Grants Commission Assessment of Local Government Debt Servicing and Capital Expenditures

The Commonwealth Government provides funds to local government via the States. Each State is required (via the State Grants Commission) to distribute those funds in compliance with the provisions of the Local Government (Financial Assistance) Act. In essence, the Act requires the State Commissions to estimate the relative needs of each local government authority (LGA) based upon revenue-raising capacity and differences in the cost of providing public services. It is this latter aspect that is the focus of this paper. At present most State Grants Commissions consider costs differentials associated with all major expenditures except debt servicing (with only Victoria and Western Australia making some allowance). No State Commission makes allowance for capital expenditures financed out of current budgets. Debt servicing is a particularly important cost for many LGAs and the potential exists for quite substantial differences in the cost of debt incurred. These differences may depend upon the timing of the debt (and therefore the interest rate), the primary cost of expenditures to which the debt relates and an unequal distribution of the burden of shortfall between the funds provided by the Commonwealth and the effort-neutral budget deficit of LGAs. This paper demonstrates the case for both a debt servicing and capital expenditure cost component in Grants Commission assessment, and shows that in practice, taking account of the differences in these costs between LGAs can be relatively simple. The inclusion of these costs ensures a comprehensive assessment of the relative needs of local government.