September 2020 What is the international evidence of the impact of COVID-19 on subnational finance?
During the summer months a number of reports were published on the financial impact of COVID-19 on the public finances of local and regional authorities. Among others, it includes publications by the OECD on the territorial impacts across levels of government and studies by the Institute for Fiscal Studies on the financial risk and resilience of English local councils, and the impact on council budgets in England of the COVID-19 crisis. With the relevant links listed at the end of this blog, we hereby provide a short summary of these reports.
The impact of the COVID-19 pandemic and subsequent lockdown on subnational finance is not straightforward. It varies across space and time, and is likely to be different than the impact on central government finance. This is because subnational governments are more vulnerable to liquidity crises as they have limited tax sources and are dependent on intergovernmental transfers, have little discretion over spending and, at same time, are often responsible for the delivery of essential and costly public services. The financial impact of COVID-19 on subnational governments will differ, depending on a number of factors. Given the nature of this public health crisis, urban areas with high population densities, high levels of deprivation and heavily reliant on retail, hospitality and tourism are more affected.
Aside from the general economic profile and resilience of the local economy, what matters for the impact of the COVID-19 crisis on subnational finance are the degree of fiscal decentralisation and the mix of revenue sources. For example, the greater the subnational spending responsibilities and the more reliant subnational governments are on volatile revenue sources (taxes on income rather than taxes on property, for example), the greater the impact of COVID-19 on subnational public finance.
With many subnational governments responsible for health & social care and welfare & social protection, spending by local and regional governments has increased as a result of the pandemic and the subsequent economic downturn. On the revenue side, subnational governments that are more reliant on income sources that are sensitive to economic fluctuations and current economic activity will experience a larger fall in income. Tax revenues will fall, as will income from charges and fees on goods and services because of the contraction in local economic activity. The impact on transfers will depend on a number of factors, including the initial fiscal health of governments, the response of central government to the crisis, and the design features of intergovernmental transfers. Albeit somewhat different this time, this scissors effect on subnational finance of an increase in spending combined with a reduction in income was evident in the last economic and fiscal crisis that followed the 2008 financial crash.
In terms of the impact over time, aside from the short-terms effects outlined above, there are likely to be medium and long-term impacts on subnational finance arising from COVID-19 and the recession that follows. As subnational government revenues are often based on previous year’s activity, there will be a lag effect, with falls (and in some cases of greater magnitude than current reductions) in local government income materialising in 2021 and beyond. Of course, it is early days yet and any forecasts of cost increases, income reductions or deteriorations in budget balances or levels of debt for 2020 and beyond should be treated with caution.
This is what the Institute for Fiscal Studies report into COVID-19 and English council funding does when, based on councils’ own assumptions and estimates, it analyses expenditure pressures and non-tax income shortfalls for 2020/21, but reminds readers of the potential significant margins of error. The estimates can be found in the IFS publications below. Aside from the conclusion that the impact is uneven across English local councils, the report concludes that English councils will have an estimated funding shortfall of about £2bn in 2020/21, even allowing for the financial supports from central government. To avoid in-year cutbacks to services and a repeat of the austerity years that followed the last crisis, councils can use reserves to offset these shortfalls but the amounts are limited, can only be a short-term solution, and levels vary significantly across councils, as do the degrees of financial risk and resilience.
Whether it is English councils or continental European-style municipalities, the medium term outlook may include, as happened in the last fiscal crisis, short-sighted cuts in public investment and/or pre-mature or overly aggressive fiscal consolidation plans which will only aggravate current and future economic conditions. Hopefully, the lessons that were learnt in relation to fiscal policy – both national and subnational – during the last economic crisis will not be forgotten. In the meantime, central governments in OECD countries continue to support the finances of subnational governments, by means of an easing of spending responsibilities, increased transfers, compensation measures, additional credit lines, loans and guarantees, temporary lifting of fiscal rules, greater access to external financing (i.e. debt) and specific supports to the most severely affected local councils. A co-ordinated policy response between different levels of government is also necessary to ensure the long-term sustainability of subnational finance.
August 2020 Improving the system of fiscal equalisation in Ireland’s local government?
Fiscal equalisation is a key element of a country’s intergovernmental fiscal arrangements where functions and funding are decentralised to subnational government. Despite Ireland’s highly centralised system of public administration, fiscal disparities exist between local authorities. In general, fiscal disparities between local councils are due to differences in revenues arising from variations in tax and non-tax bases, and differences in expenditures due to variations in spending needs or costs of public service provision. Equalisation transfers or grants are used to reduce these horizontal fiscal imbalances, so that fiscal equity can be achieved whereby citizens are not disadvantaged in their access to public services by their place or region of residency, i.e. subject to local preferences, equals should be treated equally.
A well-designed system of equalisation transfers depends on two critical decisions, namely the size and the allocation of the distributional pool. Currently, the equalisation fund is financed from a pre-determined share of the local property tax (LPT) and, less so, a contribution from the central Exchequer. The distribution of the fund is determined by the shortfall between the LPT retained locally and the general purpose grant payment of 2014, so as to ensure that no local authority is worse off from the LPT than its general purpose grant baseline.
In 2020, the equalisation fund was €135m, with 20 (of a total of 31) local authorities in receipt of an equalisation payment, and with just four local councils (Tipperary €16.5m, Donegal €16.3m, Mayo €11.5m and Waterford €11.2m) accounting for over 40% of the total. In the case of small rural councils with limited economic activity and revenue bases, the equalisation grant accounts for 10-15% of council income, and close to one fifth in the case of Leitrim County Council.
Equalisation transfers can be funded from central government (vertical equalisation) or from the wealthier local authorities (horizontal equalisation). Whichever of these mechanisms is used, a formula-based methodology to determine the size and distribution of the equalisation transfers is preferred, on the grounds of transparency and objectivity. In our research, we construct a model of fiscal equalisation that is consistent with international best practice based on quantifiable, predictable, and equitable criteria, but like all fiscal equalisation programmes worldwide, tailored to the specific circumstances of the home country.
As the objective of our model is revenue equalisation, we use the concept of fiscal capacity which is defined as the potential ability of local authorities to raise own-source revenues. From a number of alternative approaches, we use the multi-dimensional Representative Revenue System (RRS) framework to measure this local fiscal capacity or revenue-raising potential, and in turn, equalisation transfers. This requires data on own-source revenue bases (for commercial rates, LPT, fees and charges) and national average effective rates, defined as total revenue divided by the national revenue base. Using typical revenue categories, this fiscal capacity estimate is compared to a norm or common standard, defined here as the national average capacity level. Councils with below average fiscal capacity receive an equalisation grant, equal to the euro difference between the individual fiscal capacity estimate and the national standard.
Scaled by local authority population, the sum of these formula-determined equalisation amounts equals the total equalisation pool. In our simulations (for 2017 but similar in other years), the equalisation fund is €210m, which is larger than the existing pool but smaller than equalisation funds in many other OECD countries. As for the individual council allocations, although it is roughly the same local authorities (i.e. councils with weak economic bases) than receive equalisation transfers under the two models, the actual euro amounts differ.
Given the redistributive nature of fiscal equalisation, undoubtedly there will be winners and losers. Aside from central government which is the big ‘loser’ (in pure financial terms) as it funds this new equalisation scheme, in absolute euro amounts the big winners are Galway, Meath, Wexford and Laois County Councils. As for the more difficult and sensitive issue of the losers, different policy responses will be required to ensure fiscally prudent balanced budgets at the local level. This may include higher local property taxes levied by individual councils or, in the case of councils with the smallest economic bases and/or in a difficult financial position, temporary compensation payments from central government during the transition to this new and improved model of fiscal equalisation.
July 2020 What’s in the new Programme for Government on local government finance?
A new Government was formed on 27 June 2020, about 20 weeks after the general election on 8 February. This followed negotiations by the three parties Fianna Fáil, Fine Gael, and the Green Party. The negotiations led to an agreement on a Programme for Government (PfG) “Our Shared Future”
Here we will analyse the plans for local government finance in the PfG. We start with commercial rates, an annual property tax paid by occupiers of commercial properties. Due to the Covid-19 pandemic, and the associated economic crisis, the Government initially (20 Mar 2020) decided to defer rates payments due for the most immediately impacted businesses – primarily in the retail, hospitality, leisure and childcare sectors, for three months, until end-May. Subsequently, the Government decided that a waiver of commercial rates will apply to all businesses that have been forced to close due to public health requirements from 27 March 2020, for a three-month period. The cost, expected to be €260m, will be met by the Exchequer. The PfG states that the expected July Jobs Initiative will outline how commercial rates will be treated for the remainder of 2020. There is also a commitment to examine ways to further streamline the commercial rates system post Covid-19, although no further details are provided in the programme.
Next, we discuss reforms to the Local Property Tax (LPT), listed under the PfG’s Public Finance and Taxation heading. Several reviews of the LPT have been undertaken since its introduction in 2013. These analyse possible changes to the tax, and any revaluations, in light of the very strong property price increases since 2014. The Minister for Finance has postponed the revaluation process twice, and the next revaluation date is scheduled for 1 November 2020. The PfG makes three commitments: (1) to bring forward legislation for the LPT on the basis of fairness and to ensure that most homeowners will face no increase (2) to apply LPT to new homes, which are currently exempt, and (3) to retain 100% of the LPT receipts locally, rather than the current 80%. The third proposal will require adjustments to the fiscal equalisation scheme, which currently is mainly financed by 20% of each local authorities’ LPT receipts. The PfG promises to establish a Commission on Welfare and Taxation, which may review the operation of the LPT.
The PfG contains two proposals to improve reporting and accountability. First, a requirement that each council publishes an annual statement of accounts to all homeowners and ratepayers, giving a breakdown of how revenue was collected and how it was spent. Currently, councils publish an Adopted Budget during December or January (as the budgetary process at local government level must be completed by the end of year prior to the financial year to which the budget relates), and an audited Annual Financial Statement usually about six to nine months after the end of the financial year. These reports contain tables with breakdowns of income source and expenditure function. However, the presentation of the data is not that user-friendly, compared to this website.
Second, a proposal to review and modernise key performance indicators for local government, learning from metrics used in other jurisdictions. Currently, the National Oversight and Audit Commission (NOAC) publishes Performance Indicator reports, Public Spending Code reports, Local Authority Satisfaction Surveys and various other reports. In the latest Performance Indicator report (for 2018), there were 37 performance indicators, grouped into 11 different categories related mainly to local authority functions and activities. One possible comparator is Scotland where its Local Government Benchmarking Framework (LGBF) provides a high-level benchmarking tool designed to support senior management teams and elected members. It provides comparable data as a catalyst for improving services, targeting resources to areas of greatest impact and enhancing public accountability.
Finally, the PfG commits to encouraging local authorities to bring forward pilot participatory budgeting projects. Participatory budgeting (PB) is one of several possible methods to enable more citizen engagement in the local authority budgetary processes. PB is a fiscal decision-making mechanism, which involves citizens in the discussion of municipal budgets and/or the allocation of municipal funding. Different models of PB are possible, ranging from budget surveys to deliberation of entire budgets. South Dublin County Council (SDCC) piloted the first ever PB process in Ireland in 2017, allocating €300,000 to the Lucan electoral area. At the project proposal stage, 160 ideas were generated through a combination of workshops and online submissions. These were eventually whittled down to 17 projects that went out for ballot. Over 2,500 ballots were cast online and in person, and eight winning projects selected. For more information including the 2019 details, see https://haveyoursay.southdublin.ie/
The PfG contains many other proposals relating to local government, mostly focussed on: directly-elected mayors, training and support for elected councillors, and improvements to environmental and climate change policies, reflecting the Green Party’s influence. For example, there is an emphasis on a ‘Town Centres First’ type approach to regenerate our towns and villages. Overall, although there is a commitment to making local government stronger, there are no specific plans included in the PfG to devolve greater spending and taxing powers to local councils. In the absence of any significant expenditure and revenue reassignment from central to local government, it is difficult to achieve the mission of a stronger, more accountable and more responsive local government as set out in the PfG.
The Great Lockdown of 2020 has had a devastating impact on many sectors of the economy. Two such sectors are businesses and our local councils. The forced shutdown of non-essential services has led to many SMEs struggling to pay commercial rates. In response, the central government introduced a three-month rates waiver for those businesses affected by the lockdown. At the same time it promised to compensate local councils for this loss of income from non-payment of rates, estimated at €260m. There is also less income accruing to local authorities from charges on services such as car parking and planning applications due to the contraction in economic activity.
Given that this economic recession is likely to be severe, what is needed in the short-term are contemporaneous changes in taxes on local businesses and revenues of local authorities that will help both the commercial and local government sectors. One such proposal is a reform of the motor vehicle tax (MVT) and the local property tax (LPT). Changes to the MVT and the LPT as outlined below should guarantee local authorities a steady source of income in the difficult times ahead, while, simultaneously, assist local businesses and SMEs by reducing their annual rates liability.
Before the local government reforms and the introduction of the LPT in the mid 2010s, the MVT was assigned to local rather than central government. It was paid into the Local Government Fund, which, in turn, allocated monies to local authorities in the form of central government grants, both general-purpose and also specific-purpose grants for non-national roads. MVT amounts were about €1bn, per annum. The introduction of the LPT and other changes to local government income resulted in a new and improved model of local government finance.
Currently, MVT is collected by the motor tax office of the local authorities but since 2018 it has been paid into the central Exchequer for central government spending. As for the LPT, amounting to annual receipts of just less than €500m, 80% is retained in the administrative area from where it is collected and the remaining 20% is pooled and allocated to those local authorities with weaker property bases. The distribution is based on historical amounts received in 2014, called the baseline which is the minimum level of funding for each local authority as determined by the Department of Housing, Planning and Local Government.
Our proposal begins with the MVT, and receipts of €964m in 2019. Rather than assign this revenue source to one level of government, our proposal is to share the yield between central and local government, on a pre-determined basis. Revenue sharing arrangements between different tiers of government are not uncommon in other jurisdictions. Revenue sharing of tax receipts on ownership of vehicles is also not uncommon (technically, now it bears more resemblance to a grant than a local tax but let’s leave that aside!).
Given the nature of motor vehicles, it is not unreasonable for a certain share of the revenue from the tax levied on motor vehicle ownership to accrue to the local authority where the owner of the vehicle resides. A central feature of any good system of local government is the matching or benefit principle i.e. linking the taxes paid with the benefits received. In this case the motor tax accrues to local authorities, and, in turn, used for the delivery of local services including the maintenance of local and regional roads, traffic management, road safety, street cleaning, etc.
As for the actual share, this is a decision for central government. In our calculations we take a modest 25%/75% share, with 25% of MVT receipts accruing to local government on a derivation basis i.e. shared in proportion to the revenue collected in each local authority. With a 25% share to local government, amounting to €241m in 2019, this would have translated into a 15-17% reduction in commercial rates income needed by local authorities to balance their budgets.
In terms of the Annual Rate on Valuation (ARV) which when combined with the rateable valuation of a property determines the annual ratepayer’s liability, this would amount to a 20-25% average reduction in the ARV. While urban councils, in Dublin and Cork for example, that depend relatively more on rates for their annual income could see a rate cut of, say 10-15%, some smaller rural councils could implement a reduction in the ARV of up to 30%, while at the same time, continue to maintain local services and manage the local public finances. Whatever the precise cut in the ARV, it amounts to a significant and permanent reduction in the annual rates bills for businesses and SMEs with commercial and industrial properties.
As for the LPT, our proposal involves a change in how the LPT funds local government. Here, the proposal is for a redesign of the LPT that is, on the one hand, simpler and, on the other hand, more transparent. We propose to replace the current 80%/20% split with a 100% retention model where local councils retain the full 100% of LPT receipts from their administrative area. To offset the widening horizontal fiscal imbalances that this will inevitably produce, we propose that central government funds the so-called equalisation or top-up grants. This is the case in many other unitary countries.
In doing so, by separating LPT from equalisation we achieve a less complicated model of local taxation. In addition, the use of a new equalisation formula that is both measurable and objective achieves greater transparency, with more equitable fiscal outcomes across the local authorities. A common methodology used worldwide to distribute fiscal equalisation grants across local councils is the concept of local fiscal capacity and a representative revenue system. In essence, it means allocating equalisation funds based on estimates of revenue-raising capacity or potential revenue, rather than using actual revenue which can have potentially strong disincentive effects on tax collection and local tax bases.
Using this methodology, the formula-determined equalisation fund required for Ireland’s local authorities is about €200m per annum, according to our estimates. Similar to the MVT proposal, the combination of the 100% LPT retained with this new vertical equalisation fund would result in less commercial rates income needed (initially budgeted at over €1.65bn for 2020) to balance annual local authority revenue and spending. In turn, the average ARV would be lower but with a very wide variation across the 31 local authorities, with some big winners and also a small number of losers. Careful consideration needs to be given to these distributional changes, and how the losing councils can be compensated during a just transition phase.
So, as economists like to warn that there is no such thing as a free lunch, what is the catch with this proposal? The big loser is the central government, as it would have to sacrifice 25% of the annual MVT and/or over €200m gross for LPT and equalisation purposes (net figure is less, as it already contributes an annual sum to fund the distributional pool for financially weaker local authorities). Taking the MVT and LPT changes together, the total annual cost of over €400m to the central Exchequer needs to be weighed up against the combined benefits of a business sector and a model of local government finance that are more stable and sustainable, in the current business environment that is unprecedented.
Although reluctant to use the word desperate, uncertain times call for radical measures, such as the changes to MVT and LPT outlined above. A new government might wish to consider this limited but worthwhile package of tax policy measures aimed at the economic recovery, with potential local and national benefits for our scarred but resilient economy.
May 2020 Time to rethink commercial rates?
Commercial rates are a vital source of income for local authorities to fund local public services. With many businesses temporarily closed or significantly curtailed due to the Covid-19 pandemic and the subsequent lockdown, revenue from commercial rates for Ireland’s 31 local councils will be significantly lower this year that the €1.6bn projected in the 2020 budgets. In March 2020, the national government announced that commercial ratepayers impacted by the shutdown could apply to their local authority for a three-month rates deferral. In all likelihood this would have resulted in some businesses ceasing their rates payments. By May, this temporary deferral of rates transitioned into a rates waiver for ratepayers that were forced to close due to public health requirements, with impacted businesses no longer liable for rates for the three months to end June. At an estimated cost of €260m to be borne by the central exchequer, this may have to be considered again, depending on the timing of the economy’s re-opening and the response of businesses and customers. In England, non-domestic business rates (similar to commercial rates as a tax on property used for business purposes but different in that the rate or multiplier is set centrally and revenues are not all retained locally) were waived for small businesses for the entire 2020/21 financial year. It is appropriate to compare to our neighbours in Britain as that is where our rating system originated, as rates predate the foundation of the State.
According to government sources, the legislation governing the levying and collection of commercial rates is spread across numerous enactments, many of which date from the 19th century. The primary legislation relating to rates is the Poor Relief (Ireland) Act 1838. With the exception of the Local Government (Financial Provisions) Act 1978 which removed domestic dwellings from rates liability, and the Supreme Court decision in 1984 which exempted agricultural land from rates, only minor adjustments have been made since 1838 to the operation of the rating system. In current times, local authorities are under a statutory obligation to levy rates on any property used for commercial purposes, in accordance with the details entered in the valuation lists prepared by the independent Commissioner of Valuation under the Valuation Act 2001.
Rates are a recurrent (annual) tax on business properties. Similar to the residential property tax, rates are a local tax, where the tax is assigned to local as opposed to central government, and with rate-setting powers i.e. the rate called the Annual Rate on Valuation (ARV) is determined by the local authority (as a reserved function, by the elected councillors). Currently, commercial rates (and the LPT) are one of three traditional sources of local government income; charges/user fees and central government grants are the other two revenue streams. Commercial rates account for about 30 per cent of annual local authority income. However, that is not the full story. There is a large variation across local authorities with respect to commercial rates. Here we report on four differences.
For one, the rates share of revenue income. There is considerable cross-council variation in the rates share of revenue, with urban city councils that have a large commercial base heavily dependent on rates income as against smaller rural councils that are more reliant on central government grants. In the three Dublin county local authorities, approximately half of their revenue income comes from commercial rates. In small rural councils such as Leitrim, Laois, Longford and Roscommon County Councils, less than one fifth of their revenue income is derived from rates. So although the shutdown will negatively affect all local authorities, the impact will not be uniform.
Two, the variation in the ARV. Although it is difficult to compare the ARV across the local government sector due to revaluations undertaken in some but not all councils, the difference is striking. For those councils that have undergone a rates revaluation, the ARV varies from a high of 0.2760 and 0.2680 in South Dublin County Council and Dublin City Council respectively to a low of 0.1796 and 0.1732 in Fingal and DLR County Councils respectively, with 19 other councils levying rates between 0.2677 and 0.1919. Of the eight councils yet to undertake a revaluation, Kerry County Council ‘strikes’ the highest rate at 79.25 whereas the lowest rate, at 66.59, is levied by Galway County Council. Of course, one of the explanations for these large cross-council differences in ARV is the variation in expenditure per capita, ranging from a high of over €1,500 to a low of less than €600 in local council spending per person. As local governments are required to balance their adopted revenue budgets, all current expenditures have to be financed from revenue income (i.e. no planned borrowing permitted to pay for day-to-day spending, unlike at central government level), with the ARV and commercial rates used as a balancing item.
Three, there are sizeable differences in collection rates. Defined as the ratio of commercial rates collected to total rates for collection, the national collection rate in 2018 was 88 per cent. Taking into account the commercial rates accrued, but also arrears, waivers, write-offs and reliefs for vacant properties, collection rates range from a high of 96 per cent (by Fingal County Council) to a low of 76 per cent (by Donegal and Laois County Councils). Many councils with relatively low collection rates established debt collection units to manage and improve collection rates, with varying degrees of success. The increase in unpaid rates bills associated with the economic contraction is likely to result in an increase in debt collection services, used internally or, more controversially, outsourced to third-party private debt collectors.
Four, the variation in vacancy rates. Using county data, GeoDirectory publishes quarterly estimates of commercial property vacancy rates. In Q2 2019, the national vacancy rate was 13.3 per cent (equivalent to over 28,000 vacant commercial properties), with a high of 18.9 per cent in Sligo and a low of 10.1 per cent in Meath. The highest vacancy rates were all in the west and north west of the country, corresponding with the most rural parts of the economy. Given the economic downturn and the short-term prospects for the business sector, the number of vacant commercial properties is expected to increase, with a knock-on effect for commercial rates and local authority income.
Aside from these (not unexpected) cross-council variations reflecting differences in local preferences, circumstances and choices, what does this brief analysis of commercial rates tell us? Given the current economic circumstances, and the inevitable competing calls on a new government from businesses (and especially SMEs) for assistance and enterprise supports, what is needed is a comprehensive and urgent review of commercial rates. Returning to our British counterparts, when announcing the abolition of business rates in 2020/21 for small businesses the UK Chancellor of the Exchequer Rishi Sunak in his March budget also announced a fundamental review of business rates by HM Treasury. In Scotland a similar review was published in 2017. Some of the 30 recommendations of the Barclay Review of Non-Domestic Rates that might be considered here include a redefinition of the rates base, more regular revaluations and a business growth accelerator that would provide for a one-year holiday on investment in new machinery or business expansion.
In the Irish context, similar reviews have taken place in the last 15 years, but arguably in very different conditions compared to present circumstances. To name but three, there was the Indecon Review of Local Government Financing in 2005, in 2009 the Commission on Taxation Report and in 2018 the Local Government Audit Service Overview of Commercial Rates. Interestingly, in the two earlier reports there was a recommendation to widen the rates base to include certain properties, including Government buildings, educational and professional institutions with commercial outlets/activities and certain non-State properties exempt from commercial rates.
Aside from an overall review of local government funding (which may not be the best option as unlikely to recommend anything other than the need for the three sources – local taxes, charges and grants – outlined above), what would be more useful is a root and branch review of one of these sources, namely local taxes. This time-limited review should incorporate a review of the LPT (not just the date of revaluations, but also the method of valuation, the base rate and the local adjustment factor, the 80/20 split and the equalisation fund, and more substantive issues like alternatives to the LPT such as, for example, a site value tax) and a review of commercial rates, with a broad terms of reference to include not only the operation of the rating system and its overall burden on businesses and impact on ratepayers but also other business tax alternatives, of a local nature.
Among others, consideration might be given to, for example, a local business tax with a base other than property, reassignment of motor vehicle taxes (where, in future, the revenue is shared between central and local government) or a congestion tax/charge in our main urban centres. Whatever the recommendations of such a review of local taxes, the present crisis presents a new government with an opportunity to rethink commercial rates, with a view to identifying, based on theory but also international best practice, the most desirable – or least harmful – local taxes, levied by local councils and imposed on local taxpayers.
April 2020 How will the 2020 economic downturn affect local councils’ budgets?
The coronavirus disease pandemic and the self-imposed shutdown of the economy in Ireland and worldwide will result in a significant contraction in economic activity and a permanent loss to national output. Unlike the Great Recession of 2008/09 and the economic crisis that followed, the hope is that this contraction will be short-lived. This short opinion piece addresses the impact of the economic downturn on local authority spending and income, and, ultimately, local public services to residents of local councils throughout Ireland.
Using data from the adopted local authority budgets for 2020 and the www.localauthorityfinances.com interactive website we know that local council spending in 2020 was budgeted to be 10 per cent higher than the 2019 figure, which, in turn, was 8 per cent higher than the 2018 amount. At €5.6bn in current prices, the budgeted figure for 2020 was the largest euro amount for local authority day-to-day spending in Ireland, ever. It was over 40 per cent above the 2015 trough figure of €4bn, and exceeded the previous peak figure of €5.2bn in 2009. So despite local authorities having less functions now than before (with water services the primary responsibility of Irish Water and educational support grants provided by SUSI) the revenue budget of the local government sector in Ireland for 2020 was at an all-time high.
What effect will this crisis have on the local authority finances? In many local governments throughout Europe it will have a devastating impact as municipalities elsewhere often have responsibility for the delivery of significant public and social services, including health and welfare. In the Irish case, the immediate effect will be on the revenue side of the budget, with a fall in commercial rates (given the 3 month deferral of rates payments for those businesses impacted by the Covid-19 pandemic and the inevitable loss of rates revenue as some of these businesses may not re-open) and income from fees and charges on local public goods and services. Together, rates and charges account for about 60 per cent of total revenue income for local authorities.
Although a very different crisis, what can we learn from the 2008 financial crash, and the impact on local government finances? Initially, in the first couple of years there was a lag as local government budgets are not as sensitive to economic activity as are central government finances. However, by 2010 we began to see a deterioration in local government finances, with, in particular, central government cutting grants to local authorities in its attempt to manage the escalating problem in the exchequer’s public finances. By 2012, central government grants to pay for local government current spending were 25 per cent lower, with general purpose grants down by almost 30 per cent, compared to levels in 2008.
Although local government sources of revenue have changed (with the general purpose grant in the Local Government Fund replaced by the Local Property Tax and the top-up equalisation grant), local councils throughout the country are likely to see a fall in revenue from central government grants, in conjunction with a reduction in own-source revenues. As local authorities are required to balance their adopted revenue budgets, this will result in a reduction in local authority services. Although hopefully not as drastic as in the years of austerity, Council management and elected councillors will have to decide on which local services to cut, in the areas of social housing and homeless services, local and regional roads, traffic management, street cleaning, fire services, planning, environmental management, enterprise supports, community development, tourism promotion, libraries, leisure facilities, Arts programmes, parks and playgrounds, etc. Furthermore, the impact on local government finances is unlikely to be uniform, given differences in local authority revenue bases but also spending needs. Unfortunately for local councils, but also residents and users of local authority services, what is certain is that the budgets of local councils for 2021 will look very different and altogether much more challenging compared to the benign and ample budgets of 2020.
For details of the 2020 local council budgets, check out www.localauthorityfinances.com
March 2020 Should we decentralise more powers to local councils?
Now that we all have more free time (albeit in many cases enforced due to the Great Lockdown) we can reflect on one of the big economic issues, namely government spending and taxation. Whereas most of the focus before the 2020 election was on central government expenditure and national taxes, an analysis of local authority income and spending is also warranted. After all, it is local issues that can often decide the outcome of elections.
Compared to local governments in the rest of the EU, local councils in Ireland have very limited functions, with little or no responsibility for education, health or social care. As a percentage of total public expenditure, local government expenditure in Ireland is only 8 per cent, as against an EU average of 23 per cent. Using an index that measures local autonomy, Ireland ranks the second lowest of 39 European countries. Local councils in Ireland are also very large, as measured by the average number of inhabitants per municipality (150,000 persons in Ireland vs. an average of less than 6,000 persons across EU countries), making local government in Ireland less relevant and more removed from its citizens, compared to elsewhere. This also impacts on other current public policy issues. Three such examples are the rural/urban divide, regional development and urban planning, and land use, price of land and property prices and rents.
If a new programme for government is to make meaningful reforms in this area, one such change would be for a local government system that has greater remit and more powers. Unlike previous relocation plans of the early 2000s (remember Minister for Finance Charlie McCreevy’s last minute budgetary plans for decentralisation!), such a programme could make real and positive differences to people’s lives. A long term ambitious decentralisation programme could involve local councils having a role in state-funded primary and secondary schools, and in the delivery of other local services in the area of transport and social care, funded by an increase in local property taxes. If, as it is often said, all politics is local and if, as economic theory tells us, efficiency gains can be achieved by local authority service delivery rather than the uniform provision by central government, then many public services should be delivered by local government but, equally so, funded by local taxes (as well as local charges and central government grants). Given the scale of reforms needed, a Citizens’ Assembly or Commission on Local Government is called for, to ensure that the public consultation and the necessary informed evidence-based debate can take place. With the next local elections due in 2024, we have time to consider what type of local government system is best for the Ireland of the 21st century.
We finish with a more immediate concern, namely the list of promises for local government reform as outlined in the 2020 general election manifestos of the two political parties currently involved in coalition talks. Now that the election is over, attention turns to the formation of a new government and what plans it might have for a renewal of local councils. Whatever combination of parties make up the next government, the programme for government will have to compromise on the different promises listed below (and the local authority reform plans of other smaller parties involved in coalition discussions), but also reflect the realities and constraints of an Ireland post Covid-19 shutdown.
We can only wait and see. In the meantime, if you want to find out how your local council planned to raise and spend your money in 2020, check out www.localauthorityfinances.com
Local government reforms as per the 2020 general election manifestos of FF, FG and the Green Party.
Fianna Fáil. As a first tier for a new local government structure, the creation of a new community council model, with clear roles outlined in legislation. Establish 72 town councils, nationwide. A vote on a directly elected Dublin Mayor. On funding, localised rates to replace the central 0.18% current rate. Ensure that homeowners do not face significant increases in property taxes. Allow LPT to be a deductible expense against rental income. As for commercial rates, relief for start-ups and small rural businesses, and an ‘inability to pay’ clause for struggling businesses. In the longer term, a reform of commercial rates on a revenue neutral basis. Reform and increase the Vacant Site Levy to 14%.
Fine Gael. A stronger and more accountable local government, with powers transferred from city and county chief executives to directly elected mayors. Committed to a directly-elected mayor for Dublin, following the work of a Dublin Citizens’ Assembly. First directly elected mayor for Limerick no later than May 2021. On funding, committed to a fair LPT. More discretion for councillors to change the LPT rate for their own area. Most homeowners will face no increase. New homes will be liable for LPT. On commercial rates and revaluations, examine if such changes can be introduced on a phased basis. Examine further ways to streamline the system and to ensure that appeals are processed quickly.
Green Party. Hold a Citizens’ Assembly on a directly-elected executive mayor of a new regional authority for Dublin, followed by a plebiscite within the four Dublin local authorities. Hold a Citizens’ Assembly on local government arrangements in Cork City Council. Review of the role of the chief executive in local authorities. Full reinstatement of the five borough councils. The powers of local government should be enhanced. Public spending at local level should be increased (in line with EU counterparts) and local authorities should have greater fiscal autonomy. Undertake a review of the specific functions assigned to local government. A recurring annual Site Value Tax (SVT), measured on the basis of the market value of the land under the property. Conduct a root and branch review of the current scheme for the setting and collection of both property tax and commercial rates. Legislate to grant local government the powers to raise and collect a bed levy on tourists. Enable local authorities to raise municipal bonds to help fund long term infrastructure projects.