Council rates capping, inflation and state government’s role

The state government is currently legislating to cap council rate increases. The initiative arises from concerns regarding general rates rises and cost of living issues. In this post we examine how council rates have changed over time, take a closer look at the proposed legislative changes, and consider how reasonable they are.

How have council rates changed over time?
There is no ideal existing measure of how average council rates have evolved over time. While the Australian Bureau of Statistics does publish a ‘property rates and charges’ price index for Adelaide as part of the Consumer Price Index, it includes state government charges and is therefore not a pure measure of council rates movements (although it would be dominated by council rates). An alternative approach is to calculate the average general rates revenue per rateable property (e.g. residential, commercial, etc.) based on data published by the Local Government Grants Commission, which is the approach taken here.

As the figure below shows, council rates in South Australia have consistently grown well in excess of consumer price inflation over time. Over the decade to 2015/16, the average general rates revenue per rateable property rose by 71 per cent – from $956 to $1,640 per rateable property – which is a little more than two and a half times the rise in the Adelaide CPI (27 per cent) over this period. Unfortunately the existing published data does not allow us to tell how average general rates have changed over time for specific forms of land use, such as residential versus commercial properties.

Such increases do not appear exceptional by national standards. Using the ‘property rates and charges’ index as a rough proxy for council rates for residential properties, similar scale increases have been recorded in other capital cities relative to Adelaide over the long term.¹

Figure 1: Index of general rates per rateable property, local government price index (LGPI) and consumer price index (CPI)

A closer look at the legislation
The state government recently unveiled the Local Government (Rate Oversight) Amendment Bill 2018, which sets out a ‘rate oversight scheme’ that will be managed by the Essential Services Commission of South Australia (ESCOSA) – the state’s independent economic regulator. Under the proposed legislation, a rate cap will be implemented by ESCOSA by making a ‘primary rate cap determination’ for a specified financial year. The primary rate cap may apply to all councils, a group of councils, or a particular council. This raises interesting possibilities in terms of different rate caps applying to different classes of councils.

In determining the primary rate cap, ESCOSA must consider various factors, including whether a price or cost index may be used and whether a productivity or efficiency component should be included. Councils can also apply for a rate cap variation for a period of up to five years, subject to various requirements (e.g. have consulted their local community, considered other methods of addressing resourcing needs).

The LGA position on rate capping
The Local Government Association of South Australia is strongly opposed to rate capping. They argue that capping would lead to a reduction in services and declining quality of public infrastructure, and force councils to raise other fees and charges to cover the shortfall. They attribute larger than CPI increases, in part, to falling government grants and cost shifting, and rising community expectations in terms of services and infrastructure provision. In addition, they have concerns about accountability arrangements with decision making being shifted from local elected officials to unelected officials, and the additional costs associated with administering the rate oversight system.

Inflation faced by local government (local government price index)
In considering the basis of the rate cap, a good starting point would be the local government price index (LGPI) which is currently produced by SACES. The LGPI measures price movements faced by South Australian councils in respect of their purchases of goods and services. While much attention has been paid to how council rate rises have exceeded CPI increases, the CPI ultimately does not provide an accurate measure of inflation faced by local government. The CPI is designed to measure price changes faced by metropolitan households based on a ‘basket’ of goods and services that account for a large proportion of their expenditure. As other entities such as government and businesses face a quite different mix of goods and services purchases, the CPI does not provide an accurate measure of their experience of price movements. In fact, all levels of government tend to face a higher level of inflation compared to households. Part of the reason is that government’s directly employ people (e.g. council workers, planners, doctors, nurses etc.), and until recently, wages have historically grown at a rate in excess of general price inflation.

A comparison of the LGPI and CPI reveals that inflation faced by local government has tended to exceed that faced by households by an average of 0.6 per cent per annum over the 10 years to 2015/16 – see Figure 1. However, such a differential would still not explain the relatively stronger growth in the average general rates per rateable property over this period (5.5 versus 3.0 per cent per annum). Several factors may explain why this may be the case, including:

  • policy decisions by councils that lead them to raise rates by more that cost increases (e.g. to provided additional services, enhance infrastructure);
  • potential inefficiencies associated with the delivery of services by councils;
  • the LGPI may not capture all sources of cost pressures faced by local government (e.g. changes in funding by federal and state government that disadvantage local government); and
  • the existing ABS price indexes that are used to compile the LGPI may not provide an accurate reflection of price movements experienced by local government.

State Government has an important role to play in controlling local government costs
While the rate capping system has the potential to reduce future general rates rises by imposing greater cost discipline on councils, it represents only part of any solution to containing rates rises. State government policies in respect of water, energy, environmental regulation and other areas also have a significant bearing on cost pressures faced by councils, and these policies need to be properly attuned to bring about efficient outcomes not only for councils, but also households and businesses.

Unfortunately state government policies have not always been conducive to containing cost pressures. One example is the solid waste levy that applies to waste received at waste depots, which past state governments have raised well in excess of general price inflation. The solid waste levy for the metropolitan area has risen from $10.80 per tonne in 2005/06 to $57 per tonne in 2015/16, which represents an increase of 428 per cent, or almost 16 times the rise in the Adelaide CPI over this period.² While these rises are well intentioned – i.e. to reduce waste disposed to landfill and encourage recycling – they represent a major source of potential cost pressures faced by local government in respect of waste collection services, which are ultimately passed onto households via general rates rises.³

Finally, rate capping is only one of a range of potential reforms that may be applied to the local government sector to improve the efficiency and effectiveness of the sector. Examples would include, but are not limited to:

  • increasing transparency and accountability by collecting and publishing relevant benchmarking and performance data for councils in a similar approach to current practice in Victoria;
  • enhancing community engagement in local decision making (e.g. identifying which services local communities see as vital, and which they are willing to see cut back);
  • increasing shared service delivery across councils and, potentially, other levels of government;
  • reconsidering the respective roles of local and state government (should they be expanded or narrowed?); and
  • re-examining the effectiveness and equity of existing fiscal equalisation arrangements.

¹ One needs to take care when using the ‘property rates and charges’ index as a measure of changes in council rates given the presence of state government charges. For example, a 17 per cent rise in the index in 2014/15 can probably be largely attributed to the then State Government’s decision to remove discounts applying to the Emergency Services Levy.
² The solid waste levy for the metropolitan area in 2018/19 was $100 per tonne, which represents a 75 per cent rise since 2015/16.
³ One of the potential consequences of rates capping may be that some councils decide to adopt user charges for waste collection and other services.

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