By Peter Johnstone *
Proposals for extending direct funding to Local Governments from the Commonwealth Government, thereby bypassing State Governments, have been floated recently from Commonwealth quarters. Such funding could lead to future cost shifting and could worsen the current vertical fiscal imbalance in Australia.
A truly effective federal system of government in Australia requires both the avoidance of forced cost shifting between governments and a fairer sharing of growth revenues, such as income tax and GST, among all levels of government, according to expenditure needs, that is vertical fiscal equity or balance.
Direct funding, when tied to specific purposes, is little more than agency funding and should always include provisions for maintaining the real value of the funding to meet the specified purpose. Untied direct funding to Local Governments from the Commonwealth Government – that is a vertical redistribution of revenue through a transfer of revenue to Local Governments – would be a simple means of improving vertical fiscal equity, particularly if calculated as a set proportion of a growth tax.
There is no doubt that Local Governments are best placed to provide many services in the community, some of which are primarily a Commonwealth responsibility. Home and Community Care (HACC) is an example of such a service.
Direct funding via the Commonwealth, tied to purposes of this nature, can be an appropriate means of ensuring that Commonwealth objectives across Australia are met in a manner consistent with local and varying needs, if funds are transferred under sufficiently responsive and flexible conditions. However, Local Governments would be unwise to accept direct funding of specific services unless there is a particular benefit to their communities in those services being delivered by their Council, and unless the basis of funding for those services is contractually sound.
On the other hand, Local Governments should and would welcome additional sources of revenue, particularly untied direct funding from the Commonwealth. However, such funding will not contribute to the long term effectiveness and accountability of Local Governments if it is not provided on a reliable base into the future, reflecting growth in the economy.
The best form of direct funding from the Commonwealth to Local Governments would be the provision of access to a growth tax determined in accordance with the principles of vertical fiscal equity; that is, where allocation among Local Governments is on the basis of size, for example, without regard to revenue raising capacity or externally assessed needs.
The need to address horizontal fiscal equity among Local Governments, with grants based on comparative disadvantage and revenue raising capacity, could be met by a separate system of grants.
* Peter Johnstone is Chief Executive Officer of Victoria’s City of Boroondara. He has held senior executive positions with Federal, State and Local Governments.
