Amid all the talk of tax cuts, Australians should gird themselves for hefty hikes in local taxes. The citizens of New South Wales – already burdened with the highest taxes in the land – have been told in a little-noticed draft report by an independent Local Government Inquiry (LGI) that the vast majority of their local governments are unsustainable or struggling. They have neglected the upkeep of local roads, sea walls,water and sewage systems and the like. Local infrastructure deficits already detract from the quality of life, and the problem will grow. Local governments only collect about 5 percent of all revenue, but are being burdened with more and more tasks. And ambitious councils launch trendy initiatives, often duplicating federal and State offerings.
The LGI draft discusses a plethora of policy options, including lifting rate ceilings. It is my expectation that the NSW State government, which has used the GST windfall to inflate its bureaucracy and now faces deficits, will prefer this option and will shy away from guaranteed, regular funding of local governments. However, in the present climate, local government reform must be achieved without increasing the overall tax take.
Beyond this, we would be well served by a fresh look at what we want governments to do. We need a principled debate about the proper role of government in the modern age, and which tier of government should specialise on what. Local governments should be given greater autonomy, as they affect most citizens more directly than the more remote parts of the public sector.
In practice, our elected councils are mere administrative extensions of State governments, to be directed and overruled at will, or sacked. This reality sits poorly with Australia's diverse, affluent, educated and assertive population. Many are dissatisfied that traditional civic networks have been fading, because remote officials displace personal local engagement. 'Happiness research' shows that community participation is crucial to social stability and popular contentment. The welfare state has failed to fulfil its promise, so that the time is ripe for empowering citizen by decentralising some political responsibility. Besides, regional diversity and reliable, expedient local services and infrastructures are essential for success in global competition and hence local prosperity.
In Britain, leading Labour politicians have recently addressed the growing alienation from government. They advocate decentralisation and some privatisation to breathe new life into local government. In Australia, we should also explore ways of again bringing government closer to the people. To begin with, constitutions should explicitly recognise the third tier of government and assign it specific, exclusive tasks. The prevalent, often arrogant paternalism has to be replaced by sovereignty over local taxes, always of course disciplined by the competition among councils. In addition, State and federal governments should allot fixed unconditional transfers, say on a per-capita basis. Opportunistic discrimination and the rewarding of inept councils on "a needs basis" must be ruled out; poor management must not be rewarded. Let the citizens then take more interest, judge and dismiss bad local administrations!
The opportunity to reinvigorate public life from the base up and to enhance citizen sovereignty would be squandered, if exercises such as the LGI inquiry led to no more than patch-ups and rate increases.
Wolfgang Kasper is an Emeritus Professor of Economics, University of New South Wales.