SOLVING LOCAL GOVERNMENT FINANCIAL PROBLEMS
FOREWORD
It is not going too far to suggest that the position in regard to
the financing of Local Government has deteriorated to such an extent
since this report was published in 1959, that Australia's governmental
system, as laid down in the Constitution, faces irreparable damage
in the near future, unless urgent steps are taken at once.
It is worth noting that the root cause of this situation is the
same cause which is eroding stability throughout the economy.
The explosion of costs and charges, the continual erosion of the
value of the dollar through inflation, and the resulting growth
of public and private debt, are too obvious to be ignored any
longer.
It is also obvious that the all pervading silence, which attends
this root-cause, is too consistent to be coincidental. There is
a pattern about the solutions, such as they are, which are being
propounded, that can only be described as deterministic. In every
case it is designed to centralise power and to erode the sanctity
of private property and free enterprise.
Local Government may well be the last bastion which we have any
chance of defending. Once lost, a great part of our freedom and
liberty would be removed in favour of an authoritarian and centralised
planning system.
To those who feel as we do, our service in reproducing this report
is offered. While in some cases figures quoted refer to conditions
which prevailed at the time the investigation was undertaken,
in general the principles contained herein are just as applicable,
if not more so, as they were in 1959.
The solutions proposed for Local Government can just as easily
be applied to education, health, transport and cultural activities
or whatever else the Australian people desire, the only limit
is the people's capacity and will to produce the results.
For the proposals to be accepted, the mind and mood of the Australian
people must be altered to demand the necessary changes required.
Only then will financial sovereignty and security be returned
to the people.
Do not waste your time with party politicians and community leaders
but start by spreading this information amongst your family and
friends and anyone who has the right to vote ….. YOU can
make the difference!
Be sure to put your contact name and details or that of your organisation
in the space provided at the end of the document.
Your descendants deserve nothing less of you for a better Australia
…. Go to it!
Report and Recommendations of Special Committee appointed by a
1958 Conference of Deakin Electorate (Victoria) Ratepayers' Associations
to investigate Local Government Finance as received and adopted
by a further Yarra Glen Conference on Monday, May 18, 1959.
BACKGROUND OF REPORT
Following upon several conferences on Local Government finance
at Yarra Glen, Victoria, of representatives of a majority of the
Municipalities of the Federal Electorate of Deakin, a well attended
conference of representatives of ratepayers' organisations from
the Deakin Electorate met prior to the 1958 Federal Elections
and endorsed the policy of Local Government organising on a Federal
Electorate basis in an endeavour to persuade individual Federal
Members to press for greater financial sovereignty for Local Government.
It was also agreed by the ratepayers' conference that a special
committee be established to make an exhaustive examination of
all aspects of Local Government finance with particular reference
to the problem of increasing debt and the proportion of rates
required merely to meet interest charges. The special committee
of five took six months to assess all the information and evidence
placed before them.
After lengthy discussion at the Yarra Glen Conference on May 18,
it was agreed to accept Part One of the Report as an Introduction
to Part Two, and to delete two of the special committee's recommendations,
one on Uniform Taxation and the other on local loans for Local
Government.
For purposes of publication, there has been some minor editing
of the Report.
INTRODUCTION
When members of the Committee started to consider the task set
them by the Yarra Glen Conference of Deakin Electorate Ratepayers'
Organisations, they soon realised that no realistic appraisal
of Local Government finance was possible without a consideration
of national finance. Any recommendations for improving the position
of Local Government finance would be open to serious criticism
unless those making the recommendations made it clear that they
were fully aware of the full implications of their proposals.
In order that members of the Committee could be fully informed
on the basic facts of national finance, the Secretary for the
Committee wrote to a number of recognised authorities seeking
specific factual information concerning banking and economics.
The basic fact to emerge from an examination of the information
supplied, is that the productive capacity of a nation, which might
be termed its real credit, is controlled by the creation and issue
of financial credit through the banking system. As explained in
this Report, the centralised control of credit policy by the Commonwealth,
and the Commonwealth's virtual monopoly of the taxation field,
places Local Government in the position where it is subordinate
to Commonwealth policy. In a genuine democracy, control of policy,
not only political, but also economic, must be exercised by the
individual members of the community. For this important reason
the Committee rejects any suggestion that ratepayers should be
forced to suffer a reduction in their standard of living as a
result of trying to finance Local Government capital development
out of rate increases, and recommends as a fundamental principle
that ratepayers through their Local Government should have more
effective control of how the nation's productive capacity the
real credit is to be used.
If it is assumed that the nation's total productive capacity is
at present being used approximately to its maximum (it is readily
agreed that some would contest this assumption) it is clear that
any increased use of this productive capacity for Local Government
must mean a reduction in activities by the Commonwealth and State
Governments. Ratepayers must face the fundamental fact that any
programme for increasing the financial sovereignty of Local Government
must inevitably bring it into conflict with the Commonwealth which,
as the history of Federation proves all too clearly, never surrenders
voluntarily any powers it has centralised. As finance is the instrument
through which centralised control is exercised, this Committee
has decided that its Report should be divided into two parts;
one dealing as simply as possible with the actual mechanics of
the financial system as a necessary background to the recommendations
suggested in part two.
It is not suggested that the recommendations in this Report would,
even if all were introduced, produce the most desirable permanent
relationships between Local Government and the Commonwealth and
State Governments. But the Committee is certain that they would
be major steps in the right direction of greater responsibilities
and increased financial sovereignty for Local Government. This
would mean a higher status for Local Government and a stimulus
to democratic Self Government at a time when many people have
become cynical about the democratic idea. And it is not too much
to hope that increasing satisfaction in Local Government would
soon be reflected in a healthier state of national life.
PART ONE NATIONAL FINANCE
CONTROL OF THE CREATION OF MONEY
As will be seen by the authoritative statements quoted, the bulk
of the nation's money supply is created by the banking system
in the form of what is generally called bank credit. Every loan
or overdraft, whether extended to individuals or to Governments,
is a creation of entirely new money (credit) and is a clear addition
to the amount of money in the community.
Legal tender notes, silver and copper is created under the authority
of the Commonwealth Bank, but less than five per cent of business
in Australia is done with legal tender. It is only the "small
change" of the nation.
The Committee has had its attention directed to the following
authoritative and self explanatory statements concerning the creation
of money in the form of bank credit: Sir R. Kindersley, CBE (Director
of Bank of England) in Harmsworth's Business Encyclopaedia:
Deposits
Deposits of the commercial and private banks amount to about £2,000,000,000
($4,000,000,000) but this large total has not, of course, been
created by the deposit of actual cash, but has resulted in great
measure from Credit created by the banks by the lending of money.
The difference between actual cash in its own till, plus its balance
at the Bank of England (ie. Bank Reserves ten per cent to fifteen
per cent of its deposit liabilities), which are Bank Reserves,
and the total of the deposits, represents approximately the extent
to which the Bank may be said to have manufactured deposits by
the Creation and Sale of Credit (Money).
Governor Eccles, one time head of the Federal Reserve Bank Board
of the United States, said:
"The banks can create and destroy money. Bank credit is
money. It's the money we do most of our business with, not with
that currency which we usually think of as money".
(Given in evidence before a Congressional Committee) Mr. R. G.
Hawtrey, previously Assistant Under-Secretary to the British Treasury,
in his "Trade Depression and the Way Out" says:
"When a bank lends it creates money out of nothing
"
In his book, The Art of Central Banking, Hawtrey also wrote:-
"When a bank lends, it creates credit. Against the advance,
which it enters amongst its assets, there is a deposit entered
in its liabilities. But other lenders have not this mystical power
of creating the means of payment out of nothing. What they lend
must be money that they have acquired through their economic activities."
Lord Keynes, the economist, and wartime Governor of the Bank of
England states: "There can be no doubt that all deposits
are created by the banks."
Professor A. L. G. Mackay, the well known Australian economist,
has stated in his text book on Economics, that:
"In this way, by means of a loan, an advance, an overdraft,
or by the cashing of bills, the banks are able to increase the
volume of deposits in the community, and because of this process
it is not correct to say that a bank loans out deposits which
people make with it. It is clear that it creates the deposit by
the issue of the loan; the loan travels back to the banks or to
another bank and assumes the form of a deposit."
In 1939 the Canadian Government's Committee on Banking and Commerce
exhaustively questioned Mr. Graham F. Towers, at that time Governor
of the Central Bank of Canada, on banking practices. The following
are extracts from the Minutes of Proceedings and Evidence Respecting
the Bank of Canada.
Question: But there is no question about it that banks create
the medium of exchange?
Towers: That is right, That is what they are for … that
is the Banking business, just in the same way that a steel plant
makes steel.
The following are further statements by Governor Towers: "Each
and every time a bank makes a loan (or purchases securities),
new bank credit is created new deposits brand new money".
"Broadly speaking, all new money comes out of a Bank in
the form of loans."
Mr. Towers then made the following important point:
"A Government can find money in three ways: by taxation,
or they might find it by borrowing the savings of the people,
or they might find it by action which is allied with an expansive
monetary policy, that is borrowing which creates additional money
in the process."
The Committee directs special attention to this statement because
it is directly related to the question of obtaining adequate finance
for Local Government.
Giving evidence before the New Zealand Royal Commission on monetary
systems in 1955, Mr. H. W. Whyte, Chairman of the Associated Banks
of New Zealand, stated in answer to questions, that banks create
new financial credit when making loans and advances. Mr. Whyte
added:
'They have been doing it for a long time, but they didn't quite
realise it, and they did not admit it. Very few did. You will
find it in all sorts of documents, financial textbooks, etc. But
in the intervening years, and we must all be perfectly frank about
these things, there has been a development of thought, until today
I doubt very much whether you would get many prominent bankers
to attempt to deny that banks create credit. I have told you that
they do; Mr Ashwin (Secretary to the Treasury) has told you that
they do; Mr. Fussell (Governor of the Reserve Bank) has told you
that they do."
We now turn to a brief examination of the limits on credit creation
by the banking system, and how those limits are imposed. The creation
and leading of credit by all banks except the Central Bank is
governed by what is described as the "liquidity" of
the banking system. This simply means the amount of legal tender
being held by the banks. Banking practice is that credit should
not be expanded substantially beyond ten times the amount of what
is called "cash at call".
Now "cash at call" is not only governed by the amount
of legal tender manufactured by authority of the Commonwealth
Bank; credit created by the Central Bank central bank credit is
also treated as cash when deposited with the trading banks. The
Commonwealth through the Central Bank therefore dictates credit
expansion, or restriction, by its policy of creating legal tender
and central bank credit. Both private and public borrowing is
controlled by the Commonwealth's credit policy.
In order to clarify still further the powers of the Central Government
to issue new money in several ways as compared with the limits
placed upon State and Local Governments, attention is directed
to extracts from "Wealth and Income" by Professor Brian
Tew, Professor of Economics, University of Nottingham, and formerly
Professor of Economics, University of Adelaide. Tew's "Wealth
and Income" is a reference text book in economics and commerce
at the Melbourne University and makes specific references to the
operations of the Australian monetary system.
Tew states that "the central government is in the happy
position of being able to issue eligible paper, which the central
bank is always willing to buy, or alternately to be able to borrow
without limit from the central bank direct. The Central Government,
therefore, can always get as much money as it wants by virtue
of the privilege accorded to it by the central bank."
The Commonwealth makes considerable use of Treasury Bills, which
are IOU's created against the whole nation's credit, to obtain
new financial credit. It is not generally appreciated that many
Commonwealth Loans are used, not to finance public works as claimed,
but to redeem outstanding Treasury Bills, And comparatively few
subscriptions to any public loan are from genuine savings, the
bulk of the loans coming from a further expansion of credit. It
is not felt necessary to outline in detail the mechanics of this,
but merely to draw attention to the basic facts.
Although it is a popular fallacy that heavy taxation was imposed
during the war primarily to finance the war effort, the facts
are, as stated by Professor L. G. Giblin in his History of the
Commonwealth Bank from 1924-1945, The Growth of a Central Bank":
The (Commonwealth Bank) Board in 1942 recognised that a great
expansion of central bank credit was necessary to finance the
war and this expansion took predominantly the form of discounting
Treasury Bills." (p.309). Heavy taxation was imposed mainly
for psychological reasons, as revealed by a former Federal Minister
and as an instrument of financial control to prevent "excess
purchasing power" accumulating in the hands of private individuals.
Attention is drawn to this important historical fact because with
the enormous expansion of Central Bank Credit to finance vast
Federal Government's activities during the war, and the continuation
of this policy of Federal spending after the war. Those economic
advisers advocating a greater degree of centralised governmental
financial control were able to justify the introduction in 1941
of the Special Accounts system under which a proportion of the
trading banks deposits with the Central Bank are "blocked"
or "frozen", and the consolidation of this control in
the Chifley Government's 1945 Banking Legislation and the Menzies
Government's 1959 Banking Legislation.
Party political controversy should not be allowed to obscure the
basic fact, recognised by every objective student of economics,
that the present Federal Government's Banking Legislation does
not weaken in any way the central control of the expansion of
financial credit through the banking system. This point has been
candidly admitted by Canberra economist, Professor H. W. Arndt,
a political opponent of the Government.
As already explained, the amount of new financial credit which
the trading banks can create to loan to individuals, organisations,
Local Governments, and semi-governmental instrumentalities, is
governed by their holdings of cash and Central Bank credit. And
these holdings are dictated by the policy of the Central Bank
and the Federal Treasury in deciding just how much cash and Central
Bank credit is to be created and how much of the Central Bank
credit obtained by the trading banks through deposits is to be
"frozen" and how much is to be available for a further
expansion of new credit. A recent "unblocking" of trading
bank credits with the Central Bank was part of a policy of credit
expansion which it was felt the economy required.
If the foregoing facts are borne in mind, it will be readily perceived
that even when Local Government is permitted to obtain a certain
amount of loan money, the availability of this amount is directly
related to the Federal Governments current credit policy. The
policy governing money creation in Australia is therefore firmly
under control of the Commonwealth and any proposals concerning
Local Government finance which ignore this fundamental fact cannot
greatly improve the financial status of local Government.
What principles, if any, govern the Commonwealth's policy of credit
expansion?
As far as the Committee can judge from the views, some of them
contradictory, of economists and economic advisers to the Commonwealth,
the major factor governing the rate of credit expansion generally
is the price level.
The subject of prices brings us to the problem of inflation, a
problem that no country has solved in spite of periodic policies
of restrictive credit and taxation policies. Although the subject
of inflation was considered to be outside the scope of the Committee's
investigation, nevertheless it is felt necessary to draw attention
to the fact that progressive increases in the general price level
must have a serious effect on the future development of Local
Government. A study of numerous statements by economists and politicians
indicates that what is described as "controlled inflation"
is now generally accepted by those controlling national policy.
For various reasons, all inflation bears heaviest upon smaller
political and economic units and is a major factor in encouraging
the process of centralisation. Measured in realistic terms ie.,
construction work done and satisfactory services given for man
hours expended Local Government is the most efficient sphere of
Government in Australia. But increasing financial costs as a result
of a national policy of progressive inflation must inevitably
lead to suggestions that Local Government be centralised, allegedly
in the interests of financial efficiency.
We conclude our brief observations on this question by drawing
attention to the glaring contradictions between the fact that
real costs ie, man hours worked per unit of production of production
in all spheres, Governmental and private, have been reduced with
the introduction of power driven machinery while at the same time
prices have steadily increased. While a solution to this problem
obviously is a national question, bodies primarily concerned with
Local Government can make a valuable contribution to the solution
by encouraging ratepayers to keep the realities of the situation
firmly fixed in their minds.
PART TWO RECOMMENDATION
LOAN FINANCE AND CAPITAL WORKS
Apart from actually raising the amount of loans permitted by the
Loans Council, Local Government finds itself faced with the problem
of how to service the debts which loan programmes involve. A survey
of Local Government indebtedness reveals that already a big percentage
of rates go merely towards paying interest and principal charges.
In seeking a solution to this problem the Committee feel that three
fundamental principles must first be discussed and established.
(1) Commonsense and natural justice challenge the idea of using
current taxes and rates to finance capital works which as in the
case of roads, may last for 50 or more years. New capital works
should be financed out of new credits created for the purpose.
(2) The repayment of the credits for capital works should bear
a direct relationship to the estimated life of the works. This
means that a policy of long term credits for capital development
is necessary to ensure that financial bookkeeping reflects physical
facts and that the present generation is not asked to make sacrifices
for the benefit of future generations.
(3) Local Government rates should not be used to any great extent
to finance new construction, but should be devoted primarily to
administration maintenance, and the servicing of the charges against
capital construction in accordance with the principle contained
in the recommendation on loan finance and capital works.
Implementation of the above three principles would go a long way
towards solving the basic problem of Local Government finance.
But it will be immediately pointed out that even long term credits
for new capital construction leaves untouched the problem of the
interest burden. In dealing with this question it is necessary
to refer back to the factual information on credit creation provided
in part one. The actual cost of creating Central Bank credit is
small and it is submitted that a share of this credit should be
made available to Local Government for the actual cost of creation
and administration.
This Central Bank credit is not actual cash saved and loaned by
individuals who can claim a dividend on their investments, but
is new credit created against the assets and real credit of the
whole community The community should, therefore, carry no more
than the cost of administration, which according to banking authorities
is less than one per cent. Charges in excess of this merely increase
the profits of the Central Bank a public utility at the expense
of ratepayers.
In support of the above proposal the following extracts from the
Australian Royal Commission's Report on Banking (1937) is submitted:
"Because of this power (of credit creation) . . . the Commonwealth
Bank . . . can lend to the Governments or to others in a variety
of ways, and it can even make money available to the Governments
and to others free of any charge . . ." (Section 504).
Subsequently, Mr. Justice Napier, Chairman of the Commission, expanded
upon the last clause of the above statement as follows: "This
statement means that the Commonwealth Bank can make money available
to Governments or to others on such terms as it chooses, even
by way of a loan without interest, or even without requiring either
interest or repayment of principle."
Local Government is engaged in constructing national assets, such
as roads, which increase the real credit of the whole nation and
the financing of the construction of these assets should not result
in a big proportion of present ratepayers' rates being used to
provide benefits for future ratepayers. It should be noted that
the reference to road construction excludes private streets, although
some thought might be given to applying the principles embodied
in the following resolution.
RECOMMENDATION
That all new Local Government capital works roads, bridges, buildings,
etc. be financed by new financial credits from the Commonwealth
through the Commonwealth Bank, the credits to be made available
at the cost of administration and to be repaid at a rate directly
related to the estimated rate of depreciation of the assets financed
by the credits.
As an addendum to the above recommendation, some consideration
may well be given to the necessity of Local Government preparing
a proper balance sheet every year which shows not only receipts
and expenditure, but also all capital appreciation and depreciation.
A proper balance sheet would clearly show how the real assets
of Local Government are increasing. This vital information is
not computed at present.
LOCAL GOVERNMENT AND THE CONTROL OF CAPITAL INVESTMENT
Implementation of the recommendation in the foregoing section
depends, of course, upon devising an effective mechanism through
which Local Government can exercise some real control over priorities
in the field of capital development. At present the Commonwealth
exercises the major control, primarily through the Loan Council.
Yarra Glen Conferences of Deakin Municipalities have urged that
Local Government be given direct representation on the Loan Council
and this appears to be the most realistic objective at the present
time. However, whatever mechanism may be proposed for giving Local
Government more control over capital development priorities, it
must inevitably, as explained in the Introduction to this Report,
bring Local Government into conflict with the Commonwealth.
RECOMMENDATION
That Local Government be represented on the Loan Council
PETROL TAX
Campaigns to obtain more finance for Local Government, particularly
in Victoria and New South Wales, have focussed a great deal of
attention upon the petrol tax, and there can be little doubt that
the increased Commonwealth grant of £1,670,000 ($3,340,000)
for Victorian roads for next financial year was the result of
the increasing pressure from Victorian ratepayers, their Local
Governments and the State Government. This increased grant, which
is pleasing to note was made available without reducing grants
to Queensland and Western Australia, is part of the Commonwealth's
new £250,000,000 ($500,000,000) five year plan starting
on July 1.
It is essential that ratepayers and taxpayers realise the significance
of the Commonwealth's new policy of transforming the petrol tax
into merely one more source of general Commonwealth revenue. This
was not only a very shrewd move to offset the mounting pressure
in favour of the whole of petrol tax proceeds being distributed
to the States and Local Government; it struck a death blow at
any remaining hopes of removing the "emergency" rise
in petrol tax imposed by the "Little Budget.'' No doubt the
Commonwealth has observed that liquid fuel is today regarded as
so indispensable that price has little impact upon demand. It
should, therefore, be born in mind that the Commonwealth will
always regard liquid fuels as most suitable for the obtaining
of any increased tax revenue.
A study of the increasing volume of tax from liquid fuels makes
it very clear why the Commonwealth has decided to treat all petrol
and diesel tax proceeds as part of general revenue and to replace
it with a plan which, as already pointed out, is slightly more
liberal. Over the past five years the petrol tax has increased
by about seventy per cent to its present level of about £55
million ($110million). At present the Commonwealth retains £18
million ($36 million) of this amount. If this £18 million
($36 million) were distributed to all States on an equitable basis,
as demanded by the Yarra Glen Conferences, not only would all
the States be better off immediately than under the new road plan;
their position would improve immeasurably in the future if the
total amount of petrol tax continued to be paid to the States.
Some conception of what would have been possible under this policy
may be obtained by pointing out that if the seventy per cent.
increase in petrol tax over the past five years is maintained
over the next five years, the tax will be yielding approximately
£95 million ($190 million) during the last year. Under the
new agreement the Commonwealth will then be paying £58 million
($116 million) to State road funds if all the States take up their
matching grants. The Commonwealth will then be drawing in Federal
revenues nearly £37 million ($74 million) more from fuel
tax than it is returning to the States. The Commonwealth will,
therefore, approximately double its "rake off" under
the new arrangements.
RECOMMENDATION
That Local Government refuses to accept the Commonwealth's attempt
to hide the Petrol Tax in general revenue and continue to press
for the whole of the proceeds of the tax to be returned to the
States on an equitable basis.
PAY ROLL TAX
Pay roll tax continues to be levied upon Local Government by the
Commonwealth in defiance of elementary common sense. A study of
Federal Parliamentary debates reveals that even after a number
of speakers on both sides of the House have attacked the continued
imposition of this tax, and presented an unassailable case for
its abolition on Local Government Government spokesmen have offered
no defence but talk vaguely about "investigation." Reluctance
to abolish the tax is clearly another case of a reluctance to
relinquish even the smallest degree of centralised power.
RECOMMENDATION
That the campaign to completely abolish the pay roll tax on Local
Government be continued.
RATE RELIEF AND SOCIAL SERVICES
There is increasing evidence that Local Government is being progressively
embarrassed by requests for rate relief by various pensioners.
The fact that Local Government representatives, who are much closer
to the electors than politicians, feel it necessary to grant rate
relief and reductions in pan and garbage rates, is evidence that
many pensioners urgently require the protection given to them
by Local Government. But in providing relief to pensioners Local
Government is, in fact, subsidising Social Services out of its
own inadequate revenues.
RECOMMENDATION
That Local Government estimate each year the total amount of Social
Service subsidy paid to pensioners each year in rate, pan and
garbage relief, bring it to the attention of Federal Members,
and request them to press for a special Commonwealth grant to
recompense Local Government for the subsidy
EXPENDITURE ON HEALTH SERVICES
Local Government is being asked to accept more responsibilities
for various health services, baby health centres, immunisation
campaign, etc. but at the same time is expected to help finance
these services out of rate revenue. Many municipalities have complained
bitterly about the position, but have been reluctant to take a
strong stand because they do not want to jeopardise in any way
the health of the people. It should be noticed that health services
benefit the whole community, not only ratepayers.
RECOMMENDATION
That all services rendered by Local Government under the Health
Department be paid for in full by the State Government.
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