Reliance on rates will lead to ‘black hole’ in local authority finances

An over reliance on commercial rates to fund local authorities could see Galway City and County Councils face a black hole in their budgets as a result of the Covid-19 crisis, an expert in local government economics has warned.

With large numbers of businesses unable to pay rates due to closure, and many other income streams drying up as a result of measures introduced to slow the spread of coronavirus, central government will have to come up with additional grants for local authorities to avoid huge cuts to the level of service.

That was the stark warning from Dr Gerard Turley of NUIG School of Business and Economics, who said despite councils such as Galway County and City passing some of their biggest budgets ever in 2020, a shortfall as a result of this crisis could see a return to the lean days after the economic crash in 2008.

In their budgets for 2020, Galway City and County Councils surpassed all previous funding levels and were showing signs of finally escaping those dark days in the aftermath of the IMF Bailout – staffing levels, which had been slashed, were also returning to normal.

However, of a €100 million budget, Galway City Council was reliant on commercial rates for 38% of its income – the largest single source of finance it had available to it.

In the county, the €128 million budget was 23% funded by rates, second only to grants and subsidies from central government which made up 38% of income.

Dr Turley said that the Department of Public Expenditure and Reform was already looking at the likely “drastic” measures that would be required due to the fall in income for councils.

“Councils are not like central government; around the world, central government has most of the call on VAT, personal income tax and corporation tax. In terms of what local governments have here, it’s local taxes, local charges and grants from central government,” explained Dr Turley, adding that in Ireland, councils did not have the ability to borrow as such, and must, for good reason, balance their books every year.

Both councils in Galway have deferred the payment of rates to the end of June for businesses adversely affected by the Covid-19 crisis, but there are calls from many quarters to have rates suspended – businesses will already be in financial distress and, it has been argued, in no position to repay rates missed during this current period.

While day-to-day spending by local authorities during this period of shutdown would fall, the drop in income from not only rates, but also parking charges, and the payment they receive for use of amenities and facilities.

There was also a risk that if the economy does not rebound quickly and unemployment abounds, the income from rent on Council-owned houses will also decline as people have their rents recessed to reflect their reduced income.

Increasing commercial rates was a way in which councils had bridged budgetary gaps in the past, but this was not the most prudent way of handling things while businesses were struggling – and so, while unpopular, restructuring Local Property Tax might hold the key in the aftermath of this crisis as it was a more progressive tax, said Dr Turley.

The monetary powers of Councils to raise finances were limited, but included setting commercial rates and increasing or decreasing the LPT each year, he said – something that would likely be looked at by many local authorities as they grapple with the aftermath of this crisis when compiling their budgets towards the end of this year.

“The whole point of local government is to make decisions locally, and to be accountable for those decisions,” said Dr Turley, and if local powers shift to central government due to a lack of funding, there would be a detrimental effect on democracy.

The continued provision of adequate services, and the protection of necessary staffing roles in local authorities would require additional grants from central government, he explained, and its ability to do this would rely on the economy recovering quickly.

“We have to hope it will be a short shock and [the economy] will recover quickly. Local government, like central government, will be hit quite badly otherwise.

“The last crisis went on for a long number of years, followed by austerity up to 2014/15. What’s different this time around is the whole world is subject to all of this; in the last crisis, in countries across Europe, governments were increasing spending,” said Dr Turley, while Ireland and others were subject to harsh austerity measures.

The worldwide nature of the current economic difficulties was likely to draw a more coordinated response – particularly in EU countries, which would make for a less damaging long-term impact.

The adequate funding of local authorities was paramount to continued provision of services such as parks and amenities; social housing; local and regional roads; arts projects; playgrounds; tourism promotion; and many other services that are crucially important, but are often taken for granted, said Dr Turley.

■ Dr Gerard Turley is a lecturer at the JE Cairnes School of Business and Economics and Whitaker Institute at NUI Galway. Together with colleagues, he compiles an annual breakdown of which can be viewed HERE.
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