Productivity Commission Draft Report

Thursday 3 October, 2019

The Productivity Commission released its draft report on Local Government funding and financing on 4 July.  The Commission assessed current and prospective funding tools through the lens of five principles:

• Appropriate for local government use, given the role of local government
• Coherent with national policy objectives and the wider tax system
• Efficient, to avoid harmful incentive effects, and minimise compliance and administration costs
• Equitable and fair, who benefits?
• Sustainable, to provide stable and predictable revenue over time and minimise avoidance

The Commission concludes that the current framework is broadly sound and that some councils could make better use of it.  It recommends that all Councils have an assurance committee that is independently chaired, and that performance reporting is fundamentally reviewed to simplify its requirements.

The Commission believes that local government charges should be primarily targeted towards those who benefit from the services, with some consideration of ability to pay. It favours the following new funding tools for growth infrastructure:

• Value capture, volumetric charging for wastewater, and road congestion pricing;
• Special purpose vehicles to assist Councils nearing their debt limits (it’s worth noting that the Commission report indicates that Council gearing ratios are lower than central government’s; it is the peculiarities of the LGFA covenants that makes it seem that Councils are debt constrained);
• Direct payments from central government linked to new building, incentivising Councils to make land available.

Interestingly, consistent with its support for the benefit principle, the Commission recommends removing the ability to set rates differentially, and the removal of uniform annual general charges. This would be a seismic change for most Councils and while this will increase transparency, this is likely to make the rates process subject to more challenge, because rates are essentially a tax and Councils do not have to show direct benefit. 

For assistance with questions relating to this article, please contact Mark Renner.