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Dollars must flow if numbers to grow

Published in The Age (Melbourne), 29 July 2011
http://www.theage.com.au/business/dollars-must-flow-if-numbers-to-grow-20110728-1i257.html

By Adam Creighton and Oliver Marc Hartwich

Kevin Rudd’s plan for a ”big Australia” quickly turned into a ”sustainable Australia” once Julia Gillard became prime minister. She had consulted the focus groups, and Australians, it seemed, did not want rapid immigration and a population of 36 million by 2050, which the 2010 Intergenerational Report had predicted.

This insularity appears to sit oddly with Australia’s history and economy: a sparsely populated migrant nation whose wealth has grown with its size. But this view ignores the immediate impact of more people in local communities, and in particular, on the hip pocket of taxpayers. If increased population growth means higher taxes, people are unlikely to embrace it.

Debate about Australia’s population is framed with national aggregates and ignores how local governments deal with increased population. Part of the reason Australians are averse to more people is because local councils are ill equipped to absorb them and many are forcing residents to pay for them.

We surveyed all 560 of Australia’s councils to find out how they have been responding to population growth.

Incredibly, about half of the 121 councils that responded have increased their rates over the past 10 years in order to accommodate greater population. In theory, greater economies of scale in administration could enable councils to lower their rates when new people arrive. And politicians wonder why segments of Australian society are not champing at the bit for more people.

Local councils are responsible for organising and presenting our civic spaces: collecting rubbish, filling potholes, and zoning land. And more and more they are also providing childcare and sporting facilities, for example. But their expenses are not necessarily well matched by their revenue. If new residents live in existing dwellings, or if they reside mainly in higher-density establishments, rates levied on the value of land are not much help.

In fact, about one-third of surveyed councils said explicitly that population growth was damaging their bottom line. The cost of building infrastructure, which is lumpy and expensive, was their main concern. Fewer than half of the councils mentioned environmental concerns or cited NIMBY resistance to further development.

To help defray the costs of extra people, about 80 per cent of councils surveyed are imposing levies on developers for infrastructure associated with extra houses and apartments – sewerage, roads, playgrounds.

These ”developer levies” push the costs of construction onto developers. Although ”make Big Development pay” might seem appealing, they will pass on these costs. The levies simply make houses and apartments more expensive for residents. And it is not only the new residents who enjoy the benefits of better local infrastructure and a larger market for goods and services.

Use of developer levies was more common among larger councils, which presumably have better resources to prepare and enforce contracts with developers. Smaller councils, which were most partial to increased population growth in our sample, should not have their growth potential limited because they cannot get access to more sophisticated financial arrangements.

Perhaps not surprisingly then, hardly any of the responding councils thought their existing revenue streams were appropriate. Of the 27 Victorian councils that responded, for instance, only one said its funding arrangements were wholly appropriate.

More than 80 per cent of local councils surveyed wanted a slice of the GST or a part of income tax. Part of the revenue from those taxes might sensibly be given to local councils if they could determine how much had been generated in their local area – the link between local taxation and expenditure is strength of local government.

But that would be difficult and it is not the first hurdle in any case. The Commonwealth constitution doesn’t mention local government, and the states’ constitutions only briefly (Victoria’s document uniquely requires local government to be ”democratically elected”). This makes it difficult for the Commonwealth to transfer funds directly to local councils. Referendums to recognise local government in the Commonwealth constitution have failed twice, in 1974 and 1988.

Councils also thought the existing grants process, whereby state governments distribute money to councils, was obscure and arbitrary. Just as the Commonwealth tries to ensure ”horizontal fiscal equalisation” among the states, the states attempt a similar feat among their local councils.

Tweaking the state grants processes to make dollars follow people more quickly and certainly is one way to encourage councils, and their ratepayers, to absorb new residents. Failing that, local councils could be allowed to borrow to pay for new development. It is better that all ratepayers – young and old, new and established – contribute to local infrastructure costs.

If Australians can more readily enjoy the economic benefits of a larger population, the government’s meaningless ”sustainable Australia” mantra might be quietly dropped.

This year’s tax summit should look at how to make local councils compete for more people. Our politicians would do well to remember the American aphorism: all politics is local.

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