Local councils deserve a better financial deal

Australia's 560-odd local governments are the poor third cousin of our federation. Our founding fathers completely ignored them; they don't appear once in the constitution.

State constitutions at least mention them Victoria's even goes out on a limb to ensure they are ''democratically elected'' but throughout Australia they remain creatures of state parliaments, more beholden to the minister for local government than their own ratepayers.

Tasked with collecting rubbish, building roundabouts and zoning land, local governments are not obvious candidates for constitutional reverence.

Indeed, in 1974 and 1988, referendums to include them in the constitution failed.

But understanding better how local government operates may help unravel Australia's population paradox: we are a large country with a small population and we want to keep it that way, apparently. Remember how quickly former prime minister Kevin Rudd's ''big Australia'' became a ''sustainable Australia'' once the focus groups found out about it? It's easy for elite opinion to blame xenophobia, but if local governments are responding to extra population by punishing ratepayers, Australians will not necessarily welcome new residents.

For a new report, we recently surveyed all of Australia's local councils. We wanted to find out how they perceived the financial consequences of catering for more people. We also asked them about their responses, and what they thought of their revenue-raising capabilities.

It turns out more than half of the 121 councils that responded to our survey have increased their rates to ''cope with population growth''. Such responses will hardly endear ratepayers to the benefits of bigger populations! Moreover, about one-third of local councils, especially the larger ones, stated that increased population growth had a ''negative effect'' on their finances.

In theory, it should be possible for extra people to mean lower rates for existing ratepayers, as the council's fixed costs are defrayed over a larger number of ratepayers. But councils' revenues are only linked indirectly to population growth. The vast majority of revenue comes from rates charged to land owners based on the value of their land. If new residents live with existing land owners, or gravitate towards higher density accommodation, the revenue the council collects per resident will probably fall.

The trend is exacerbated as Australians expect more and more from their councils. Many are now providing subsidised services to local residents (such as child-care centre and sporting facilities). And the quality of infrastructure that Australians are demanding new bike paths, youth ''services'' and security parking, for example is greater than decades ago.

Almost 95 per cent of councils said the costs of infrastructure were their biggest concern associated with population growth. Only a minority of councils mentioned more traditional worries; environmental degradation and nimby opposition among residents, for instance.

The larger councils were better able to overcome their revenue constraints by lumbering developers with special levies. About 80 per cent of councils used ''developer levies'' regularly or sometimes to shunt the cost of new infrastructure onto developers.

Local residents may benefit from this in the short term; they enjoy new local infrastructure ''for free''. But as developers pass on the costs of the levies to prospective residents, accommodation becomes less affordable and the aggregate amount of new development lower.

Moreover, foisting the cost of infrastructure that will benefit all residents and will last for more than one generation on one generation of new residents is not equitable. Councils should have better access to debt financing, so the costs of new development can be spread more evenly over time and ratepayers.

No one in Canberra could doubt government's desire for more money. And local governments are no exception. Only three councils of 121 responding thought the existing revenue arrangements were wholly appropriate. More than four-fifths of respondents wanted to have a slice of GST or a sliver of income tax, too.

Giving local governments access to GST or income tax would be fine if their allocation reflected their contribution. Keeping a strong link between local taxation and local expenditure is the hallmark of good local government it encourages prudent spending. In practice, it would be difficult to allocate GST or income tax to particular municipalities, not to mention the legal problems stemming from local governments' absence in the Commonwealth constitution.

A better way to liberate councils from their dependence on rates would be to update the obscure formulae through which states make grants to local governments. Akin to the interstate allocation of federal grants, state governments try to maintain ''fiscal equalisation'' among local councils. These formulae should be weighted more heavily towards population, to encourage local councils to compete for residents.

Households may need to report their number of residents more frequently than the quinquennial census. But this intrusion seems a small price to pay to encourage local governments and ratepayers to welcome new residents.

Adam Creighton and Dr Oliver Marc Hartwich are research fellows at The Centre for Independent Studies.