June 2021 Reform of the Local Property Tax
In June 2021 the Minister for Finance announced changes to the Local Property Tax (LPT). The Government had approved the reforms at a Cabinet meeting, and the Minister published the general scheme of the Finance (Local Property Tax) (Amendment) Bill 2021. The main aims of the reforms are to revise property valuations and to make previously exempt properties subject to the tax.
The LPT was introduced in 2013, as part of efforts to broaden the tax base after the financial crisis and the Great Recession. The tax rate is 0.18%, and the valuation date is the 1st May 2013. To allow a degree of fiscal autonomy, councillors in local authorities vote each year whether to apply the basic 0.18% rate, or to adjust the rate by up to +/- 15%. This is known as the Local Adjustment Factor (LAF). Reviews of the LPT were published in 2015 and 2019. For various reasons, plans to apply updated current valuations to properties were postponed several times. The Programme for Government published in June 2020 committed to (1) bring forward legislation for the LPT on the basis of fairness and to ensure that most homeowners will face no increase, (2) bring new homes, which are currently exempt from the LPT, into the taxation system, and (3) retain all money collected locally within the county.
The reforms announced in June 2021 provide the detail on the implementation of these plans. The main reforms are as follows:
- Revaluation date of 1st November 2021
- Rate cut and bands widened for calculating LPT liabilities to ensure that most homeowners will face no increase when properties are revalued on 1st November 2021
- Property valuations to be reviewed every four years
- New properties will be brought into the system each November
- Some currently exempted and excluded properties will become subject to LPT (for example first-time buyers and unsold trading stock)
- Modifying the exemption for properties vacated by persons due to illness
- Increased income thresholds for deferrals
- Reduction in the deferral rate of interest
- No change in Local Adjustment Factor
- Local authorities to retain 100% of LPT collected in their area
At the moment, an LPT liability is calculated by applying the tax rate to the midpoint of a particular valuation band. There are 19 bands covering valuations up to €1m, and the standard tax rate is 0.18%. For properties worth over €1m, no banding applies, and an actual value must be declared. The LPT liability is 0.18% of the first €1m, and 0.25% on any excess.
The LPT Amendment Bill proposes to keep the number of valuation bands at 20, but to widen them, so that the first 19 bands cover properties up to €1.75m. To ensure that most owners will not face an increase in their LPT, the basic rate will be reduced from 0.18% to 0.1029%.
Properties in bands 12-19 (between €1.05m and €1.75m) will be charged a mid-point rate of 0.1029% on the first €1.05m and 0.25% on the balance over €1.05m. Properties in band 20 will be charged on the individual property price as before, with a higher rate of 0.30% applied on the value in excess of €1.75m (0.1029% on the first €1.05m, 0.25% between €1.05m and €1.75m, and 0.30% on the balance).
Based on modelling done by civil servants, the best estimates of the impacts of the planned changes to the tax base and rates on LPT liabilities are as follows:
- 11% of house owners will see a decrease
- 53% of house owners will see no change in liability
- 33% of house owners will see an increase of up to €100 (generally one band)
- 3% of house owners will see an increase over €100 (generally two bands)
The Bill proposes that 1 November 2021 be the next revaluation date, and provides for 4-year revaluation periods after that. New properties becoming liable each year will be assessed as if they had existed at the previous valuation date.
The Bill proposes to remove various exemptions, and make these properties subject to the tax. One exemption is any house purchased or built as a principal private residence in 2013 (Section 8 exemption). Another is any new or unused property bought from a builder or developer between 1 January 2013 and 31 October 2021 (Section 9 exemption). A third exemption applies to houses in ‘unfinished housing estates’, also known as ‘ghost estates’ (Section 10 exemption). The temporary exemption for houses damaged by pyrite will be phased out, but a temporary exemption for houses affected by defective concrete blocks in Donegal and Mayo will be introduced. The number of extra properties to be made subject to the LPT is estimated at 100,000. This explains much of the planned increase in the LPT yield, from an estimated €492m in 2021 (before any local adjustments) to a planned €560m.
Currently, if an elderly or infirm person vacates a property on a long-term basis, the property becomes exempt from LPT, as long as it remains unoccupied. This condition may be one reason why some houses are left vacant. In the context of the housing crisis, this condition is being modified to allow occupation, without losing the exemption.
Some other changes planned in the Bill include: ‘co-living’ developments will be defined as residential property and the normal Revenue compliance checks will be applied to self-assessed valuations, whereas previously Revenue accepted the 2013 valuations at ‘face value’.
The LPT is part of the fiscal equalisation process in Ireland, as 20% of LPT receipts from each local authority are pooled, and redistributed to councils with weaker finances. The Bill proposes that 100% of LPT receipts will remain in each local authority. The Bill does not contain any detail on how fiscal equalisation will be organised or financed in the future.
Overall, the planned revaluations of residential properties for the purposes of the LPT, and the commitment to regular revaluations, as well as the other reforms are welcome improvements to the operation of this tax.
May 2021 What the data tell us about public housing and the housing market
As local government in Ireland is the tier of government responsible for social housing, local authority expenditure on housing equates, more or less, to Ireland’s public sector expenditure on housing. Given this, an analysis of local authority budgets, financial statements, performance indicators, and housing statistics from the Department of Housing, Local Government and Heritage provides us with some interesting stylised facts about social housing.
Housing is the main social service provided by local government in Ireland. Indeed, of the eight service divisions or statutory functions assigned to the local authorities, housing is the largest. The housing service division involves responsibility for the provision of social housing, housing maintenance and estate management; supports to private rental accommodation; inspection and enforcement of regulatory standards for private rental accommodation; urban renewal and regeneration schemes; homeless services; and traveller accommodation.
The annual budgets of the local authorities report the day-to-day spending on housing. Of a total estimated spend of €5.6bn in 2020, €1.9bn was for housing and building services, representing an increase of over 150% since 2013 when the recurring housing budget was at its lowest during the years of austerity. At 35% of the 2020 total revenue budget, this is far by the largest service division, with the others being roads (20%), environmental and fire services (12%), recreation and amenities (9%), development management and planning (9%), water services (7%) and others (9%).
Of this €1.9bn, over €1bn is spending on supports to private rental accommodation in the form of two housing supports schemes, namely RAS (Rental Accommodation Scheme) and HAP (Housing Assistance Payment). This reflects an earlier move by successive Irish governments away from direct public provision of social housing to a greater reliance on the private sector to meet social housing need. €275m is spent on maintenance and improvement of local authority housing units, as is a further €273m on homeless services (equal to a 4 fold increase since 2014), with another €130m spent on housing loans and grants.
As for capital expenditure, according to the most recent amalgamated audited annual financial statements of the 31 local authorities, capital expenditure was €2.3bn with housing accounting for 60% or €1.4bn, up from a low of just €350m in 2014. Over a decade ago, the housing budget accounted for only about 35% of a much larger capital budget of over €6.5bn. When taking current and capital expenditure together, the total housing spend is now over 40% of total local government spending, as compared with only about 25% at the time of the 2008/9 financial crisis.
What about annual social housing output, and the stock of local authority housing? Leaving aside Approved Housing Bodies (AHBs) and Rent Supplement administered by the Department of Social Protection, local authorities provide social housing through a number of different mechanisms. Taking 2019 as a recent example, a total of over 24k local authority housing units were delivered in the form of new build (2,271), acquisition (1,905), Part V of the Planning and Development Acts (589), voids (303), leasing (1,161), RAS (1,043) and HAP (17,025).
In 2019, local authority new build and acquisition combined was over 4,000 units, a figure last seen at the outset of the Great Recession, which was then followed by years when local authority new build and acquisition was as low as 300-700 units per annum. Although RAS/HAP filled this gap and now account for a greater percentage of yearly output, the stock of social housing units is still primarily provided by local authorities, with almost 140k units in 2019, or about 55% of the estimated total social housing stock.
Given all these statistics, how can local authorities help to solve the housing crisis? Aside from direct provision of social housing funded by existing sources (primarily the Housing Finance Agency) other sources of finance such as the European Investment Bank or, in the longer term, use of a municipal bond agency or direct local authority issuance of muni bonds as in other local government systems worldwide should be considered.
Furthermore, changes to the existing Vacant Site Levy (VSL) which clearly has not worked (see the Nov 2020 NESC report Housing Policy: Actions to Deliver Change on a proposed Site Value Tax) and to the Local Property Tax (LPT) as outlined in the recent ESRI Options for Raising Tax Revenue in Ireland report of May 2021 could also be enacted. In conjunction with the private sector and as part of a long-term housing strategy, greater direct provision of local authority housing can result over time in an increase in the supply of affordable housing, a reduction in rents in urban centres and, hopefully, a well-functioning housing market in Ireland.
April 2021 Ireland and the Local Autonomy Index
Measuring decentralisation and local autonomy is a challenging task. It is even more difficult if it is used for international comparative purposes, as local government systems differ around the world. In this blog we outline the Local Autonomy Index (LAI), and apply it to intergovernmental relations and multilevel governance in Ireland.
In the mid 2010s, the European Commission funded a project to develop a comprehensive methodology for measuring local autonomy, resulting in the LAI. This study was based on a review of the scholarly literature and, more specifically, an earlier methodology applied to regional authorities across 42 democracies. Applied to municipalities and local councils, and using reliable and comparable data, the result was an index of local autonomy based on 11 core elements or variables: institutional depth; policy scope; effective political discretion; fiscal autonomy; financial transfer system; financial self-reliance; borrowing autonomy; organisational autonomy; legal protection; administrative supervision; central or regional access. Whereas the first eight of these are identified as self-rule, the last three are categorised as interactive rule, which characterises the relation between local government and higher tiers of government.
A standardised code book was developed where each of the 11 variables are defined and operationalised. For example, given our interest and research output in the area of local government funding, we report here the definitions relating to the four funding variables. Fiscal autonomy is defined as the extent to which local government can independently tax its population. The financial transfer system variable is measured as the proportion of unconditional financial transfers to total financial transfers received by the local government. Financial self-reliance is defined as the proportion of local government revenues derived from local/own sources. As for the borrowing variable, it is simply the extent to which local authorities can borrow, and if so, what restrictions apply.
Using the five pillars of intergovernmental fiscal relations framework (that is, the institutional arrangements; expenditure assignment; revenue assignment; intergovernmental transfers; borrowing and debt) the two variables that relate to expenditure functions are the policy scope (defined as functional responsibilities for provision and delivery of services) and the political discretion, defined as the extent to which local government has real decision-making powers.
Results were first published in 2015, with assessments by individual country experts. As expected there is much variation, with respect to variables, across countries and over time. For the 39 European countries in 2014, on a scale from 0 to 37 the range was a high of in excess of 28 (Switzerland, Finland, and Sweden, for example) to a low of less than 16 (Cyprus, Georgia and Moldova), with an average score of 22. Given the tradition of centralised governance found in Anglo-Saxon countries, the LAI for UK (433 local authorities) and Ireland (31 local authorities) was at the lower end of the scale, at 17 and 15 respectively. For Ireland more specifically, the scores for institutional depth, financial self-reliance and central or regional access are relatively high, whereas the scores for policy score and political discretion, the financial transfer system and borrowing, and the legal protection and administrative supervision are all low, indicating a highly centralised system of governance, with limited legal protection, functions, and discretion.
With respect to specific variables for all 39 countries, whereas institutional depth scores the highest, the lowest (mean) scores are for effective political discretion and fiscal autonomy. As for changes in the LAI over time, the index increased during the period 1990-2014, arising from an increase in almost all variables measured, the only exception being borrowing autonomy. In 1990, the average score was 19.5; by 2014, it was 22. This reflects an overall increase in local autonomy, indicating greater decentralisation during this 25 year period.
The scores are currently being updated, for the period 2015-2020 with the coverage extended to a much larger set of countries beyond Europe. Ireland’s LAI for 2020 is 16.5, showing little change in local autonomy over the period but also confirming Ireland’s intergovernmental system as highly centralised, from a political, administrative, functional and financial perspective. The LAI simply reinforces what is widely known, and that is an intergovernmental system in Ireland characterised by a high degree of centralisation and a low degree of local autonomy.
For more information, see the websites below on the self-rule index project and the European Charter of Local Self-Government
March 2021 The issue of equalisation payments to financially-weaker councils
In this monthly blog we return to the issue of fiscal equalisation that we addressed last August, and present here some new evidence and interesting findings. Acknowledging differences in fiscal disparities due to variations in the economic base of localities, the objective of equalisation is to equalise fiscal resources of local councils, with the ultimate aim to reduce interjurisdictional inequalities in expenditures on public services.
Currently, the stated public policy aim with respect to equalisation grants is that local authorities that are in shortfall receive equalisation funding so that their total Local Property Tax (LPT) allocation is equal to the baseline. The Department of Housing, Local Government and Heritage define the baseline as the minimum level of funding available to every local authority, with funds ‘…redistributed to provide additional funding to certain local authorities that have lower property tax bases due to the variance in property values across the State’. Local authorities in shortfall receive an equalisation grant equal to the difference between the LPT retained locally (80% of LPT) and the LPT baseline, which, in turn, is equal to the 2014 general purpose grant allocation and the Pension Related Deductions (PRD) retained by the local authority.
Given that the current system of equalisation is based on historical data from (what was generally recognised as) an overly complex needs and resource model, it is our view that the current equalisation scheme is not fit for purpose, as it is insufficient, non-transparent, and may even result in inequities across some local authorities. One often-cited example is Galway County Council and its annual equalisation grant of less than €3m, compared with equalisation payments in excess of €11m and €16m for neighbouring Mayo and Tipperary County Councils respectively, which have, arguably, similar socio-economic and demographic profiles.
We outlined our new methodology in last August’s blog, where we use a fiscal or revenue-raising capacity model to generate equalisation transfers. The advantage of using potential rather than actual revenue is that an assessment of fiscal capacity is independent of the tax rates levied, the enforcement effort or taxpayer compliance. In addition, from an incentive perspective, it is superior to actual revenues as the use of the latter may incentivise local governments to collect less tax in anticipation of more transfers or grant funding.
Using all own-source revenues (namely, commercial rates, LPT, fees and charges), the formula for the equalisation grant under the proposed scheme is the difference between the fiscal capacity of a local authority and the standard, defined in this case as the national average of the fiscal capacity estimates. If the fiscal capacity of a local authority is less than the standard, a local authority receives an equalisation grant equal to this shortfall.
Although our research (due to be published in The Economic and Social Review in Spring 2021) was for the fiscal year 2017, similar results are likely for subsequent years. The local authorities that receive equalisation funding under the two schemes are the same, more or less. In 2017, there were 21 recipients under the existing scheme, as against 22 under our scheme, with Cork City Council, Meath County Council and Wicklow County Council the only differences between both schemes (the latter two councils receive equalisation grants under our proposed scheme whereas Cork City Council was in receipt of equalisation funding under the actual scheme). However, that is where the similarities end.
There are many differences. For one, whereas in the current system it is the richer local councils that primarily fund the equalisation pot (vis-a-vis 20% of the estimated LPT yield), in our proposed scheme the funding comes from central government. Secondly, the amount of the equalisation fund differs, from €210m in our scheme as opposed to €135-140m in the current scheme. Thirdly, given the highly political nature of fiscal equalisation, the new redistributive scheme results in winners and losers. Aside from Meath County Council which is a new recipient (as it has a relatively low rates base), in total euro terms the biggest winners are Galway, Wexford, Laois and Donegal County Councils, and Limerick City and County Council. These five councils together gain an estimated €55m per annum from the operation of the new model.
Aside from Cork City Council (which is no longer a local authority in receipt of an equalisation payment due to the 2019 boundary extension), the biggest losers are Tipperary, Leitrim and Monaghan County Councils, with these three councils losing approx. €11m gross per annum. While there are only a small number of losers, they are compensated by the fact that they retain 100% of their LPT yield under the new scheme. Any further losses can be offset by locally determined increases in rates (that is, a higher ARV), increases in the LPT rate (via the Local Adjustment Factor), or where necessary, a temporary transition payment from the Department.
While these political economy issues need to be addressed, we believe that a new formula-based equalisation model based on fiscal capacity estimates will result in equalisation payments and a local government funding system that is more objective, sustainable, and most importantly of all, equitable.
February 2021 Local budgets and fiscal rules
While central governments are borrowing extensively to finance day-to-day spending during the Covid-19 pandemic, local governments are required to adopt a balanced budget. Continuing from previous blogs on local authority budgets, this opinion piece addresses the issue of local budgets and fiscal rules.
In general, fiscal rules are a special case of policy rules that, in turn, are part of the much wider rules versus discretion strand of literature in macroeconomics. Often expressed as pre-determined numerical limits on budgetary aggregates or indicators, fiscal rules are long-lasting institutional constraints on budget policymakers’ decision-making discretion, aimed at fostering prudent fiscal policy, promoting overall fiscal discipline, and ensuring long-term fiscal sustainability. Although they can apply to all levels of government (supranational, national, regional) here we are interested in local fiscal rules, as applied to municipalities, cities and county councils.
The rationale for fiscal rules is based on the phenomenon that politicians and governments suffer from a deficit bias, which leads to an adverse incentive to overspend, under tax or borrow excessively. This deficit bias can often be explained by persistent expectations of local governments to receive transfers from upper tiers of government while at the same time, the tendency to push the burden of fiscal discipline to future generations and/or cater for interest groups at the cost of taxpayers in order to increase the likelihood of re-election.
Fiscal rules are not a recent invention. Several countries have a balanced budget rule in their constitution and some of those date back to the end of the nineteenth century. In the US, for example, the states adopted balanced budget rules of varying strength before the year 1900. However, by 1990 the IMF fiscal rules database still showed less than ten countries worldwide having implemented fiscal rules on either a national or subnational level. By 2009, the number of countries had increased to 80. Moreover, arising from reforms in fiscal government frameworks and the perceived success of fiscal regulation, the number of rules for lower levels of government has soared in the past couple of decades.
There are different types and characteristics of fiscal rules. Pertaining to local rules, the main types are the budget balance rule (BBR), borrowing and debt rule, expenditure rule, revenue rule and the no-bailout rule. The requirement in Ireland for local authorities to balance the annual budget is an example of a BBR. It is the most common fiscal rule applied to local government, with the vast majority of EU countries having some version of the BBR. The next most popular is the constraint on borrowing and debt, often in the form of the so-called golden rule where borrowing is limited to investment purposes.
We know from the literature on fiscal rules and the experience of governments across time and space that the design of fiscal rules matters, in terms of the impact and effectiveness on fiscal outcomes. Design features relate to rule characteristics such as the fiscal framework, scope and time horizon, escape clause and sunset provision, accounting system and auditing standards, but also enforcement and sanctions for non-compliance. Recent economic events have seen adjustments to these design features, not only in relation to coverage, legal basis and enforcement, but more broadly, in terms of their type and number, partly in response to economic and fiscal crises, but also lessons learnt from cross-country experiences.
Applying and enforcing fiscal rules is as much a political economy issue as it is an administrative and technical matter. Indeed, if strictly enforced in a mechanical way, as with any blunt instrument of governance, fiscal rules can have unintended consequences. Hence, flexibility is necessary, with policymakers needing to consider cyclically adjusted rules combined with temporary escape clauses in times of economic crises. Furthermore, they are not a substitute for sound fiscal policy, or for a well-designed system of intergovernmental fiscal relations. Likewise, they are not a necessary condition for fiscal adjustment or consolidation. Political commitment and will is important, as is broad electoral support.
As with other elements of intergovernmental fiscal relations, fiscal rules are country-specific when it comes to their design and application. Indeed, there is great diversity in country approaches and experiences. These cross-country differences need to be carefully considered when tailoring suitable local fiscal rules, as we know from elsewhere that one size does not fit all. With no ideal or best rule, the choice of rule or set of rules will depend on country circumstances, economic structure, and initial conditions, the wider intergovernmental fiscal framework, and the priority given to different policy objectives.
As in the case of Ireland, although further reforms are likely, local fiscal rules are here to stay, as an established part of the intergovernmental fiscal framework where spending and taxation powers are decentralised, and where local authority budgets play an important role in benefiting both the livelihoods of local businesses and the lives of local residents.
January 2021 The impact of the coronavirus pandemic on local authority Budgets
The coronavirus pandemic has had a severe impact of the finances of central governments across the world. This blogpost examines the impact of the pandemic, and the associated economic contraction, on the finances of local governments in Ireland, specifically Galway City Council and Galway County Council.
As expected, central government tax revenues declined, and current expenditures rose, during 2020. Given the forecast 6.5% fall in modified domestic demand during 2020, the decrease in tax revenues is less than might be expected, at just 3.6%. In contrast, net voted public expenditure rose by 25%, reflecting huge increases in expenditure on healthcare and social protection. We wish to examine what is happening to local government revenues and expenditures, by looking at the adopted Budgets for 2021. Based on the two Galway councils, the conclusion is that the pandemic has not significantly affected overall revenue and expenditure, due to two main reasons: the central government has paid large grants to replace commercial rates income, and local expenditure assignments are limited and not exposed to macroeconomic fluctuations.
Galway City Council plan to spend €102.5m on current services during 2021, which is a rise of €2.8m, or 2.9% on the adopted Budget figure for 2020. The change in planned current revenues is the same, as local authority Budgets must be balanced. Galway County Council plan to spend €136.6m, a bigger rise of 6.6% over the amount in the 2020 adopted Budget. Given the slight deflation in consumer prices during 2020, these represent reasonably significant increases in real expenditures.
On the revenue side, neither council is planning any increase in their own-source revenues: commercial rates, fees/charges and the Local Property Tax (LPT). This means that own-source revenues will slightly decline as a share of total revenues, and the dependence on central Government grants will rise.
Starting with commercial rates, both councils voted to make no change to the Annual Rate on Valuation. The elected members of Galway County Council rejected proposed increases in rates in 2019 and 2020, and opposed any increase in 2021. Given that, and conscious of the impact of the pandemic on businesses, the 2021 Budget was prepared with no proposed rates increase even though such would have been required to maintain expenditure at 2020 levels.
In response to the pandemic, the central government introduced a Commercial Rates Waiver scheme. This means a 100% waiver was applied to all businesses with the exception of a small number of categories, mainly banks, utilities, large supermarkets and corporates. The waiver was extended twice, and in total covers the nine months April to December 2020. The central Government allocated €900m for the waiver, and this is a very significant support to businesses and local authorities. By the end of December, Galway City Council received €20.7m and Galway County Council received €10.5m <where did you get this information?> To underline the scale and significance of this support, these grant payments represent 20% of the City Council’s income. The Chief Executive states that the waiver scheme “has been fundamental to the city council’s finances in this challenging year and it has ensured that the council has not had to significantly curtail any of its services to the public. The scheme has enabled the council to continue to deliver all essential services during the COVID pandemic. The scheme has been essential to the survival of many businesses and it has also ensured maintenance of significant employment levels within many enterprises.” The Chief Executive had expected that the Council might face a €20m deficit in 2020, but central Government supports mean the expected deficit is much less at €250,000.
The central Government has indicated that the commercial rates waiver will continue into the first quarter of 2021, although it will be more targeted at firms most affected by level 5 restrictions.
The secondown–source revenue is fees and charges from providing goods and services, for example rents charged on social housing and car parking fees. Neither local authority plans any significant changes to the levels of charges. The County Council expects this income to rise by about 2.7% to €36.4m. As the city is more reliant on visitors, tourism, and hospitality related businesses, the travel restrictions have a much bigger impact on the City Council. The Budget expects these revenues to fall by €3m or 11%, to €23.8m. The two largest decreases are a €1m fall in parking fees and a significant €2.7m fall in income from Recreation/Amenity/Culture. This includes a large decline in income from Arts events.
The Local Property tax is by far the smallest of the three own-source revenues. The central Government sets the main rate, 0.18%, and local authorities can implement a Local Adjustment Factor of +/- 15%. The majority of local authorities voted to use their autonomy and increase the LPT rate for 2021.Three councils, all in Dublin, voted to continue to cut the rate. Six councils voted to make no change, including the two Galway authorities. In the Galway County Budget, the Chief Executive states that LPT receipts have remained static since 2014.
Turning to specific-purpose grants and subsidies received from the central Government, both local authorities expect significant increases: a rise of €6m or 19% in the City Council, to €36.7m, and a rise of €7m or 15% in the County Council, to €55.6m. The pandemic is not the sole cause here; rather they reflect efforts to deal with deficits in housing supply and transport. For example, the County Council plans to receive an extra €5m in transport grants, while the housing grants paid to the City Council are due to rise by 25%, or €5m to reach nearly €25m.
We now examine any significant changes to planned expenditure within the eight Service Divisions. Spending in some divisions will be cut, due to the challenging economic and financial background. In the City Council Budget, only the Housing and Building division will benefit from any significant increase. Planned spending rises by nearly 16%, or €6m, to €39.1m. The pandemic causes planned expenditure in the Recreation & Amenity division to fall by 18% or almost by €4m. In the County Council Budget, although there are not any cuts at divisional level, the only significant increases in expenditure are in the Roads, Transport & Safety and Development Management divisions.
December 2020 The local authority budget process
During the months of November or December each year, local governments in Ireland adopt and publish their budget for the following year. The budget covers current revenue and current expenditure. Legislation requires each local authority to prepare an annual budget, in advance of the start of the forthcoming year. This short blog examines the key features and stages of the budgetary process.
Before the draft budget is prepared, the council must decide whether to vary the Local Property Tax (LPT) rate. Local authorities can implement a Local Adjustment Factor of +/- 15%. The first stage of this process is inviting public consultation on possible variations of the LPT rate. This consultation period lasts for 30 days. Then the council prepares a report for the elected members, on the results of the consultation, the financial position of the council, and the impacts of any possible variation on households and the local economy. The meeting to decide on any variation typically happens during September, as the Chief Executive must notify the Minister and the Revenue Commissioners of the decision by the end of that month. The decision to vary the LPT rate is a reserved function of the elected members.
The preparation of the budget is a phased process, and it is the responsibility of the Chief Executive. The Department decides the format of the budget, and all local authorities use the same format. During the drafting process, the Chief Executive meets with the various divisions/units within the authority to discuss their plans for current and capital expenditure. The Local Government Act 2001 requires the Chief Executive to consult with the Corporate Policy Group of the local authority. This committee consists of the Cathaoirleach/Mayor and the chairpersons of the Strategic Policy Committees. The Chief Executive also consults with the councillors who have formed a majority group on the council of elected members. Another input into this bargaining process are the amounts of specific purpose grants and Local Property Tax receipts that will be allocated by central government to the local authority during the following year.
The Local Government Act 2014 adds a requirement that the Chief Executive prepare a draft budgetary plan for each municipal district (where applicable), and submit this for consideration by the elected members of each municipal district. The Chief Executive is required to consider the resource need and population of each municipal district. It is a reserved function of the elected municipal district members to make amendments to this draft budget, and following this, they by resolution adopt the municipal district budget. The Chief Executive must take account of the adopted budgets at the municipal district level when preparing the council-wide draft budget.
The next stage in the process is to hold the annual budget meeting of the council, which typically occurs during November. At least seven days in advance of the meeting, the draft budget must be presented to the members of the council, and made available to the public. At the meeting, the elected members must make several decisions. First, they may amend the budget, and after any amendments, adopt the budget. The law requires that the budget must be balanced (a local fiscal rule!), so any changes in expenditure must be matched with changes to revenues. A second decision is to set the Annual Rate on Valuation (ARV), which is the tax rate levied on commercial and industrial properties. The ARV is calculated as the ratio of the Rates to be levied to the Net Effective Valuation (i.e. the Rates base), with the Rates derived as the balancing item between estimated expenditure and all non-Rates estimated income. The total estimated expenditure is spending on all the eight service divisions, whereas the non-Rates income is the total of revenue from the LPT (including an equalisation payment, if applicable), charges on goods and services, and central government grants.
Third, the Local Government Act 2014 gives elected members the power to vary the level of Rates refunds paid on vacant properties, and to vary the refund across different local electoral areas. If the owner/landlord of the commercial property can show that the premises is vacant due to a genuine reason (inability to find a tenant, undergoing repairs, preparing for re-development), then the local authority may pay a rebate to the eligible person. For example, in 2020 in Galway City Council, landlords are liable for 63.5% of the Rates, while in Offaly County Council ratepayers are given a 100% rebate.
Once these decisions are made, and the budget is approved, the adopted version is made available to the public, and submitted to the Department of Housing, Local Government and Heritage and the Department of Public Expenditure and Reform by the end of December. Subsequently, the Department compile the data from the 31 adopted budgets, and publish a consolidated budget, with tables showing trends in income and expenditure, and analysis of income and expenditure by service division.
November 2020 How local a tax is the LPT?
The Local Property Tax (LPT) came into effect in 2013, arising from the Finance (Local Property Tax) Act 2012. It is a tax assigned to local authorities in that the LPT receipts are designated for local government rather than for the central Exchequer. However, what constitutes a local tax, and does the LPT fit the criteria for such a tax?
We know it was central government that introduced the LPT as a way to broaden the tax base arising from the 2008/09 economic crash and its aftermath. It was designed by an Interdepartmental Group on Property Tax, which recommended residential properties as the tax base and 0.18% as the tax rate, with a higher rate of 0.25% on any portion over €1m. It is the Revenue Commissioners that is responsible for its collection. Given all this, what makes it a local tax? A local tax is traditionally defined as a tax where the local government has rate-setting powers. From 2015 onwards, a ‘Local Adjustment Factor’ (LAF) applied, where local authorities have the power to vary the basic rate, annually by +/- 15%. Applied at the margin, and although 20% of the receipts are pooled into an equalisation fund for distribution to the financially weaker councils, these rate-setting powers are the critical feature that make the LPT a local tax.
Since the introduction of the LAF, clear patterns have emerged with respect to the use of these local tax powers. One, over time, more local authorities are using these powers (or reserved functions, as these powers rest with the local councillors rather than with the Chief Executive or management). Although the number of councils opting to vary the rate did decline in the first three years (from 14 local councils in 2015 to 8 local councils in 2017), it has increased to 23 councils in 2020 and to 25 councils by 2021.
Two, there is a trend away from a reduction in the rate which was common in earlier years (in 2015 all 14 councils cut the rate, with almost half this number applying the maximum reduction of 15%) to an increase in the rate, with for example, 22 (of the 25) councils in 2021 increasing the rate (of which, 12 voted to apply the maximum increase of 15%). Three, in euro terms, the net change in annual LPT receipts due to the application of the LAF has declined over the years, from a peak of over -€43m in 2015 to +€2.8m in 2021.
Four, the Dublin councils have cut the LPT every year since 2015 and by the maximum of 15%, with the exception of Dun Laoghaire-Rathdown County Council for 2021 (no change in the basic rate) and Fingal County Council for the years 2018-2021 when councillors voted for a smaller 10% annual reduction. These reductions amount to income foregone of almost €200m since 2015, at a time when local public services (and especially local authority housing) were under significant pressure.
This has been exacerbated by the 2020 coronavirus crisis, and the subsequent downturn in economic activity. Although the decision by central government to waive commercial rates has been offset by compensation payments to local authorities, other sources of local authority income from charges and fees will be lower in 2020 due to the suppressed levels of economic activity and household incomes arising from the lockdown and public health restrictions.
With LPT rates for next year already decided, attention now turns to the 2021 annual budget meetings this November, and the local councillors’ other significant budgetary power, i.e. setting the commercial rates ARV (Annual Rate on Valuation). Rates income is used as a balancing item to equate budgeted expenditure with budgeted income, where the other sources of revenue are income from local charges and fees, central government grants (specific-purpose and equalisation transfers) and locally-retained LPT receipts. Commonly known in economics as a fiscal rule, this statutory requirement to adopt a balanced budget may see increases in the ARVs for 2021, at a time when many local businesses face enormous challenges as public health restrictions continue.
What we can say for certain is that the local authority adopted budgets for 2021 will look very different to the 2020 budgets adopted less than a year ago. Local councils may be no different than central government in future years when taxes – local and central – may have to be increased to pay for higher levels of spending and borrowing. Further annual increases in the LPT rate levied by local authorities are likely. Given these changed circumstances what remains to be seen is whether the four Dublin councils will persist with the annual reduction in the LPT rate, or will financial and budgetary considerations result in a change in LPT policy. Whatever the decision, it should be determined by local choices, characteristics and conditions, or expressed in another way, preferences, profile and place. After all, it is meant to be a local tax!
October 2020 What reforms of the LPT are needed?
In September the Local Property Tax (LPT) was in the news, again. The Minister for Finance announced the deferral of the revaluation date (for a third time) for the LPT and by doing so, effectively granting owners of residential properties a tax break while depriving local authorities of much needed income. Secondly, because local authorities are required by end September every year to inform Revenue of their local LPT rate for the next financial year, we learnt of the LPT variations for 2021. Although the majority of local authorities opted to increase the LPT rate, Dublin City Council, Fingal County Council and South Dublin County Council voted to continue the rate reduction, despite the disproportionate benefit to owners of more valuable properties and the precarious financial position of local authority budgets arising from the current economic crisis.
The purpose of this blog is to outline the background to the LPT, its successes but also the urgent reforms needed to prevent a possible repeat of the past when similar residential property taxes were abolished (remember domestic rates, the Residential Property Tax, and the Non-Principal Private Residence charge!). From a public policy perspective, our concern is for the long term integrity and sustainability of the LPT, and a fear that the LPT has been undermined by the failure of successive governments to update it and implement (some of) the recommendations of commissioned reviews into the LPT and its operations (including the 2015 Thornhill Review and the 2019 Interdepartmental Group Review).
As economists consistently argue, property taxes are considered to be among the least bad taxes. When considered on efficiency or equity and distributional grounds, property taxes score well, distorting economic activity and behaviour less than other taxes. Property taxes are also difficult to evade, and if designed properly can have a positive impact on land usage and urban planning. Despite this, property taxes are often rated by taxpayers as the most unpopular tax, due possibly to its salient feature but also the form of payment i.e. the annual cheque in the post, or more likely these days, the single online payment.
Following the economic crash of the late 2000s when the Irish government was heavily reliant on transient taxes based on cyclical economic conditions, the EU/IMF Programme of Financial Support recommended a widening of the tax base. The design of a local property tax report by the Interdepartmental Group on Property Tax included 18 key recommendations, and ultimately led to the introduction of the LPT in 2013. Aside from broadening the tax base, the LPT is a tax on wealth (in the form of property) and provides a stable source of income – not to mention accountability – for local government. It is a self-assessed recurring tax on owners of residential properties, based on market value, as of 1 May 2013, which, fortunately or unfortunately (depending on whether you are a taxpayer or a revenue-raising government official) coincided with the trough in property prices in Ireland.
Due to the increase in property prices since 2013, government policy with respect to any LPT revaluation has been to ensure ‘relative stability’ by limiting any increase in LPT liabilities. The 2020 Programme for Government commits to no increase in the LPT for ‘most homeowners’. While understandable from a political economy perspective, we believe this focus on the LPT revaluation process and limiting the LPT yield has been excessive, and at the cost of other considerations.
Equally pressing concerns from a design and operational perspective are the following three issues, namely the tax base and related exemptions, deferrals and reliefs; the 80% retained / 20% pooled split and the distributional impact of the equalisation transfers funded largely from the 20% fund; and, the circa €500m yield relative to the €1.5bn yield from commercial rates, where the latter is also a tax on property but likewise a tax on business. Viewed as a disproportionate burden on commercial properties, this is at a time when many SMEs in the retail, hospitality and tourism sectors are struggling to survive due to the covid-19 pandemic and the subsequent downturn in economic activity.
Given Ireland’s difficult history with property and residential property taxes, the LPT has been a huge success (water charges is a different story!). From its initial design and assessment, to its operation and local variation in rates, to its compliance and collection, the Department of Finance and the Revenue Commissioners deserve praise and admiration in implementing a new tax, and a local property tax at that! All the more reason to protect the legitimacy and integrity of the LPT, surely.
As a share of total tax revenue, LPT receipts are less than one percent, and dwindling. Given the least harmful nature of the tax and the modest rate and yield by international standards, we believe that there is potential for an increase in revenue from the LPT. Although property prices have increased since 2013, so also has taxpayers’ ability to pay as wages and household incomes have also increased, as recently acknowledged by the Oireachtas Committee on Budgetary Oversight.
Here we outline our recommendations, based on what we see are the outstanding problems relating to the name, the valuation process, revenue retention, the base and the local variation in the rate. We begin with a name change that better reflects the nature of the tax. LPT is a tax assigned to local government. Property taxes are viewed as the best local tax as property is immobile and largely inelastic, with values less volatile and sensitive to the economic cycle. Since its introduction, however, much of the focus and debate has been on the tax base i.e. residential properties. In order to stress the importance of the LPT as a local authority tax that funds local authority services, we recommend a change in the name to the Local Council Tax (LCT), as common in England and Scotland and as recommended in recent commissioned reports. Although may be one of perception, we believe a name change can lead to more taxpayers recognising the important link between local taxes paid and local services rendered, resulting in a greater tolerance of the tax and future tax increases, when levied at the local level.
On the issue of revaluation, we recommend that government commit to a valuation date and regular periodic revaluations thereafter (every 3-5 years), to ensure future LPT payments accurately reflect the value of the property. As we know 2013 valuations are out of date, and the longer the revaluation is deferred, the more politically difficult it will be to revalue. We know this from our nearest neighbour where in England council tax is based on April 1991 property values! Whenever it does take place, the revaluation date and the Local Adjustment Factor (LAF) notification should be timed to suit the annual local authority budgeting cycle.
Regarding receipts, we recommend that local authorities retain 100 per cent of revenues raised in their local administrative area, with central government funding the necessary equalisation transfers to the local authorities with smaller tax bases. This will compensate for the reduction in local government funding that took place when general-purpose grants were initially cut and then abolished (and replaced with the LPT) and, in the future, could fund a stronger and more decentralised system of local government in Ireland with greater functional responsibilities. Returning to equalisation, this vertical system will replace the current horizontal model where Dublin and other largely urban councils are partly funding financially weaker councils, and with a fiscal equalisation system that is not sufficiently large, objective or transparent in its allocations.
As for the base, we recommend its update, with exemptions kept to a minimum, based on sound public policy reasoning and regularly reviewed. There should be automatic annual changes in the base rate in line with a suitable benchmark e.g. inflation rates, population changes, or local authority expenditure increases.
Finally, we reject the call that local authorities should be limited to upward only adjustments in the base rate. Although sensible from a fiscal discipline perspective, this is outweighed by the loss in autonomy to local authorities. If we believe in fiscal decentralisation and empowering councils to make local decisions that best reflect local preferences and circumstances, then local councils should have rate-setting powers, both to increase rates but also to lower rates. Whereas we might not agree with the decision by the Dublin councils to cut the LPT in the last seven years (estimated at almost €200m in revenue foregone), the role of local government is not only as a provider of services but also as an instrument of local democracy. We urge central government to update the LPT and make the necessary changes to ensure its long-term acceptance and survival. A bit like democratic governments, although not ‘perfect or all-wise’, the alternative policy options are worse.
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.