Local governments deliver efficient government services despite being starved of resources and autonomy. A reform program is needed to remove the barriers hindering further productivity.

Local governments play an indispensable role in the productivity of Australia's economy, but they are typically seen as bit players in the big policy moves orchestrated by the Commonwealth and state governments around macro-economic management, infrastructure investment, social security and health, education, defence, and foreign affairs. Despite these preconceptions, we live our lives in local places. The standard and efficiency of our local services — clean streets, parkland, libraries, and sporting facilities — are no less important in determining our quality of life than the macro policy settings determined by other spheres of government.

Local governments are productivity pacesetters

When it comes to delivering efficient government services, local governments are setting the pace.

The period between 2012 and 2021 was hugely demanding of Australia’s public sector. Amongst rich nations, Australia experienced chart-topping rates of population growth, generating pressures for rapid expansion of all manner of government services. In 2020, the COVID-19 pandemic hit, further boosting demands on government spending and resources.

Over these nine years, total outlays for the Commonwealth grew from $17,200 per capita to $26,500 per capita, an increase of more than 50 per cent. Outlays per capita accelerated with the onset of COVID-19, but strong growth in spending was already well entrenched before the pandemic.

Meanwhile, state government outlays grew by 32 per cent over the same period, from $11,300 to $14,900 per capita. State government spending also increased more quickly with the pandemic, but on the back of a well-established growth path.

Local government, whose services are highly exposed to population growth (and, indeed, COVID-19) related spending requirements, saw only a 23 per cent increase in total outlays per capita across the nation. This suggests that councils were fairly effective in getting value from the resources available to them compared to the other spheres of government.

However, that total spending embeds transfers from other governments which complicates assessments of relative productivity. Looking at the number of employees by level of government provides another perspective on the issue. Between 2012 and 2021, total employment numbers in local government barely changed at around 190,000. On a per capita basis, employment in local government actually fell by 11 per cent — yet services to the community were maintained at a seemingly reasonable standard. On the face of things, this signifies a significant productivity gain.

By comparison, total employment across state governments more than kept pace with population growth, increasing by 213,000 workers over the nine years in question, ultimately reaching 1.66 million by 2021. For its part, the Commonwealth saw total employment fall marginally from 250,000 to 248,000.

What does the community think about local government?

It’s one thing for experts to assert that local government is maintaining services with fewer pro-rata resources, but what do the people think? Australians consistently report having more faith in their local councils than either the Commonwealth or state governments.

A 2018 survey administered under the auspices of the Museum of Australian Democracy in the Department of Prime Minister and Cabinet found that trust in government generally was at an all-time low. However, within this dismal scene, local government’s light shone brightest.

The voters most suspicious of government were those from Generation X; only 21.5 per cent of these expressed trust in the Federal Government, and 26.7 per cent in state government. However, more than a third felt they could have confidence in their local council. Voters from all generations — Gen Z, Millennials, Gen X, Baby Boomers, and Builders — indicated greater trust in local government compared to the Federal Government by margins of between 12 and 27 percentage points, and between 7 and 28 percentage points compared to state and territory governments.

It’s reasonable to assume that ‘trust’ in this context reflects voter satisfaction with services as well as faith in the democratic process.

Reform program needed

Notwithstanding this sound record of doing more with less and, apparently, winning the broad support of their constituencies, local government has been starved of resources and autonomy.

Councils typically face stringent rate capping imposed by their host states. The share of Commonwealth tax revenues redistributed to local government via routine Financial Assistance Grants has shrunk from 1.2 per cent to 0.53 per cent over the past two decades. Compared with other advanced economies, local government expenditure as a share of GDP in Australia is among the lowest at around 2.0 per cent. In New Zealand, local government’s share is closer to 4.0 per cent.

Unsurprisingly, a significant proportion of local governments, especially those in regional areas, face a constant fiscal challenge. Some cannot generate enough revenue to maintain their existing assets let alone invest in new community-building programs.

State governments typically respond to the financial pressures confronting local government by proposing or enforcing rationalisation of boundaries — amalgamations and restructuring to spread administration and infrastructure costs over a bigger tax base. This is likely to overlook the key ingredient in the apparent efficacy of local government as a resource manager. State government functions benefit from economies of scale: this partially explains their operations in massive silos covering health, education, policing, and transport services. This makes sense as these are standard services that, in the main, can make use of a common administration, capital assets, and other fixed costs. Local government, however, doesn’t work in this way: they benefit from economies of scope rather than scale. Compared to other spheres of governance, local government excels at leveraging the synergies between its resources and those of the private and community sectors. That’s why they can do more with less.

The services provided by local government are no more important, or less important, than those administered by the State and Commonwealth governments: they’re just different. Local government deserves recognition and respect for doing a good job with the limited resources available to it. Indeed, the sector’s solid performance warrants a reform program to further strengthen local government. High on the priority list should be more effective horizontal fiscal equalisation, starting with an appropriate fixed share of Commonwealth tax revenues.