Local Government Finance

The issue of local government financing has been a topic of significant attention for the past
three decades. Local authorities in Ireland are disadvantaged in the sense that they enjoy little
financial autonomy in comparison to their OECD counterparts. The lack of fiscal autonomy
which currently afflicts local government means that there is increased pressure on central
government to provide financing. This in turn is preventing local authorities from providing
adequate levels of public services.

The 2006 Indecon International Economic Consultants report on local government financing
stated that significant increases in central government funding needed to be implemented in
order to maintain the current service provision levels at local level. The report also
recommended that the current form of local government financing needs to be revised with
greater emphasis on locally based sources of funding.1 The 2008 OECD report echoed the
sentiment that Ireland must move towards local forms of financing.2

Currently in Ireland, local taxation is accumulated in the form of commercial property rates.
These commercial rates are not exchanged for any particular service, but are in effect
collected to meet the deficiencies arising in local government financing. It should be
highlighted that commercial rates are ‘not related to specific benefits received by the
individual ratepayer since the benefits of local expenditure are not confined to ratepayers.’3 In
2004 the commercial rate intake constituted about 25% of funding for local government.4
Commercial rates represented 28% of total revenue income for local authority budgets in
2009.5 This trend represents a greater financial dependency by local government on the
commercial sector.

Local government in Ireland is being forced to place a greater financial burden on the
commercial sector of the economy as they attempt to balance deficits incurred from current
and capital expenditure. The 2009 OECD report shows that in comparison to other European
nations very little tax revenue goes directly to local government. The figures in the OECD
report from 2007 show that the average amount that goes to local authorities is 2.2% in
Ireland which is well below the 10.6% average of 18 other European countries. 6

The current local government financing arrangements place undue strain on the ability of
authorities to successfully manage their localities. Under the Planning and Development Act
2000, development contributions are payable by persons developing property to ensure an
appropriate contribution toward the cost of public infrastructure and facilities.7 However, the
downturn in the construction industry leaves the future of this revenue in doubt. Likewise, the

1
Indecon International Economic Consultants, 2006. Review of Local Government Financing. Dublin.
Government Publications.
2
OECD, 2008. Ireland: Towards an Integrated Public Service. Paris. OECD.
3
Review of Rating Law: Report of Working Group, 2001. Dublin. P5.
4
Indecon International Economic Consultants, 2006. Review of Local Government Financing. Dublin.
Government Publications. P.ii
5
Local Authority Budgets 2009. Department of Environment, Heritage and Local Government. 2010.
6
OECD, 2008. Ireland: Towards an Integrated Public Service. Paris. OECD.
7
Commission on Taxation Report, 2009. Dublin. Stationary Office.
proceeds of the motor tax industry cannot be depended upon as a stable source of funding for
local authorities through the Local Government Fund.

Financing Solutions

The need for a more stable source of financing has been highlighted in almost all reports
regarding the financing of local authorities. The introduction of the levy on non-principle
private residences may be commended as the first step on the path towards more stable and
regular financing. A form of property tax is an equitable way to provide some measure of
fiscal stability for local government. However, the current fiscal emphasis, solely on
commercial properties unfairly distributes the tax burden upon a commercial and retail sector
that is struggling in the face of an economic downturn, high operating costs and a land border
with Northern Ireland where goods and services can be obtained cheaper.

The need for the implementation of some form of domestic property tax is imperative for the
equitable, sustainable and fair distribution of fiscal responsibility in local government
financing. It is true that rates on domestic dwellings were never abolished, but the liability for
their payment was transferred upon central government.8 The current unsustainable situation
is not only creating a financing gap between rural and urban councils but is also targeting a
commercial sector that cannot afford to carry the fiscal responsibility alone.

The unpalatable nature of domestic property rates will never win popular favour with the
public and this has always prevented the incumbent from tackling the issue because of the
risk of political suicide. However, in the long run such a move could provide the financial
backing for greater quality of public service at local level, greater autonomy for local
government and a fairer deal for businesses and retailers who are struggling in a tough
economic climate to maintain their fiscal responsibility.

Clearly, there must be an alternative to the current form of local government funding. The
buoyancy created through development levies has proved to be unsustainable. A situation
now presents itself where local authorities are overly dependent on revenue from commercial
rates. Local authorities must be empowered through a stable and dependable source of
financing.

Any alternative to the current form of local authority financing must strive to keep the overall
tax burden low and maintain the integrity of the tax system. Secondly, the implementation of
any new tax must aspire to increase economic activity within the Republic of Ireland and
increase the ability of the Irish commercial sector to trade on a more cost effective basis. A
restructuring of the current tax system must observe the promotion of employment and the
ability of the commercial sector to provide employment.

8
Healy, David. ‘Financing Our Local Authorites’. 2006. PSAI.
Replacing stamp duty with a Site Value Tax. Such a tax would not only raise funds for cash-
starved councils but would also act as a disincentive to hoarding land. (Irish Times, April 16th
2010)