Wales 1997 Benchmarking Local
Government Performance in New South Wales:
Interim Report, IPART, Sydney.
Inman, RP & DL Rubinfeld 1997 ‘Rethinking
Federalism’, Journal of Economic Perspectives
1
1(4):43–64.
Matthews, RL 1994 Fiscal Equalisation — Political,
Social and Economic Linchpin of Federation,
Federalism Research Centre, Australian National
University, Canberra.
McNeill, J 1997 ‘Local Government in the Australian
Federal System’ in B Dollery & N Marshall eds
Australian Local Government: Reform and
Renewal, Macmillan, Melbourne.
References
Australian Urban and Regional Development Review
1
994a Financing Local Government: A Review
of the Local Government (Financial Assistance) Morton Consulting Services 1996 Assessment of
Act 1986, Discussion Paper No. 1, AURDR,
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Revenue-Raising Capacity of Local Government,
Morton Consulting Services.
Australian Urban and Regional Development Review National Office of Local Government 1997 1996–97
1
994b Local Government Funding Methodologies,
Report on the Operation of the Local Government
(Financial Assistance) Act 1995, NOLG,
Canberra,
Discussion Paper No. 2, AURDR, Melbourne.
Donahue, JD 1997 ‘Tiebout? Or Not Tiebout? The
Market Metaphor and America’s Devolution NSW Local Government Grants Commission 1994
Debate’, Journal of Economic Perspectives
1(4):83–92.
Annual Report 93/94, Department of Local
1
Government, Sydney.
Galligan, BA 1995 Federal Republic: Australia’s Sharman, C 1998 ‘Working Together Towards an
Constitutional System of Government, Cambridge
University Press, Melbourne.
Inclusive Federalism’, Agenda, 5(3):267–76.
Independent Pricing and Regulatory Tribunal of New
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National Council of the Institute of Public Administration, Australia 2000