Rate Cap = Crazy Idea

Rate Cap

Labor went to the last State election saying they would cap rates at CPI plus 2 per cent. Now the Liberals are following suit and talk is a cap at CPI. I don’t blame them; I’d probably do the same if I were in their shoes. But it does need to be seen as the populist and short-sighted idea that it is. As I detail near the end of this article, the workable method to limit future rate rises is to target the expenditure side of Local Governments; not the income side.

The reason I don’t blame them is because when you’re in government it is much easier to target someone else rather than do anything yourself about controlling the costs of living for the people you represent. For example, not imposing a 4.5% electricity price increase or the astronomical 90%+ increases in the landfill levy would be a good start. Both of which ironically will place upwards pressures on council rates due to local governments significant use of electricity and having to clean up the inevitable increase in illegal dumping.

Certainly the inefficient and free-market prohibiting stamp duty, where the average house purchaser hands over a whopping $17,500 to the State government, should be abolished. As too the counter productive and illogical payroll tax, where employers pay up to 5.5% tax on their wages bill and is the highest in the country. Why on earth would you have a tax which penalises employment, especially when WA’s unemployment rate is hovering at the highest level in a decade?

Nonetheless, I’m not writing this to hold a mirror up to the State government, but rather to illustrate the obvious short-comings of this politically popular, but unwise proposition of capping council rates.

The Problem with the proposal
It’s pointless. Any local government can already provide zero per cent rate increases through a number of ways:

  1. Transfer funds from reserves (savings set aside to fund future projects) to cover operational costs – I have previously written about how this nifty little strategy artificially, and ultimately only temporarily, lowers rates at the expense of financial responsibility and sustainability.
  2. Use debt – Follow the lead of the State and Federal government ($25 billion and $430 billion respectively… and counting). Borrow funds so the current electors don’t have to bear the brunt and instead leave the mess to a future generation.
  3. Sell assets – Again do what the State and Federal governments do so well. Sell long term assets to balance the annual budget. Or in the case of State and Federal governments, sell assets to vainly attempt to balance the annual budget.
  4. Postpone necessary spending – This is an insidious strategy. Whilst it would be very easy to delay, say, $1 million in asset maintenance, ongoing and regular asset management is of critical importance for responsible local governments. Postponing maintenance of assets can have costly repercussions, for example, if you delay re-surfacing a road for an extra few years, you run the risk of the road failing and having to totally reconstruct it at a cost four times more.

None of the above strategies are sustainable and a rate cap will create far more costs in the long run.

The other problem with this proposal is that CPI is a poor peg to use when setting council rates. “CPI is a measure of the average change over time in the prices paid by households for a fixed basket of goods and services” (ABS). The fixed basket of goods bears no resemblance to the costs incurred by local governments.

The Solution
The only sustainable and responsible solution to limiting rate increases is to limit expenditure; not income.

This can be achieved either through creating efficiencies or limiting services.  (As an aside, the inefficiencies which plague all governments are often the result of Federal and/or State laws)

There are always efficiencies which can, and should, occur. Local government reform/amalgamations was one attempt to create efficiencies. Greater collaboration between local governments and duplication of documents is another. There should always be a drive for greater efficiency, but I can’t see how the State government can legislate anything on this front.

What they could do however is stipulate that local governments move back to their core services. My view on this is not yet determined, but I raise it because I have some concern about the breadth of services which local governments now provide. In defence of local governments this growth is in no small part due to the constant cost shifting that has been occurring from the State and Federal governments, however should local government provide the many hundreds of services that they currently do? As PWC’s report on the sustainability of local government states, “Most local councils, due to community pressure, state and Australian Government inducements and the withdrawal of services by other levels of government, now provide a growing range of social and human services.” Should local government be responsible for social and human services? If the answer is no, then the State Government could prohibit this from occurring, and this would then reduce expenditure and  rates will drop.

All of that said, I suspect that it is more politically beneficial to bang on about capping rates, even with the obvious flaws, rather than prohibiting certain services so expect capping rates to become an election issue, and if it occurs, expect problems to ensue.

Power to the people. Feel free to share your views on whether rates are too high and if so what you think should done about it.

(Please be aware that these views are my own and have not been endorsed by the City of Bayswater)

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