AN EMPIRICAL ANALYSIS OF THE DETERMINANTS OF PER CAPITA MUNICIPAL EXPENDITURE IN SOUTH AUSTRALIAN LOCAL GOVERNMENT.

Author:Tran, Carolyn-Dung Thi Thanh
  1. INTRODUCTION

    In line with many other nations worldwide, Australian state and territory local government systems face formidable problems stemming largely from financial pressures (Drew and Dollery, 2016). An almost universal phenomenon in all local government jurisdictions resides in a mismatch between municipal revenues and municipal outlays which has made it increasingly difficult to adequately fund local government operational expenditure as well as local infrastructure maintenance and investment (see, for example, Farvacque-Vitkovic and Kopanyi, 2014). In Australia the structure of fiscal federalism, with its marked degree of vertical fiscal imbalance between federal, state and local governments, has led to many of the present problems with financial sustainability since local government not only has a limited means of 'own-income' generation, but also depends on grants and other transfers from higher tiers of government (Dollery, Kortt and Grant, 2013).

    However, in common with their counterparts elsewhere, numerous other factors are at play in Australian local government derived from both expenditure responsibilities and revenue constraints (Grant and Drew, 2017). For instance, financial pressures have been exacerbated by various ill-conceived public policies imposed on local authorities by state departments of local government through severe limitations on property taxation in the form of rate-capping in New South Wales (NSW) and Victoria (VIC), with South Australia (SA) about to follow suit. A central aim of these policies has been to limit income growth as a means of forcing local authorities to become more efficient, thereby controlling expenditure.

    The impact of national and state government limitations on revenue-raising by local councils, including property taxes (Temple, 1996; Anderson, 2006; Florestano, 1981), has been examined in a substantial conceptual and empirical literature (see, for example, McCubbins and Moule, (2010) and Mullins and Wallin (2004)). The main thrust of the empirical literature on property tax limitations has been to demonstrate that - as a rule - this policy instrument has had deleterious effects.

    Policymakers have also sought to ameliorate the financial stresses on local government through structural change (Zafra-Gomez et al, 2014), often by means of compulsory council consolidation, which is typically aimed at securing economies of scale as well increasing operational efficiency, thereby reducing the pecuniary costs of local service provision (Denters and Rose, 2005). Given the heavy emphasis on council amalgamation in Australian local government, a substantial empirical literature has examined its impact on performance (Dollery, Grant and Kortt, 2012). In general, the bulk of empirical evidence indicates that municipal mergers do not improve local government performance in general and do not lower operational expenditure in particular.

    The inability of revenue limitations, municipal mergers and other policies directed at constraining the outlays of local government has focused recent research efforts on the cost structure of local service provision (Kushner and Ogwang, 2017). Strong a priori reasons exist for assuming that there are significant differences in the costs of local government services for different types of local authority. Available empirical evidence tends to bear out these presumptions (see, for instance Dollery, Grant and Kortt (2012) for a discussion of this literature). For example, small rural councils cannot normally secure scale economies in those local services which exhibit economies of scale due to their limited population size (Dollery, Marshall and Sorensen, 2007). Similarly, economies of density attendant upon spatially concentrated municipalities with large populations are usually only available to metropolitan councils situated in inner cities (Holcombe and Williams, 2009). Furthermore, input costs are frequently higher in non-metropolitan local government as a consequence of the 'tyranny of distance' as well as the scarcity of skilled labour.

    In addition, the service mix and service quality offered by different kinds of local authorities tends to vary between different categories of local authority, despite statutory standards imposed by national and state governments, such as required environmental, infrastructure and building standards. In the Australian milieu, country councils usually provide local services at the lower end of the quality and frequency spectrum, typically in response to local community preferences shaped by lower median incomes, lower property values and thence a smaller rate base (Dollery, Crase and Johnson, 2006). Moreover, these differences are exacerbated by the more fiscally straightened circumstances of non-metropolitan municipalities which often concentrate on basic 'services to property' with few frills. In addition, different municipal functions and services have different cost functions (Bikker and van der Linde, 2016; Bailey, 1999) which means that local service composition can have a substantial impact on overall cost structure.

    Non-discretionary or environmental factors beyond the control of individual municipalities are a critically important determinant of local government costs. Moreover, these factors vary widely between different types of local authority (lo Storto, 2016; Geys, and Moesen, 2009), especially in Australian local government (Worthington and Dollery, 2002). For example, in general, regional, rural and remote local councils typically have low population densities as a direct consequence of spatial size and low populations. As a consequence, the proportion of expenditure on road infrastructure tends to be much higher than in their metropolitan counterparts. In much the same vein, the demographic structure of these kinds of councils differs systematically from urban municipalities, largely in terms of a greater percentage of elderly persons. This has implications for council costs, particular in terms of aged care and public buildings. Topographical characteristics, soil type, vegetation and other elements of the natural environment are also significant in driving council cost structures (Afonso and Fernandes, 2008). Da Cruz and Marques (2014) offer a taxonomy of the determinants affecting the performance of local governments.

    The purpose of our paper is to explore two research questions within the context of municipal expenditure in SA local government. First, we examine the expenditure of the different categories of SA local authorities in order to determine if council type plays a significant role in the structure of council expenditure. Second, we investigate the impact of external, non-discretionary factors on council expenditure in SA local government considering several expenditure categories and council types. The paper is divided into four main parts. Section 2 summarizes the theoretical background to the analysis. Section 3 provides a synoptic account of the characteristics of SA local government by way of institutional background. Section 4 outlines the empirical strategy followed in the paper whereas section 5 discusses the results of the empirical. The paper ends with some brief concluding remarks in section 6.

  2. THEORETICAL BACKGROUND: MUNICIPAL EXPENDITURE FACTORS AND COUNCIL TYPE

    Municipal expenditure depends on council size and the specific characteristics of local councils (Soukopova et al, 2013; Da Cruz and Marques, 2014). Small councils and municipalities in rural areas face greater difficulties in maintaining or increasing service provision (Mohr, Deller and Halstead, 2010). Moreover, the provision of some services becomes more complex because of the need for substantial investment and significant ongoing maintenance costs, such as water services (Gonzalez-Gomez et al, 2012). In general, the empirical literature has revealed scale inefficiencies in small and medium-sized local authorities (Zafra-Gomez and Muniz Perez, 2010; Perez-Lopez, Prior and Zafra-Gomez, 2018), which could explain some of the differences in expenditures between council types.

    The debate on performance differences between small and large municipalities has a long tradition and economies of scale in particular have been analysed extensively (Drew, Kortt and Dollery 2014). Several theories have been advanced to explain how councils can benefit from economies of scale. For instance, in the public choice tradition, Tiebout (1956) and Ostrom, Tiebout and Warren (1961) have argued that competition among smaller municipalities favours the adoption of the optimal council size to provide local service at the minimum cost. Similarly, other scholars have claimed that intermunicipal cooperation and council consolidation can secure the advantages of scale economies (Bel and Fageda, 2006, Leland and Thurmaier 2000, 2010, Bel and Warner, 2015). In this context, studies by Bel and Mur (2009), Dijkgraaf and Gradus (2013), Zafra-Gomez et al (2013); Perez-Lopez, Zafra-Gomez and Prior (2018) obtained empirical evidence on cost reduction of intermunicipal cooperation. Moreover, a voluminous literature exists on municipal mergers (see, for instance, surveys by Leland and Thurmaier (2010), Faulk and Hicks (2011) and Faulk and Grassmueck (2012)). Empirical scholars of local government have examined the impact of compulsory council consolidation on various aspects of municipal performance, including financial sustainability (special editions of Journal of Public Management and Finance volumes 13(2) and 13(3)), operational efficiency (Dollery, Grant and Kortt, 2012) and operational effectiveness (Ma, 2017; Lundell, Karjalainen and Christensen, 2016; Drew and Dollery, 2016).

    In essence, a good deal of the empirical work in the area has been premised on the assumption that the number of residents and population growth as variables can capture the presence of economies of scale, which in turn leads to cost...

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