FUNDING LOCAL GOVERNMENT IN AUSTRALIA: THE EVOLUTION OF UNTIED COMMONWEALTH FINANCIAL ASSISTANCE Brian Dollery, Michael Fletcher and D.S.

Transcription

1 J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 10(4), WINTER 1998 FUNDING LOCAL GOVERNMENT IN AUSTRALIA: THE EVOLUTION OF UNTIED COMMONWEALTH FINANCIAL ASSISTANCE Brian Dollery, Michael Fletcher and D.S. Prasada Rao* ABSTRACT. Australian fiscal federalism possesses a greater degree of vertical imbalance than comparable federations elsewhere due to a concentration of revenue-raising powers at the level of the Commonwealth government and a concentration of expenditure functions at the state and local government levels. Efforts to deal with this problem have focused on intergovernmental grants. While substantial literature exists on the financial nexus between the Commonwealth and state governments, little research effort has been expended on the local government grants process. The present paper seeks to remedy this by documenting the evolution and role of the local government grants process. INTRODUCTION Like many of its counterparts elsewhere in the world, Australian federalism is plagued by the problem of vertical fiscal imbalance between its three tiers of government. Under the Australian Constitution and its later refinement by the High Court, the revenue-raising powers of Australian governments are concentrated at the level of the * Brian Dollery, Ph.D., is Associate Professor in Economics and Research Fellow in of the Centre for Local Government, University of New England, Armidale, Australia. His research interests lie mainly in the economics of federalism. Michael Fletcher, B.Ec., and a postgraduate student at the University of New England, is a fiscal analyst, Fiscal Policy Division of the Australian Commonwealth Treasury in Canberra ACT. Prasada Rao, Ph.D., is Professor in Econometrics and Director of the Centre for Efficiency and Productivity Analysis at the University of New England. His research interests are in the theory and construction of index numbers and the empirical analysis of international comparisons of prices, output and productivity. Copyright 1998 by PrAcademics Press

2 482 DOLLERY, FLETCHER & RAO Commonwealth (or federal) government. However, most public expenditure is undertaken by state and local governments. The result has been a much more extreme degree of vertical imbalance than that evident in comparable federal systems of government in Europe and North America. As Groenewegen (1990: 248) has observed: "Vertical imbalance arises because the Federal Government has revenue resources far in excess of its expenditure needs, while the states and local government have insufficient independent revenue sources to finance their expenditure commitments." Financial grants from the Commonwealth to the states via the Commonwealth Grants Commission has generated a voluminous theoretical, institutional and empirical literature (Mathews, 1994). By contrast, notwithstanding the considerable magnitude of financial assistance to local governments in Australia, surprisingly little effort has been devoted to investigating the local government grants process. Commonwealth untied grant assistance to local government as a proportion of total revenue for local government in 1994 ranges from 9 percent in Victoria to 14 percent in Tasmania. Taking into account metropolitan/rural differences, the highest contribution to total revenue was 17 percent for rural councils in Tasmania and the lowest was 5 percent for metropolitan councils in Queensland. Commonwealth untied assistance to local government in fiscal year (FY) 1996 amounted to $1,160 million (Department of Local Government, 1995). The present paper represents a modest attempt at redressing this unfortunate situation by seeking to document the history and role of the local government grants process in Australia. The paper itself is divided into six main sections. After a brief initial section which provides a synopsis of Australian federalism and its characteristic vertical imbalance, the subsequent four sections focus on the four major financial assistance legislative acts affecting local government, beginning with the 1973 Grants Commission Act. The 1973 Act was the starting point for Commonwealth untied financial assistance to local government and it developed the principles and methodology which apply to financial assistance grants (FAGs) today. The third section discusses the background to the Act and then goes on to explain its principles and methodology. The discussion then focuses on the next major development, the 1976 Local Government (Personal Income Tax Sharing) Act (PITS). This Act was significant in increasing the volume and certainty of grants to local government by linking Financial Assistance Grant (FAG) levels of Commonwealth personal income tax revenues. The 1976 Act also introduced a per capita minimum grant requirement and established Local Government

3 FINANCING LOCAL GOVERNMENT IN AUSTRALIA 483 Grants Commissions (LGGCs) which took over the Commonwealth Grants Commission s role in estimating and distributing FAGs to local government. The discussion then reports on the 1986 Commonwealth Local Government (Financial Assistance) Act which sought to better achieve horizontal equalisation between local government authorities by adopting principles developed in a previous Commonwealth inquiry led by Professor Self. In addition, the 1986 Act broke the nexus between personal income tax and FAGs to local government with FAGs instead being linked to payments to the States. The fifth section outlines the changes made to the 1986 Act by the 1995 Commonwealth Local Government (Financial Assistance) Act. These changes in the main involved increasing reporting requirements and did not affect FAG principles of methodologies. A final section provides some idea of the numerical trends in local government financial assistance. The paper ends with some brief concluding remarks. AUSTRALIAN FEDERALISM AND VERTICAL IMBALANCE The Australian federation is made up of three tiers of government: - the Commonwealth government with powers designated in the Australian Constitution; - six state governments with residual powers and two territory governments with 'state-type' powers granted to them by the Commonwealth; and - over 800 local authorities with powers and responsibilities delegated to them by their respective state governments. The relative importance of these three tiers of government varies through time. However, the dominance of the Commonwealth government has steadily increased since Federation in Three factors appear to have influenced this process. First, the external powers of the Commonwealth, which enable it to negotiate external treaties on behalf of Australia, have increased its influence. Second, the corporations power has allowed the Commonwealth government to regulate the activities of corporations. Third, largely as a result of the states ceding their income taxing powers to the Commonwealth in 1942, the Commonwealth now occupies a dominant fiscal position in Australia. Some idea of the relative size of the three tiers of Australian government (as measured in both revenue and outlay terms) is provided in Table 1.

4 484 DOLLERY, FLETCHER & RAO Table 1 also serves to highlight the problem of vertical fiscal imbalance in the Australian federation. For instance, the Commonwealth raises around 72 percent of all government revenue but accounts for about 54 percent of all government own purpose outlays. Similarly, state and territory governments are dependent on grants for over 45 percent of the revenues. However, vertical imbalance is much less acute for local government, which generates some 70 percent of its own expenditures. Quite apart from the magnitude of vertical imbalance in Australian federalism, the constitutional basis for Commonwealth funding of the activities of sub-national governments in Australia is much more precarious than that for other equivalent developed federal countries. Walsh (1993: 32), for instance, has noted: Clearly, the degree of dependence of the states on Commonwealth funding is very high - indeed it is exceptionally high among the federal countries of North America and Western Europe with which Australia can be most appropriately compared. It needs to be TABLE 1 Commonwealth, State and Local Governments' Shares of Total Revenue and Outlays, (a) Government Levels Total revenue Total outlays (b) Commonwealth State/Territory Local 4 5 a. Total revenue and total outlays exclude transfers between levels of government b. Shares do not add to 100 percent due to rounding. Source: Industry Commission (1996: Table 2.1). emphasised, moreover, that 'dependence' is the correct word. There are no constitutional guarantees that the Commonwealth will continue its grants according to some formula for sharing revenues (as there is in Germany, for example); and legislation specifying shares in revenue, or providing 'guarantees' about future levels of grants, often has been amended or scrapped arbitrarily by the Commonwealth.

5 FINANCING LOCAL GOVERNMENT IN AUSTRALIA 485 The existence of vertical imbalance in a federal fiscal system is problematic for various reasons (Bahl and Linn, 1994), but perhaps the central concern is that it does not meet the essential efficiency requirement specified by the economic theory of fiscal federalism: namely, there should be an equivalence between tax revenue and expenditure commitments. The absence of this condition in Australian federalism means that neither the Commonwealth nor the state and local governments have to adhere to the discipline of a budget constraint which obliges them to match expenditure with concomitant taxation. Thus, it is often argued that state and local governments are unlikely to exercise responsible control over expenditures since they are mostly funded through financial assistance grants from the Federal government. Moreover, because it always has revenue in excess of its own expenditure commitments, the Commonwealth government does not have sufficient incentives to limit its own expenditures. Four generic methods of dealing with the problem of vertical imbalance in federal systems of government have been identified. In the Australian institutional milieu these methods may be summarised as follows: taxation powers could be shifted to the two lower tiers of government from the Commonwealth government; expenditure powers could be transferred from the state and local governments to the Commonwealth; revenue-sharing arrangements could be instituted (which have already been tried along somewhat limited lines in Australia from FY 1976 to FY 1985); and finally, a system of inter-governmental grants could be employed. In Australia this latter technique has been adopted to overcome both vertical imbalance and horizontal imbalance. Financial assistance grants, in the form of General Purpose Payments (GPPs) and Special Purpose Payments (SPPs), are the predominant mechanism used to deal with fiscal imbalance in Australia. In the present context we are specifically concerned with funding of local government and it is possible to identify four distinctive characteristics of the local government grants system in Australia. Firstly, and in common with its counterpart in the United States, Australian local government raises about seventy percent of its total expenditure compared with around sixty five percent for United States' municipalities. Secondly, although the Commonwealth government in Australia provides the requisite finance, the actual allocation and distribution of funding to local governments is done by state-based Local Government Grants Commissions (LGGCs). Despite the fact that each Australian state has its own LGGC, each LGGC applies allocative principles drawn from a common legislative core. The most

6 486 DOLLERY, FLETCHER & RAO important of these universal principles include: funds are allocated on a full horizontal equalisation basis; the operation of any given local government is computed at a standard not lower than the average standard of other municipalities in the state; assessment of revenue and expenditure needs and disabilities occurs; and effort neutrality in raising revenue is prescribed between different municipal jurisdictions in a given State. Thirdly, the overwhelming monetary value of grants made to Australian local governments comes in the form of general financial assistance grants, in stark contrast to local government grants in the United States which are predominantly hypothecated. And finally, the ability of individual local governments to affect the grants process through their revenue-raising or expenditure decisions is extremely limited. Indeed, even if specific councils are given information on the assessment of their revenue and expenditure needs and the disability factors applied to them, they cannot determine their relative funding outcome (Australian Urban and Regional Developing Review [AURDR], 1994a). THE 1973 GRANTS COMMISSION ACT Since 1947 local government had been making approaches to the Commonwealth government for access to federal funding without success. However, in 1973 the Whitlam government recognised local government was in fact disadvantaged and deserved federal assistance. Local government at this time was faced with a situation of growing infrastructure demands, mounting borrowing and indebtedness, and the need to expand the provision of people-based services (Pensabene, 1990: 41). Yet local government had a limited revenue base consisting primarily of property rates and, therefore, was forced into borrowing with the result that local government s share of public debt rose from about 17 percent in 1940 to 36.7 percent in 1970 (Pensabene, 1990). The Whitlam government recognised the need for greater vertical equalisation between the Commonwealth and local governments and crafted the 1973 Grants Commission Act with this goal in mind. The 1973 Act marked the first significant Commonwealth government contribution to local government finance. The Act instructed the Commonwealth Grants Commission (CGC) to be designated the Grants Commission under the Act, to estimate and distribute untied FAGs to recognised local governing bodies so that all the local governing bodies in a region could (by reasonable effort) operate at a standard not appreciably

7 FINANCING LOCAL GOVERNMENT IN AUSTRALIA 487 below that of other local governing bodies in that and other regions (Commonwealth Grants Commission, 1983). This principle, termed horizontal equalisation or intra-state equalisation, remains the most significant determinant of untied Commonwealth FAGs. An important requirement of the Act was that local councils formed federally approved local government regional bodies. In 1973 applications were received for grants by 68 groups of local governing bodies, comprising 889 councils. Mathews (as discussed in Commonwealth Grants Commission, 1983) developed an allocation methodology on which the Grants Commission assessed these applications. This model calculated the horizontal equalisation requirement of councils as the sum of two components. Firstly, a revenue allowance was determined by applying a standard rate of taxation to the difference between a council s taxable capacity and a standard taxable capacity. For these calculations, councils were divided into four categories. The revenue standard for each category was based on the mean value of rateable property per capita of all the councils in the category. This was later changed to the mean of the top 50 percent, in terms of rateable value, in a category (Commonwealth Grants Commission, 1983). The second equalisation component was an expenditure allowance based on expenditure standards or means together with certain disability factors for services in the various categories of councils. However, from a historical context it is important to note that the current model is not significantly different from the one Mathews designed for the 1973 Grants Commission Act. At this stage it is also worth noting that the calculations are based on potential rather than actual revenues and expenditures i.e. property values rather than actual rates raised; that is, it is related to effort neutrality. This was done in order to preserve local government autonomy since, in the model, council rating policy could not influence their level of grant. In its first report in 1973 the Commission recommended the payment of a total of $ million to 806 councils (13 councils had refused to join regional organizations and so were not included and a further 70 councils were assessed to receive zero grants). The Grants Commission s second report in 1974 resulted in 844 councils receiving a total of $ million in untied grants. This increase was the result of the previously mentioned change in the revenue standard from the mean of all, to the mean of the top 50 percent of councils in a category (Commonwealth Grants Commission, 1983). These Commonwealth untied grants were obviously very significant in improving the welfare of local government. However, there were

8 488 DOLLERY, FLETCHER & RAO complaints about two aspects of the process. Firstly, some councils objected to the requirement that councils join regional bodies, and secondly, unhappiness was expressed over the fact that some councils received zero grants. Also the Act significantly increased the workload of the CGC. These problems were addressed in the next significant change to local government finance; the 1976 Local Government (Personal Income Tax Sharing) Act. THE 1976 LOCAL GOVERNMENT (PERSONAL INCOME TAX SHARING) ACT The 1976 PITS Act provided for payments to the States of a specified percentage of Commonwealth personal income tax revenue. Initially set by Fraser in FY 1977 at 2 percent, the applicable percentage changed over time to 1.75 percent in FY 1980, 2 percent in FY 1981 and finally to 1.9 percent in FY The FY 1985 figure was the result of an amendment to the Act which provided for a 2 percent real increase in local government funding. This objective was equivalent to setting the share of personal income tax receipts at 1.9 percent (Pensabene, 1990). The Act also established State Grants Commissions (called Local Government Grants Commissions) (LGGCs) who were to take over the Grants Commission s role in calculating and distributing FAGs. The Grants Commission reverted to its original title of the Commonwealth Grants Commission. The 1976 Act, in response to criticisms over zero grants, specified two components for a FAG. In addition to the traditional equalisation component (component B), a minimum of 30 percent of the total Commonwealth pool available had to be distributed on a per capita minimum basis (component A). This change not only ensured that all councils received at least some untied Commonwealth assistance, but also effectively reduced the amount available for equalisation. Note that 30 percent is a minimum only, and LGGCs are free to increase this component at the expense of the equalisation component if they so wish. In fact, in Western Australia the per capita component has been as high as 80 percent (Commonwealth Grants Commission, 1983). The LGGCs first distributed grants in FY 1977, with some assistance from the CGC. In subsequent years each state and the Northern Territory s LGGC developed their own methodologies based on their interpretation of the national horizontal equalisation principle. The role of the CGC in local government finance became to determine each State s LGGCs share of the available Commonwealth pool. Each State s LGGC would submit an estimate of their local governments FAG requirements, which would be

9 FINANCING LOCAL GOVERNMENT IN AUSTRALIA 489 scaled down by the CGC according to the available pool of Commonwealth funds. The scaling method employed by the CGC took account of the collective local government needs of the States. The 1976 PITS Act was crucial in terms of increasing the volume and certainty of Federal funds to local government. Commonwealth contributions to total revenue rose from 3.6 percent in FY 1975 to 10.5 percent in FY Correspondingly, local government borrowing declined in importance from 13.8 percent to 9.6 percent between FY 1975 and FY 1983 respectively (Pensabene, 1990). However, the Commonwealth was becoming increasingly concerned that local government was benefitting from the PITS arrangement at the expense of the States. In 1986 a new local government finance act broke the PITS Act nexus between personal income tax and payments to local government, and instead linked local government payments to payments to the States. THE 1986 COMMONWEALTH LOCAL GOVERNMENT (FINANCIAL ASSISTANCE) ACT The 1986 Commonwealth Local Government (Financial Assistance) Act followed a Commonwealth inquiry in 1984 led by Professor Peter Self. The Self (1985) report s primary aim was to promote the achievement of horizontal equalisation between local government authorities in the States. Accordingly, Self defined horizontal equalisation, and then in order to better achieve this aim, formulated principles which were to establish the basis of the LGGC s methodologies. Horizontal equalisation was defined as "... ensuring that each local government body in the State is able to function, by reasonable effort, at a standard not lower than the average standard of other local government bodies in the State, and that takes account of differences in the expenditure required by those local governing bodies in the performance of their functions and in the capacity of those local governing bodies to raise revenue" (Pensabene, 1990: 23). This definition is not noticeably different from the definition expounded by the 1973 Grants Commission Act. In simple terms it means that local authorities with low revenue raising capacity and high expenditure needs would, other things being equal, receive significantly higher equalisation grants than authorities with high revenue raising capacity and low expenditure needs. The Self Principles (as found in Pensabene, 1990), which LGGC s have to incorporate into their allocation methodologies, are as follows:

10 490 DOLLERY, FLETCHER & RAO 1. Disadvantages in revenue and expenditure functions should be accorded natural weights, not weighted or discounted prior to aggregation. 2. An assessment of disability for any function (either revenue or expenditure) should depend on deviations from average. Both positive and negative deviations should ordinarily be taken into account. 3. Only one calculation of disadvantage should be made for each expenditure function without supplementary use of calculations for special needs. 4. In adjusting their assessment of disability for specific purpose grants, LGGCs should follow the inclusion approach as developed by the CGC for making similar adjustments to the assessed equalisation needs of the States. 5. When assessing revenue disabilities by some measure of property valuations, LGGCs should use either classes of property or categories of councils. 6. LGGCs should make it clear that individual grants are liable to be reduced as well as increased in the light of changing needs. 7. As far as possible the importance of expenditure functions for weighting purposes should be determined on a comparable basis for all functions by using current expenditure or, if this cannot be calculated, total expenditure both current and capital (in each case including specific purpose grants). 8. LGGCs should increase their assessment of needs when they believe that a local authority is providing significant services of benefit to people other than its residents. 9. Assessments may be made in respect of water or sewerage functions provided by local authorities, either singly or in a group, in such a way as to compensate any council incurring exceptionally high costs in respect of these services. These principles were expected to lead to a redistribution of funds to the more needy councils. However, a review of the 1986 Act commissioned on 7 July, 1993 (see Australia Urban and Regional Development Review, 1994a) found that since the new methodologies had been operating (1991 was the first year of operation since there was a four year phase in period) there had

11 FINANCING LOCAL GOVERNMENT IN AUSTRALIA 491 been no significant changes to the pattern of distribution but rather an acceleration of pre-existing trends, namely: 1. A decrease in the share of funds to developed metropolitan councils ( due in the main to stable or decreasing populations in these areas); and 2. An increase in the share of funds to fringe metropolitan municipalities caused by increases in population in these areas. Ian Pawsey, Victorian Grants Commission chairperson in 1990, considered the most significant change to methodology due to the 1986 Act was on the revenue standard. LGGCs are now required to set standards based on the average of all councils, and not only the top 50 percent (Pawsey, 1990). As we noted earlier, the 1986 Act was significant in that it broke the nexus between personal income tax and FAGs to local government. Under the 1986 Act local government payments in aggregate were linked to FAG payments to the States. State payments are the responsibility of the CGC and are announced at the annual Premier s Conference. To assist in phasing in this new arrangement real levels of local government FAGs were maintained in FY 1987 and 1988 under a guarantee. Now in full operation, this new system of linking local government FAGs to State FAGs has resulted in a decrease in the volume of grants (the Commonwealth has pursued relatively contractionary fiscal policy at Premiers Conferences in recent years) and also increased uncertainty regarding grant amounts from year to year. Unfortunately, the decrease in the volume of funds had a paradoxically high impact on the equalisation element in the FAGs. This is because the other elements of FAGs include a per capita minimum which cannot fall below 30 percent of the available Commonwealth pool and, secondly, a local roads component which is essentially formula driven (i.e. based on road and bridge length and population). Therefore, when LGGCs are required to scale down their grant allocations in accordance with the level of Commonwealth funds available, then it is the equalisation component that is invariably reduced. The 1986 Act was also important because the CGC, following a review, decided to change the methodology it used to allocate States shares of local government FAGs. Where previously the CGC had assessed the relative needs of the States collective local authorities, on the grounds of simplicity and predictability the CGC changed its method to allocating on the basis of population share only. For example, in NSW had 33.9 percent of

12 492 DOLLERY, FLETCHER & RAO the national population and so received 33.9 percent of the total $1,160 million available. This change benefitted Queensland and Western Australia but made Tasmania worse off (Department of Local Government, 1995). In terms of documenting the history of Commonwealth FAGs to local government there is one further significant event, relating to the funding of local roads. Prior to FY 1992, local roads funds were paid to councils, through the Roads and Traffic Authority (RTA), as tied grants. However, at the 1990 Special Premiers Conference it was decided that these funds would be untied and paid as general purpose grants through the LGGCs (State roads, highways, etc. were still to be funded via the RTA). The LGGCs basically adopted the RTA formula which took account of road length and population, but added bridge length. When the LGGCs first took over local road funding they had to put a limit in place so that councils could not receive greater than a 10 percent increase or decrease in local road funding from year to year. This restriction was necessary because of the different way in which the RTA had previously categorised shires and councils. For example, in NSW in 1996 this restriction applied to Nundle Shire Council as ordinarily Nundle would have received decreases of more than 10 percent in its road funding. This is prevented by subsidising Nundle from other councils local roads components. Finally, it is worth noting that all components of FAGs (equalisation and local roads components) are untied. This means that local councils do not have to spend their local roads allowance, which is paid separately, on local roads. They are free to spend the grant elsewhere. Grants are untied presumably to prevent the Commonwealth from imposing on local governments policies and autonomy. THE 1995 COMMONWEALTH LOCAL GOVERNMENT (FINANCIAL ASSISTANCE) ACT The 1995 Act followed a review of the 1986 Act commissioned in July The results of this review have been discussed elsewhere (Australia Urban and Regional Development Review, 1994a; 1994b). The review focused of how successfully the current LGGC methodologies were in achieving an equitable level of service provision across council areas and also looked at the problematic issue of incorporating efficiency into the funding methodologies. The review concluded that the majority of grants were going to the most disadvantaged councils: an Australian Bureau of Statistics index of

13 FINANCING LOCAL GOVERNMENT IN AUSTRALIA 493 socio-economic disadvantage was used here. However, the review was concerned about the different grant distribution outcomes that were resulting from the different state grants commissions models and, further, the review was unable to explain these different grant distributions in terms of the models characteristics primarily because of the lack of accurate national data. Accordingly, the review called for a national reporting framework to be established to enable better assessment of grant outcomes in terms of the horizontal equalisation objective and also to provide data on which to judge efficiency. Note that efficiency relates to the cost of providing the various services such as garbage collection, etc. As grants are untied and provided on a policy neutral basis, efficiency issues are not taken into account when FAGs are allocated. The changes to the previously mentioned 1986 Act that resulted from the review were essentially aimed at improving the standard of data LGGCs and the Commonwealth receive from local governing authorities. The 1995 Act provided for the establishment of a national reporting framework. While the exact nature of this framework is still being formulated, the 1995 Act requires that the Commonwealth minister report to Parliament in more detail on grant outcomes, the efficiency of councils, and the provision of services to aboriginal communities (Local Government Grants Commission, 1995: 1). The first of these reports is due to be tabled in parliament in December, In draft stage at present the report contains a detailed description of the States funding methodologies, as well as tables comparing the grants of similar sized councils across states. This will enable better assessment of grant outcomes. For example, a large rural council s grant levels in New South Wales can be compared with its Queensland equivalent. The report does not attempt to compare efficiency levels of councils as mentioned in the 1995 legislation. This is primarily because there is some concern that councils would focus on expenditures for which they could get some efficiency reward at the expense of services that might be costly, but desired by the community. The New South Wales and Victorian LGGCs are attempting to encourage efficiency by circulating amongst councils comparative cost information on services. The idea is that councils can compare their costs with similar sized council in other regions and then find out how these lower costs were achieved. Because of the effort neutral nature of grants (i.e. grants are assessed on the inherent characteristics of a council, such as proportion of aged people as against a state average etc.,

14 494 DOLLERY, FLETCHER & RAO rather than actual cost), a council can benefit from reducing its costs since they still receive the same level of grant. TRENDS IN LOCAL GOVERNMENT FINANCIAL ASSISTANCE GRANTS An indication of trends in FAGs to local governments can shed light on the impact of these legislatively induced changes in funding methodologies, particularly the watershed 1986 Commonwealth Local Government Act, on the magnitudes involved. Table 2 contains local government FAGs as a percentage of local government revenue and as a percentage of total federal outlays for the period 1984 to TABLE 2 Financial Assistance Grants to Local Government, FY Year Nominal Value ($) FAGs as % of FAGs % of Local Revenue Commonwealth outlays ,531, ,831, ,532, ,427, ,717, ,500, ,739,860 na ,291, ,018,144,222 na ,049,093, ,059,268, ,086,917, Source: Australian Bureau of Statistics (1996). The trends in FAGs to local government evident in Table 2 should be interpreted with care for at least three reasons. Firstly, the new methodologies arising from the 1986 Act had a four year phase in period and consequently did not come into operation until Secondly, real levels of local government FAGs were maintained under a Commonwealth government guarantee for the fiscal years 1987 and And thirdly, changes to the nature of road funding outlined earlier affected the value of FAGs.

15 FINANCING LOCAL GOVERNMENT IN AUSTRALIA 495 CONCLUDING REMARKS This paper has sought to provide an account of the development of the institutions concerned with Commonwealth assistance to local government. The origins of financial assistance to local government stem from a desire to achieve both vertical and horizontal equalisation. Vertical equalisation relates to ensuring that local government can provide its plethora of services given they are limited in their abilities to raise revenue. Horizontal equalisation seeks to ensure that all councils can provide at least an average level of services despite any disadvantages they may encounter in either rating capacity or provision of services. In addition to outlining these principles the paper has given a brief account of how the equalisation objective is achieved through the calculation of an expenditure and revenue allowance. These allowances take into account the disadvantages a particular council may have relative to the average council. REFERENCES Australian Bureau of Statistics (1996), Government Finance Statistics: Australian Budget Statements , Publication No , Canberra: Australian Government Printing Services. Australian Urban and Regional Development Review (1994a), "Financing Local Government," Discussion Paper No.1, Canberra: Australian Government Printing Services. Australian Urban and Regional Development Review (1994b), Local Government Funding Methodologies, Discussion Paper No.2, Canberra: Australian Government Printing Services. Bahl, R. and Lim, J. (1994), "Fiscal Decentralization and Intergovernmental Transfers in Less Developed Countries," Publius: The Journal of Federalism, 27: Commonwealth Grants Commission (1983), Equality in Diversity: Fifty Years of the Commonwealth Grants Commission, Canberra: Australian Government Printing Services. Department of Local Government (1995), NSW Local Government Grants Commission Annual Report 1994/95, Sydney, NSW: Local Government Grants Commission.

16 496 DOLLERY, FLETCHER & RAO Groenewegen, P. D. (1990), Public Finance in Australia: Theory and Practice, 3 rd Edition, Sydney: Prentice Hall. Industry Commission (1996), Stocktake of Progress in Microeconomic Reform, Canberra: Australian Government Printing Services. Local Government Grants Commission (1995), Local Government Grants Commission Financial Assistance Grants to Local Government Information Sheet: 1995/96 Grants, Sydney, NSW: Local Government Grants Commission. Mathews, R. (1994), Fiscal Equalisation: Political, Social and Economic Linchpin of Federation, Canberra: Federalism Research Centre, Australian National University. Pawsey, I. (1990, September), "Four years on - the new direction," Australian Municipal Journal: Pensabene, T. (1990), "A Review of the Outcomes of Commonwealth General Purpose Funding to Local Government Since 1974/75," Office of Local Government, Department of Immigration, Local Government and Ethnic Affairs, Canberra: Australian Government Printing Services. Self, P. (1985), National Inquiry into Local Government Commonwealth, Canberra: Australian Government Printing Services. Thompson, N. J. (1979), "Local Government and the Grants Commissions," Australian Quarterly, 51: Walsh, C. (1993), "Vertical Fiscal Imbalance: The Issues", in D.J. Collins (Ed.), Vertical Fiscal Imbalance (Conference Series No. 13, Sydney: Australian Tax Research Foundation, pp