Senate Economics References Committee
Appendix 2: Commonwealth funding of local government - A history
Local government has received general purpose assistance from the Commonwealth in the form of Financial Assistance Grants (FAGS) for over a quarter of a century. These grants are essential sources of funding to local governing bodies and are imperative to their survival. A history of such measures follows.
Chart 1 shows how the level of payments since 1974-75, Chart 2 provides a perspective of the true value of these payments by illustrating them as a proportion of Commonwealth taxation receipts.
1975 General Revenue Assistance
General revenue assistance was introduced in 1974-75 in recognition of the fact that new demands were being placed on local governing bodies in areas such as health and welfare services. Under The Grants Commission Act 1973 regional bodies were established to represent and act on behalf of local governing bodies.
The aim was for these bodies to apply for a grant to ensure that it or any of the local governing bodies it represented could function at a standard not appreciably lower than the standard provided by other regional bodies or local governing bodies. Despite the existence of the regional bodies the Commonwealth Grants Commission (CGC) provided the grants directly to local governing bodies. Not all local governing bodies received funding, as it was an application based programme.
1976 A Tax Sharing System
In 1976 the Commonwealth introduced The Local Government (Personal Income Tax Sharing) Act 1976. This act also changed the manner in which local governing bodies received money from the Commonwealth.
From this point on all local governing bodies were entitled to a fixed portion of Commonwealth personal income taxation revenue. This percentage was originally 1.52%, it then rose to 1.75% in 1979-1980, and then increased to 2% in 1980-1981. These untied grants were commonly known as PIT's (personal income transfers) and moved in line with Commonwealth tax collections. This was a true tax sharing agreement reflecting changes in national economic activity. Under this arrangement local government would share the benefit in times of economic buoyancy and absorb some of the burden when the economy slowed.
1985-86 General Revenue Funding
In 1985-1986 the Commonwealth ceased the tax sharing arrangement with the states, territories and local government. For that year general revenue funding to Local Government was capped and only allowed to increase at a real rate of 2% for that year.
Since the ending of the tax-sharing agreement general purpose assistance grants to local government have fallen from 1.0 % of total Commonwealth tax collections to around 0.6 %.
1986 General Purpose Payments
In 1986 the Commonwealth accepted the overall findings arising from the National Inquiry in Local Government Finance. The inquiry recommended that the Commonwealth should maintain some form of general purpose payments (GPP's) for local government.
The Commonwealth introduced The Local Government Financial Assistance Act 1986. Increases in funding to local government were linked to increases in GPP's provided to the states.
1992 Incorporation of Tied Local Road Grants
In 1991-92 previously tied Commonwealth local road grants became untied and were paid to local governing bodies as a identified local road grants (ILRG's). It was agreed that these funds would remain separately identified and would continue to be distributed on the same principles that had applied to the allocation of such road funds. From 1991-1992 to 1993-1994 GPP's were maintained in real terms.
FAGS would now have two components, GPP's and IRLG's.
1994-95 Introduction of a Specific Escalation Factor
In 1994-95 the States agreed to have their Financial Assistance Grants (FAG's) indexed via an escalation factor, that took into account changes in population and inflation, this in turn was reflected in FAG's to local government. The Commonwealth Treasurer at each Federal budget determines the escalation factor.
The determined escalation factor is based on the estimated change of the population and inflation. This is then adjusted for the difference in the estimate and the outcome of the actual factor in the previous year.
2000-01 Commencement of the New Tax System (NTS)
In 2000-2001 the States and Territories began to receive the full proceeds from the Goods and Services Tax (GST). This change removed the link between growth in assistance to the States and Territories and the growth in the assistance to local government. The Local Government Financial Assistance Act 1995 was amended to include the details on how the escalation factor was to be calculated.
2001 Review of the Act by the Commonwealth Grants Commission
In 2001 the CGC reviewed the Act on request from the Treasurer (with a limited terms of reference) and recommended restructuring the payment of FAGS. This would see the whole pool split into three categories:
- a per capita pool
- a local roads pool
- a relative need pool
At the point of writing the recommendations were still with the Commonwealth.
Chart 1: Financial Assistance Grants to Local Government
Chart 2: Financial Assistance to Local Government as a Proportion of total Commonwealth Tax
