Current situation
Local government has three major sources of revenue: municipal rates (38.7% of total local government revenue), user charges (30.5%), and grants and subsidies from other spheres of government (12%). Local government does not underestimate the importance of Commonwealth Financial Assistance Grants (FAGs) which accounts for more than 50% of council revenue in some rural and remote councils where own-source revenue raising capacity is severely limited.
As the Fair Share report makes clear, under existing financial arrangements, local government is struggling to meet increasing demand for its services. Consequently, local government faces the choice of either increasing revenue or cutting services. Cutting local government services is not usually a viable option and is counter to the objective of delivering equitable local services across Australia. Over the past 30 years, local government has maintained its revenue-raising effort and has worked hard to expand its own source revenue. During the 1970s, fees and user charges comprised 13% of total revenue. This revenue source now represents 30.5% of the total. Local government has also continued to increase municipal rates. However, compared to growth in Commonwealth taxation revenue (39% over the period 1998-99 to 2002-03), rates are a slow-growth tax (25% over the same period). Furthermore, state government restrictions such as rate pegging have limited local government's ability to increase rates.
State governments are also drawing an increasing proportion of their revenue from property taxes, making this form of revenue even more politically sensitive to change. The tax burden placed on property owners by state governments has increased from 30% to 39% of total state taxation revenues over the past five years. As the state governments take more from property owners, it becomes increasingly difficult for local government to increase rates in line with demand for local government services, primarily for equity and political reasons.
In consequence, FAGs remain an essential component of local government revenue.
