Financial Assistance Grants
The good and bad of Financial Assistance Grants
The Australian Government introduced Financial Assistance Grants (FAGs) in 1974-75 as a way of distributing taxation revenue to local government. The primary objectives of FAGs are to:
- improved the capacity of local government to provide their residents with an equitable level of services
- improve the financial capacity of local government
- provide certainty of funding
- improve the efficiency and effectiveness of local government
The current FAGs program does not provide local government with a source of revenue that meets existing demand, nor does it reflect historical growth in demand for government services.
At present, the Australian Government annually adjusts the quantum of FAGs using an escalation factor based on inflation and population growth.
Over the past 20 years, the application of this escalation factor has resulted in a decline of FAGs as a percentage of total Commonwealth revenue, as shown in the diagram below. The 2005-06 Federal Budget papers indicate that this trend is set to continue. The value of FAGs (including the local roads component), as a proportion of total Commonwealth revenue, will have fallen from 1.18% in 1993-94 to 0.97% in 1996-97 and to just 0.74% by 2008-09. The diagram below highlights this trend.
While highly valued by local government, the FAGs program is now 30 years old and has not kept pace with the changing demand placed on councils. As indicated above, the demand for increased spending on human services, such as health, welfare and public safety, has trebled in the past three decades at the expense of traditional services such as roads, thus contributing to the severe run down of local roads and other infrastructure. This trend is set to be exacerbated with the onset of an ageing population.
While the $2.55 billion boost in Australian Government funding for local roads through the Roads to Recovery programs will go a long way to address the backlog of road maintenance, there is still significantly more work to be done. The Department of Transport and Regional Services 2002-03 Local Government National Report states that while R2R had almost halved the rate of decline in the condition of the local road system, there was still an annual deficit in expenditure of over $600 million.
Local government financial assistance grants as a percentage of Commonwealth taxation revenue.
If local government is to continue to satisfy legitimate community expectations, while also coping with legislated responsibility transfers from other spheres of government, it is essential that the financial relationship between the Australian Government and local government be significantly reformed. A guaranteed share of total Commonwealth taxation revenue should replace the current FAGs arrangement.
