Vertical Fiscal Imbalance (VFI) and access to a growth tax

Published: 29th May 2020

The COVID-19 pandemic and the resulting economic crisis it has caused has thrown up many questions about how we operated as a society before it hit, and how we will likely operate in the aftermath.

All levels of government are reviewing their mode of operation going forward. They are looking at reforms across the board.

One area that cannot be overlooked is taxation reform and local government needs to be at the table.

Australia’s councils have been facing the same conundrum for more than three decades now and that is the lack of access to a growth tax to fund growth. As they say at all London Underground rail stations: ‘Mind the Gap’. Our lot will not improve until that gap closes. Our sector is extremely grateful for the almost $400 million in economic stimulus funding it received from the State and Federal governments last week following advocacy from your Association.

Those injections of funding were big and very welcome, and as our Premier has assured us, they will not be the last we will receive as we work with both levels of government to create jobs and stimulate our local economies, with further funding tranches to come. But it does not shift our attention away from solving the long-term problem facing councils as we struggle to continue providing the services and infrastructure our communities expect - closing the vertical fiscal imbalance funding gap.

Between 1975-76 and 1985-86, in aggregate, Australian Councils received firstly one then two percent of all Personal Income Tax collected in Australia, under the so-called PITS Act. Allocations grew by double digits every year, reaching as high as 14 per cent. Then in the mid-1980s Canberra broke the nexus/ hypothecation by limiting all future increases in what were then deemed Financial Assistance Grants to CPI and population increases, putting an end to funding growth in real terms.

Indeed, on two occasions even those “multipliers” were frozen for years at a time. It has been a 35-year slide into the funding abyss.

The VFI funding gap for Queensland councils has been calculated a number of ways. The Queensland Local Government Grants Commission estimated the unmet need to be around $780 million in 2018-19. It is worth noting that figure does not have regard to water and sewerage undertakings which are not the responsibility of councils in other states, other than Tasmania and country NSW, yet is a burden all Queensland councils must bear.

A return to a Financial Assistance Grants pool of at least 1 per cent of Commonwealth taxation revenue - the subject of continued advocacy by the LGAQ and ALGA - would add over $2 billion to the national pool and over $400 Million more for our member councils in Queensland. Under the Queensland Local Government Grants Commission distribution model, it would provide more per capita to those small and remote councils that need it most.

We should also receive guaranteed future indexation to avoid the situation seen in recent years where councils were expected to go without this significant population and cost-driven component. But we also need to see the re-opening of a federal discussion around taxation and Inter-governmental relations. This would be both an opportunity and a threat.

It is long forgotten that in 1998 the LGAQ was able to negotiate with both the then State Government and Opposition to secure for Queensland’s councils a fixed percentage of the original GST package. (This was subsequently scuttled by the Greens and Democrats in the Senate).

It was a killer deal.

The most recent piece of research conducted by the LGAQ into the “gap” was completed just on a month ago. It goes to show we look at every angle in every similar three-tier federation to get inspiration.

Put simply, we will never stop trying to close the VFI funding gap by gaining access to a growth tax or taxes.

As always, the LGAQ is fully armed and prepared to enter into any broader national dialogue on remaking federal financial relations in Australia.