Assessing Local Government Revenue Raising Capacity

Key points

• The ratio of local government own-source revenue to GDP is about 2 per cent.

– The ratio of rates revenue (the only tax instrument of councils) to GDP decreased from 1.0 per cent to 0.9 per cent between 1990-91 and 2005-06.

• Local governments in urban areas are predominantly funded from their own sources of revenue, particularly rates, fees and charges. For most rural and remote councils, grants are also a substantial source of their revenue.

• The revenue-raising capacity of local governments depends partly on their fiscal capacity, which differs by class of local government.

– The fiscal capacity of a council is best measured as the aggregate after-tax income of its community.

• Urban developed councils tend to draw lightly of their fiscal capacities. Remote and rural councils tend to draw more heavily on their fiscal capacities.

• Analysis of the relative potential of local governments to increase their own-source revenue indicates that councils are raising about 88 per cent of their hypothetical benchmarks, on average across Australia. This should not be taken to imply that local governments should increase the revenue they raise.

– Whether councils can realise this hypothetical benchmark will depend on their individual circumstances and the willingness of their communities to pay.

• Most councils could do more to help themselves, but a small number will remain highly dependent on grants, despite high levels of revenue-raising effort.

• State governments impose legislative and regulatory constraints on the raising of revenue by local governments that affect the ways in which councils raise revenue, but the overall impact on revenue-raising capacity is unclear.

– However, in New South Wales, rate pegging and only partial reimbursement of concessions appear to dampen revenue raised by councils in that State.

• The application of a set of principles to guide the revenue-raising and expenditure decisions of councils can assist them in improving the well-being of their communities.