Source: SGS Economics and Planning (2024). Notes: 1. ‘High’ = council meets or exceeds all 3 tests of financial sustainability (operating surplus ratio, asset sustainability ratio, debt service ratio), ‘Medium’ = council meets 2 of 3 tests, ‘Low’ = council meets only 1 or none of the tests. 2. Regarding data sources: councils must report their financial performance to their jurisdiction’s audit department each financial year. Where readily available, SGS consolidated the data to generate a headline assessment of local governments’ financial sustainability. Northern Territory, South Australia, and Western Australia are excluded from this analysis due to a lack of comparable data across all 3 indicators.

Since undertaking that analysis, financial pressures have persisted at the sector scale. Earlier this year, the NSW Audit Office reported an increase in the number of councils making operating losses, from five councils in 2023-24 to 17 councils in 2024-25. Of the 17 councils, one is metropolitan, four are regional, and 12 are rural. There were 11 councils also assessed to be experiencing heightened financial sustainability risk due to ‘various combinations of operating losses, insufficient cash, declining populations and low capacity to generate own source revenue’. In Western Australia, the Auditor General’s financial health analysis of 138 local government entities in 2024-25 noted ‘a sector declining in its ability to meet short-term financial obligations’.

The above developments reflect an intergovernmental policy framework that fails to align local responsibilities with revenue means. Consequently, the financial situation of many councils would be severely compromised without major grant programs such as Financial Assistance (FA) Grants and the Roads to Recovery Program. Research estimates that FA Grants comprise over 20 per cent of annual operating revenue for around a quarter of councils nationally. This figure is likely to be higher in regional, rural and remote areas, where councils are further constrained in own-source revenue.

Evidence around the drivers of worsening local government financial sustainability outcomes suggests the interplay of several issues:

1. Councils are under-compensated and under-supported to carry out their frontline duties
2. Funding allocations do not fully reflect relative need
3. Financial risk is increasingly concentrated in the level of government least equipped to absorb it.

Councils are under-compensated and under-supported to carry out their frontline duties

Cost shifting is one of the clearest examples of how councils are undercompensated for taking on new responsibilities and requirements. Cost shifting occurs when local governments are assigned, required to provide, or inherit services that were previously the responsibility of other spheres of government (usually state and territory), without commensurate compensation. Cost shifting also arises from states’ control of user fees and charges, which impedes full cost recovery, the diminishing proportion of state government funding for public libraries and other services, and/or the withdrawal of previously free tools and resources, e.g. real-time flood forecasting.

The costs to absorb these impacts quickly accumulate, at the expense of councils’ financial sustainability and autonomy. Local Government NSW’s 2025 Cost Shifting Report reveals a total cost shift to councils of $1.5 billion in 2023-24; the equivalent of more than $490 per ratepayer nationally. The Local Government Association of Queensland’s 2022 Cost Shifting Report estimates $360 million cost shift to local governments; a 378% increase over the past two decades.

For many years, councils have been forced to manage the cost shift arising from regulatory change and service withdrawals. This is on top of some councils stepping in (voluntarily, and therefore not strictly defined as a cost shift) to fill service gaps in healthcare, aged care, mental health, and childcare as a result of regional and rural market failures.

Opportunities to tackle cost shifting have so far met limited success. In 2024, the Victorian Legislative Council Economy and Infrastructure Committee handed down its Final Report on the Inquiry into Local Government funding and services, calling for a restoration of a 50/50 funding agreement for the operation of public libraries (the most commonly cited example of cost shifting). This was not supported by Victorian Government. By comparison, the Committee’ recommendation to reinstate a 50/50 Victorian Government and local council funding split for the School Crossing Supervisor program is under review, noting that the $57.4 million budget allocation across 2024-25 and 2025-26 reflects a 50 per cent state contribution to the program.

Funding allocations do not fully reflect relative needs

Since 1974-75, the Australian Government has administered FA Grants via the Local Government (Financial Assistance) Act 1995. The FA Grants are a key source of funding to local government, with $3.6 billion provided in 2026-27 and a total of $74 billion since the program commenced. FA Grants are paid to the states and territories as tied grants, to be redistributed through their respective Grants Commissions to councils as untied grants. FA Grants have two components: general-purpose grants and an identified local road component. Both components are untied in the hands of local government, allowing councils to spend the grants according to local priorities.

A comparison of total FA Grant funding by state and territory is shown below (Figure 2). The average annual growth rate of FA Grant funding across all States and Territories was 4.82% over the seven years. The states with the highest total FA grant funding – New South Wales, Victoria and Queensland – are those with the largest populations, given that the Commonwealth determines state and territory entitlements of general purpose grants on a per capita basis.

Figure 2: Total Grant by jurisdiction ($ value), 2017-25