Abstract

The financial position of local government in New South Wales reveals a broader structural tension in Australian public administration. Councils are responsible for extensive public assets, local infrastructure, environmental management, community services and place based planning functions, yet their revenue autonomy is significantly constrained. This article examines the concept of local government’s “fair share” through the interrelated issues of vertical fiscal imbalance, democratic constraint, rate pegging, cost shifting and property related taxation. It argues that the debate should not be reduced to whether councils should increase rates. Rather, it should be understood as a question of institutional design: whether the tier of government closest to communities has the fiscal capacity, democratic authority and policy stability required to steward place over time.

Key Themes

• Local government carries significant responsibility for infrastructure, services and community wellbeing, while operating within constrained revenue settings.
• Rate pegging reflects a tension between ratepayer protection, local autonomy and institutional capacity.
• Cost shifting can weaken councils’ ability to maintain assets, plan strategically and retain public trust.
• A fairer funding model requires deeper consideration of tax sharing, service responsibility and democratic accountability.

Introduction: the structural problem beneath local government finance

The question of whether local government receives its “fair share” is often treated as a dispute about money. This framing is too narrow. The deeper issue concerns the institutional position of local government within the Australian federation and, more specifically, within New South Wales.

Councils are expected to maintain local roads, bridges, parks, pools, libraries, waste systems, cultural facilities, environmental programs, community infrastructure and planning functions. These responsibilities are central to the liveability and functioning of urban, suburban and regional places. Yet the fiscal tools available to councils are limited, regulated and, in key respects, controlled by other levels of government.

This creates a structural tension. Local government is highly visible to residents because its services are encountered in everyday life. However, its capacity to respond to local needs is shaped by State policy, Commonwealth funding arrangements, grant programs, rate pegging, cost shifting and the broader distribution of taxation revenue.

The issue is not merely procedural. It goes to the relationship between responsibility, authority and accountability. Where a council is expected to manage local consequences without sufficient control over local resources, a gap emerges between public expectation and institutional capacity. That gap can undermine civic trust.

Vertical fiscal imbalance and vertical democratic imbalance

The language of vertical fiscal imbalance is well established in Australian public finance. It describes the mismatch between the revenue raising capacity of different levels of government and the expenditure responsibilities they are expected to meet. In this context, local government is heavily reliant on grants and transfers from State and Commonwealth governments to perform functions that are increasingly complex and costly.

However, the issue may also be understood as a vertical democratic imbalance. Local councils are democratically elected institutions, but their practical autonomy is limited. Their ability to raise revenue, determine service levels, respond to growth and invest in infrastructure is subject to extensive external control.

This distinction matters. Fiscal imbalance describes the funding problem. Democratic imbalance describes the governance problem. Together, they reveal why local government finance cannot be properly understood as a narrow matter of rates, grants or annual budget discipline.

Local government’s responsibilities are place based. Its funding framework, however, is often system based. The result is that councils must respond to the specific needs of their communities while operating within financial settings designed and controlled elsewhere.

The stewardship role of local government

Local government in New South Wales manages a substantial civic estate. The supplied material notes that NSW councils employ approximately 60,000 people, care for more than $177 billion in community assets, manage around 90 percent of the State’s roads and bridges, and support hundreds of libraries, pools, museums, galleries, theatres and cultural facilities.

These assets are not peripheral. They are part of the everyday infrastructure of civic life. Roads connect households to employment and services. Libraries provide access to knowledge, digital resources and community space. Pools, parks and sporting facilities support health, recreation and social connection. Waste, stormwater and environmental management functions affect public health, resilience and ecological sustainability.

Viewed through a planning lens, councils are not simply service providers. They are stewards of place. Their work sits at the intersection of infrastructure, land use, environmental management, social wellbeing and local economic development.

This stewardship role becomes more important as urban change accelerates. Population growth, housing pressure, ageing assets, climate risk, labour shortages and rising construction costs all increase the complexity of local governance. A funding model that does not recognise these cumulative pressures risks weakening the very institutions expected to manage them.

Rate pegging and constrained local autonomy

Rate pegging is one of the clearest examples of constrained local fiscal autonomy in New South Wales. The policy limits annual increases in council general income unless a council obtains approval for a special variation. It is often defended as a mechanism for protecting ratepayers and encouraging fiscal discipline.

Those objectives are legitimate. Local taxation should be transparent, accountable and sensitive to household affordability. However, the difficulty arises when the permitted increase in council revenue does not reflect actual cost pressures, infrastructure obligations or service expectations.

The supplied material identifies the 2022 to 2023 rate peg as particularly significant. The variation ranged from 0.7 percent, excluding population growth factors, to a maximum of 5.0 percent with population growth factors. This was described as the lowest rate pegging outcome in two decades and was associated with an estimated $80 million shortfall for the sector.

The timing is important. Councils were emerging from a period marked by drought, bushfires, COVID 19, floods, labour shortages, supply chain disruption and escalating costs. In that context, the question is not simply whether councils should be allowed to raise more revenue. The question is whether the methodology used to regulate local revenue can adequately account for the real cost of governing place under conditions of volatility.

The 2023 to 2024 rate peg was higher, ranging from 3.7 percent to 6.8 percent with the population factor. Yet even where annual increases rise, the structural issue remains. If cost pressures are recurrent, externally imposed or lagged in the calculation of permitted income, councils can experience an ongoing erosion of capacity.

Cost shifting and the erosion of institutional capacity

Cost shifting is one of the most important concepts in the local government finance debate. It occurs when another level of government imposes, transfers or expands responsibilities without providing adequate funding. The effect is not simply financial. It changes the priorities and operating capacity of local institutions.

The supplied material uses the Emergency Services Levy as an example. It states that the levy increase reduced local government funding in New South Wales by $77 million in 2023 to 2024 and consumed a substantial proportion of approved rate rises in several councils.

The significance of this example lies in its institutional effect. If a council’s approved increase in revenue is largely absorbed by a cost imposed from outside the organisation, the council’s practical capacity to improve services, maintain assets or respond to local priorities is reduced. The community may see a rate rise, but not experience a corresponding improvement in local outcomes.

This dynamic can be corrosive for public trust. Residents may reasonably ask why rates increase while service levels remain under pressure. Councils may explain the impact of external costs, but the complexity of intergovernmental finance is not always visible to the public. The result is a trust deficit produced by a system in which accountability is local, but control is distributed.

Property taxation and the fair share question

The argument for a local government “fair share” becomes particularly significant when considered against property related taxation. Councils contribute to the conditions that support property value: planning decisions, public domain investment, roads, drainage, local centres, parks, libraries, open space, environmental quality and community infrastructure all shape the attractiveness and functionality of place.

At the same time, significant property related revenues are collected by State governments. The supplied material refers to research suggesting that property related tax collection in New South Wales includes council rates, stamp duties, land tax and emergency services levies. It also notes that in the 2020 to 2021 financial year the NSW Government collected $9.379 billion in stamp duty.

The Campbelltown example illustrates the issue in practical terms. According to the supplied material, property sales in the local government area generated an estimated $80.75 million in stamp duty, while the council received a substantially smaller amount through NSW Government grants. The example is not presented here as a complete fiscal model. Rather, it demonstrates a broader policy question: when local places generate substantial property related taxation revenue, should there be a more transparent mechanism for returning a share of that value to the infrastructure and services that support those places?

This is a question of tax integrity as much as local government funding. If public investment and local governance contribute to the creation and maintenance of property value, then the distribution of property related tax revenue should be open to scrutiny.

The issue is not whether stamp duty should simply be transferred to councils. State governments have their own responsibilities and fiscal pressures. The more precise question is whether the current distribution of property related revenue adequately recognises the local infrastructure burden associated with growth, development, asset maintenance and urban change.

The limits of shifting costs to ratepayers

A fair funding model for local government cannot rely only on increasing rates. This is important. Ratepayers face affordability pressures, and local government areas vary significantly in their socio economic profile, asset base, population growth, infrastructure backlog and revenue capacity.

A council with a large geographic area, ageing infrastructure and limited rate base may face very different pressures from a fast growing metropolitan council with development activity and expanding service demand. A uniform or overly narrow revenue model may therefore reproduce inequity between places.

This is why the supplied material’s central questions are valuable: should some services be funded through another form of taxation, and is local government receiving an appropriate share of that taxation?

Those questions shift the discussion from local revenue raising to intergovernmental design. They also recognise that some local government functions produce benefits beyond the individual ratepayer. Environmental management, emergency preparedness, roads, planning systems, waste infrastructure and community facilities can support broader regional, State and national outcomes.

Where benefits are shared, funding responsibilities should also be shared.

Toward a more mature fiscal settlement

A more mature conversation about local government finance would begin by clarifying the role of councils in contemporary governance. This requires more than periodic debate about rate pegging. It requires an integrated assessment of services, revenue, accountability and institutional capacity.

Several questions follow.

What functions should local government reasonably be expected to perform?

Which of those functions are primarily local, and which serve broader State or national interests?

How should revenue be distributed where local places generate substantial property related tax income?

How can grant funding be made more predictable, less fragmented and better aligned with long term asset management?

How should democratic accountability operate where councils are responsible for outcomes but constrained in the revenue tools available to them?

These questions do not point to a single technical solution. They point to the need for a new fiscal settlement. The Australian Local Government Association’s call for a minimum of 1 percent of Commonwealth taxation revenue is one example of this broader national debate. In New South Wales, the rate pegging system, cost shifting and the relationship between property taxation and local infrastructure provide a clear basis for renewed policy consideration.

Conclusion

The question of local government’s fair share is not simply a claim for more funding. It is a question about the architecture of public responsibility.

Local councils are expected to steward the places in which people live, work, move, gather and invest. They manage infrastructure, services and environmental systems that are essential to community wellbeing and economic function. Yet their fiscal autonomy is constrained, their exposure to cost shifting is significant, and their reliance on grants can limit long term planning capacity.

This creates a structural imbalance between what communities expect local government to deliver and what the funding system enables councils to sustain.

A serious reform conversation should therefore move beyond the narrow politics of rate increases. It should examine how public value is created in place, how property related taxation is distributed, how local infrastructure is funded, and how democratic accountability can be aligned with fiscal authority.

The fair share question is ultimately a governance question. If local government is to remain a credible steward of place, it requires a funding framework that reflects the scale, complexity and public value of the role it is already expected to perform.

References

1. Local Government NSW. LGNSW Submission: NSW State Budget 2022–23. https://lgnsw.org.au/common/Uploaded%20files/Submissions/2022/LGNSW_Submission_State_Budget_2022-23_FINAL.pdf
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3. Independent Pricing and Regulatory Tribunal NSW. Information Paper: Rate peg for NSW councils for 2023–24. 29 September 2022. https://www.ipart.nsw.gov.au/sites/default/files/cm9_documents/Information-Paper-Rate-peg-for-NSW-councils-for-2023-24-29-September-2022.PDF
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7. Australian Broadcasting Corporation. Stamp duty adds $9.379 billion to state budget. https://www.abc.net.au/news/2021-06-20/stamp-duty-adds-9-379-billion-to-state-budget/100229554
8. HtAG Analytics. Campbelltown City Council property data. https://www.htag.com.au/nsw/nsw272-campbelltown-city-council/
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