local government financing

8/9/2019 Local Government Financing

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Local Government Finance

The issue of local government financing has been a topic of significant attention for the past

three decades. Local authorities in Ireland are disadvantaged in the sense that they enjoy little

financial autonomy in comparison to their OECD counterparts. The lack of fiscal autonomy

which currently afflicts local government means that there is increased pressure on central

government to provide financing. This in turn is preventing local authorities from providing

adequate levels of public services.

The 2006 Indecon International Economic Consultants report on local government financing

stated that significant increases in central government funding needed to be implemented in

order to maintain the current service provision levels at local level. The report also

recommended that the current form of local government financing needs to be revised with

greater emphasis on locally based sources of funding.1 The 2008 OECD report echoed the

sentiment that Ireland must move towards local forms of financing.2

Currently in Ireland, local taxation is accumulated in the form of commercial property rates.

These commercial rates are not exchanged for any particular service, but are in effect

collected to meet the deficiencies arising in local government financing. It should be

highlighted that commercial rates are not related to specific benefits received by the

individual ratepayer since the benefits of local expenditure are not confined to ratepayers.3

In

2004 the commercial rate intake constituted about 25% of funding for local government.4

Commercial rates represented 28% of total revenue income for local authority budgets in

2009.5

This trend represents a greater financial dependency by local government on the

commercial sector.

Local government in Ireland is being forced to place a greater financial burden on the

commercial sector of the economy as they attempt to balance deficits incurred from currentand capital expenditure. The 2009 OECD report shows that in comparison to other European

nations very little tax revenue goes directly to local government. The figures in the OECD

report from 2007 show that the average amount that goes to local authorities is 2.2% in

Ireland which is well below the 10.6% average of 18 other European countries.6

The current local government financing arrangements place undue strain on the ability of

authorities to successfully manage their localities. Under the Planning and Development Act

2000, development contributions are payable by persons developing property to ensure an

appropriate contribution toward the cost of public infrastructure and facilities.7

However, the

downturn in the construction industry leaves the future of this revenue in doubt. Likewise, the

1Indecon International Economic Consultants, 2006. Review of Local Government Financing. Dublin.

Government Publications.2

OECD, 2008. Ireland: Towards an Integrated Public Service. Paris. OECD.3Review of Rating Law: Report of Working Group, 2001.Dublin. P5.

4Indecon International Economic Consultants, 2006. Review of Local Government Financing. Dublin.

Government Publications. P.ii5Local Authority Budgets 2009. Department of Environment, Heritage and Local Government. 2010.

6OECD, 2008. Ireland: Towards an Integrated Public Service. Paris. OECD.

7Commission on Taxation Report, 2009. Dublin. Stationary Office.


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proceeds of the motor tax industry cannot be depended upon as a stable source of funding for

local authorities through the Local Government Fund.

Financing Solutions

The need for a more stable source of financing has been highlighted in almost all reports

regarding the financing of local authorities. The introduction of the levy on non-principleprivate residences may be commended as the first step on the path towards more stable and

regular financing. A form of property tax is an equitable way to provide some measure of

fiscal stability for local government. However, the current fiscal emphasis, solely on

commercial properties unfairly distributes the tax burden upon a commercial and retail sector

that is struggling in the face of an economic downturn, high operating costs and a land border

with Northern Ireland where goods and services can be obtained cheaper.

The need for the implementation of some form of domestic property tax is imperative for the

equitable, sustainable and fair distribution of fiscal responsibility in local government

financing. It is true that rates on domestic dwellings were never abolished, but the liability for

their payment was transferred upon central government.8

The current unsustainable situation

is not only creating a financing gap between rural and urban councils but is also targeting a

commercial sector that cannot afford to carry the fiscal responsibility alone.

The unpalatable nature of domestic property rates will never win popular favour with the

public and this has always prevented the incumbent from tackling the issue because of the

risk of political suicide. However, in the long run such a move could provide the financial

backing for greater quality of public service at local level, greater autonomy for local

government and a fairer deal for businesses and retailers who are struggling in a tough

economic climate to maintain their fiscal responsibility.

Clearly, there must be an alternative to the current form of local government funding. The

buoyancy created through development levies has proved to be unsustainable. A situation

now presents itself where local authorities are overly dependent on revenue from commercial

rates. Local authorities must be empowered through a stable and dependable source of

financing.

Any alternative to the current form of local authority financing must strive to keep the overall

tax burden low and maintain the integrity of the tax system. Secondly, the implementation of

any new tax must aspire to increase economic activity within the Republic of Ireland and

increase the ability of the Irish commercial sector to trade on a more cost effective basis. A

restructuring of the current tax system must observe the promotion of employment and theability of the commercial sector to provide employment.

8Healy, David. Financing Our Local Authorites. 2006. PSAI.


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Replacing stamp duty with a Site Value Tax. Such a tax would not only raise funds for cash-

starved councils but would also act as a disincentive to hoarding land. (Irish Times, April 16th

2010)

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