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Rate cap = Short term gain + longer term pain

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Council rates linked to the Consumer Price Index may seem like a win for ratepayers, but could deliver a sting in the tail when the impacts of the Victorian Government’s 2.5 per cent rate cap are felt down the track.

​The Municipal Association of Victoria (MAV) President, Cr Bill McArthur said all the evidence on current and historical rate capping models implemented across Australia pointed to longer term community pain.

“Local government understands the obligation on all levels of government to tighten their spending. This was demonstrated with an average 3.8 per cent rate increase this year, the lowest in a decade.

“Councils are continually looking for opportunities to save money and innovate to improve their efficiencies through new operating models, collaborative procurement and shared service delivery.

“The councils hardest hit by the cap will be those who can least afford it. Rural shires have small budgets and populations, extensive road networks to maintain and a comprehensive range of community services.

“It is critical that these services continue to be provided equally to all Victorians, regardless of where they live. Under the rate cap model, the State will need to invest far more into rural areas to make up the shortfall.

“Strong evidence from numerous independent and government studies about rate capping imposed in other jurisdictions confirms caps lead to a reduction in spending on community infrastructure,” he said.

Following a three-year Northern Territory rate cap from 2008, a review by the NT Government found that it made councils overly reliant on grant funding. In NSW where rate pegging was introduced in 1977, the NSW Treasury Corporation found that councils faced an infrastructure funding shortfall of $7.2 billion in 2012.

“Many reviews have called for NSW rate caps to be scrapped due to the harmful unintended consequences of excessive cuts to infrastructure maintenance and renewal spending; plus councils’ reluctance to borrow more or apply for a rise above the cap where there’s a genuine need for spending to ensure long-term sustainability.

“Victoria’s Kennett-era rate cap also led to cuts in infrastructure spending, and a 2012 Auditor General’s report confirmed Victorian councils’ $225 million asset renewal gap is projected to grow to $2.6 billion by 2026.”

Cr McArthur said it was disappointing the State had ignored Essential Services Commission (ESC) advice to establish a rate cap based on 60 per cent Consumer Price Index (CPI) and 40 per cent Wage Price Index (WPI), opting for a straight CPI cap instead.

“The State had agreed in-principle to the ESC model. Inclusion of a wages component recognises that council staff costs are necessary to deliver a broad range of human-based services like food safety and local laws officers, garbage collectors, road maintenance crews, planning, kindergarten, child care and library staff.

“Sadly there has been no pre-Christmas announcement for Victorians of a commensurate CPI cap on all State taxes, which have risen an average 5.59 per cent for each year of the past decade, or a cap to State property taxes which have gone up an average 7.13 per cent a year.

“Community views will now be integral to local decision-making about the budget tightening measures adopted to achieve the 2.5 per cent rate cap, and we urge all councils to start these difficult community discussions.

“A rate cap linked to consumer price movements, rather than council cost drivers, will mean councils need to look at a range of options. This includes deferring planned infrastructure, reducing capital works and the mix of current services, and higher debt levels. These options could also push greater costs onto future ratepayers.

“We will be collating and reporting on impacts of the rate cap on council budgets so that communities can better understand the consequences of this State-sanctioned model,” he said.

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For further information contact MAV President Cr Bill McArthur on 0437 984 793 or the MAV Communications Unit on (03) 9667 5547.