Rates alone won’t do for development

By Adam Coleman

Local governments can’t rely on revenue from rates if it is to facilitate regional development and should consider redistributing funds to economic development projects, according to a new report.

Commissioned by the Australian Local Government Association (ALGA), the State of the Regions Report 2006-07, says that many Australian councils are faced with low development productivity and rapidly ageing populations.

Councils must have adequate resources to break out of this vicious cycle and to attract industry for productivity driven growth, the report says.

Authors of the report, National Economics believes councils’ ability to raise rate revenue is constrained by household income and business productivity.

The group claims that high land values, relative to income, can cut the capacity of councils to raise revenue “because it can lead to higher numbers of high debt households with reduced household disposable incomes”.

According to National Economics deputy director, Ian Manning, many councils have an unused borrowing capacity, which “could very well be used in infrastructure investments which they believe will increase the rate base”.

“It’s quite a reasonable commercial proposition. Such infrastructure investments do exist. They can be anything from roads to industrial state development, skills development or regional promotion,” Mr Manning told governmentnews.com.au.

National Economics estimates councils need an injection of $2.3 billion to bring lagging regions nearer the average standard for regional growth and the provision of infrastructure attractive to business and desirable population levels.

Mr Manning suggests there is an opportunity for councils to redistribute funds towards economic development projects.
“You can some times get some admin efficiencies out of joint working, particularly in the states were the councils remain small in size.

“Now that doesn’t mean that councils have many areas that they can cut easily, though sometimes we think there are some councils that might be able to cut a bit of [funding to] roads.  It’s always a big expenditure item, so it is always worth looking at very carefully,” he says.

The local government role in economic development has become more complicated, with keeping the manufacturing sector in a region vital to local economic growth.

The report singled out ageing populations as a challenge for regional development.

“If you have a high proportion of retirees in your population, firstly you don’t get much in the way of skilled labour supply, their rate paying capacity is pretty low, they may have quite valuable properties but their cash flow is small. So from a council point of view they are actually a fairly high needs group,” says Mr Manning.

“Councils are very well placed to provide services to that group efficiently but on the other hand they are very badly placed to finance it. We actually recommended that they should not attempt to get into services for the elderly, except in so much that they are financed by the commonwealth and the state. They shouldn’t do it out of their own funds. Some councils do and they quite often get burnt.”

National Economics says the central development objective for local government areas is to maximise productivity and for that it needs resources to supplement rate revenue.

The benefits of higher productivity are many it says, including increases in real wages, allowing firms to employ more highly skilled workers and improve profits, which in turn enables increased investment and boosted manufacturing capacity.

Mr Manning suggests that some councils have ‘unused rating capacities’.
“They have chosen to rate low. Now in NSW there is a lot of underrating but that is thanks to the state government. NSW rates consistently a percentage point below the rest of the country.”

There is also the capacity to boost research and development and boost exports according to the report.
Such support for councils would allow local government regions to boost growth in domestic demand and provide opportunities to replace imports with Australian products, thus strengthening Australia’s skills pool, it says.

“There are a lot of councils that are struggling to provide to keep up with Australian standards. That’s very often through no fault of their own because they have a high needs area with low rate capacity,” says Mr Manning.

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