Insights

The ability for local governments to fund infrastructure and services

Posted December 05, 2024

Author(s):

Jo Noesgaard

Experts in this area:

Sectors:

Community Infrastructure

Related Services:

Economic analysis

Types:

Local government

SGS Economics and Planning Local Gov Infrastructure

Local governments are under increasing financial strain, affecting their delivery of crucial services and infrastructure to communities. Solutions are needed to support local governments' financial sustainability in the face of growing challenges.

SGS has been working with several Australian local governments and peak bodies to understand how local governments can be financially sustainable in a challenging legislative and fiscal environment. Part of this work was research that supported LGNSW's submission to the NSW Parliamentary Inquiry on the local government's ability to fund infrastructure and services. The research showed:

The rate peg is not keeping pace with capital expenditure, limiting the ability to fund infrastructure needs.
Councils face growing financial pressures due to an increasing asset portfolio and escalating costs for new infrastructure renewal, redevelopment, and construction.
Increased climate events are intensifying challenges, requiring both existing and new infrastructure to be redeveloped to higher standards, while the frequency of infrastructure replacement is also rising.

_{Figure 1: Compound annual growth in capital expenditure (per capita) by council type, 2012-13 to 2021-22}

Rates are a key revenue source for Australian local governments. NSW and Victorian councils are currently limited by a rate cap/peg, restricting how much rates can be increased. As a result, revenue from rates has decreased in both states, leading to a growing reliance on grants. These grants, however, are often infrequent and restricted to specific services, which may not address more urgent community needs.

Case study: The Financial Sustainability of Australian Local Governments

SGS supported ALGA's submission to the Inquiry into Local Government Sustainability by analysing the financial pressures facing councils nationwide. Our research revealed that many councils struggle to fund essential services, with over half unable to generate enough own-source revenue to cover operating costs in 2021-22. Despite their fiscal discipline, structural challenges like rate caps, declining Financial Assistance Grants, and rising tied funding limit councils’ ability to meet community needs. Addressing these issues could yield significant economic and social benefits, from better-maintained infrastructure to improved community services, highlighting the need for reforms to ensure local governments remain resilient and sustainable.

^{Figure 2: Local government share of taxation revenue against total revenue, 2005-23}

Solutions and recommendations

For local governments to continue providing essential services to their communities, they must be able to raise sufficient funds to meet these needs sustainably, including:

The ability to set a budget that reflects community needs and responsible asset management.
The ability to raise funds to meet these budget requirements.
Appropriate service planning and asset management processes in place to ensure budgets are sustainable, in alignment with best practice, and addressing community needs.

SGS supports the ongoing review to ensure that local governments have the resources and support they need to provide high-quality, effective, and efficient services in a financially sustainable way. This is important for tackling local governments' challenges, such as managing growing infrastructure and service needs. By creating a sustainable financial approach, we can help local governments continue to meet the needs of their communities while ensuring they remain financially stable. This will also help them build resilience to handle future challenges better and ensure essential services are available across our communities.