I am delighted to be back in the House to discuss one of the most important issues which falls under my remit as Minister for the Environment. A "hot political potato", a "thorny problem", a "minefield", "a hornet's nest", a "poisoned chalice"— these are just some of the terms used in the last few decades to describe the issue of local government funding. Is it any wonder that successive Governments and Ministers for the Environment have, if not altogether turned their backs on the issue, pushed it to one side? I believe the issue, while often contentious, is too important to be ignored. I am pleased to have Government approval for and to have published radical proposals, and of the opportunity to discuss them in this House.
There is no need for me to go into the history books to examine the reasons for the decline in the finances of local authorities although, given the year that is in it, such an option is not altogether unappealing to me. Suffice it to say that over the last quarter of a century or more local authorities have seen their financial position steadily worsening with little, if any, prospect of improvement in sight. The local authority funding base was, and is, too narrow. There was little buoyancy. New functions were continually transferred to local authorities without the appropriate transfer of the wherewithal, that is, the funding, to carry out those functions.
Local authorities were largely at the mercy of central Government for financial resources. They were never sure how much rate support grant they might receive from one year to the next. The rate support grant did not always keep pace with inflation and in some years it decreased rather than increased. Local authorities were often expected to adopt their annual estimates of expenses without knowing how much rate support grant they might be allocated from central Government. This was untenable and it was, in truth, unreasonable of central Government to expect them to do so. The position on local authority finances had come to such a sorry pass that by 1996 they had built up a revenue accounts deficit of about £120 million.
We all know what the practical consequences of this funding shortfall are. There has been little, if any, discretionary spending. The level of service being provided in all areas had to be cut to the bone. In some cases services had to be cut out or abandoned altogether. Perhaps the most obvious and contentious example was the degeneration in the state of our county roads.
It was against this background that the Government undertook in its programme for Government, A Government of Renewal, to commission a professional study on local government funding to see how we could introduce an improved system, “a fair, equitable and reasonable funding system”, as the programme put it. Within a matter of months I had engaged KPMG to carry out that study. At the time, of course, the sceptics and those who knew it all suggested this was nothing more than a cynical exercise on my part, a delaying tactic, an excuse for inaction and a report to add to the many others already stashed on the shelves of the Custom House library.
The task set for the consultants was, in a sense, to set the agenda for change. I asked them to look at local authorities' existing and future requirements and to evaluate the capacity of the then existing systems to meet those requirements. The consultants carried out in-depth research, both in Ireland and internationally, into current local government practices. The study involved extensive consultations with officials of my Department, the Department of Finance and representatives of local authorities. An advertisement was placed in the national daily newspapers inviting submissions from interested parties. Incidentally, such was the interest in this subject that over 60 submissions were received.
The consultants examined a range of funding options, including a local property tax, a local income tax, a system based on Government grants, a system based on charges, a poll tax, the assignment of central taxes to local government and a local sales taxes. Each of these proposals had certain advantages and disadvantages. The study highlighted for me that there is not one obvious right formula to fund local government. There are probably as many views in this Chamber on the ideal way to finance local government as there are realistic options to be embraced.
Having looked at the expenditure requirements of local authorities up to the year 2000, the consultants concluded that, if we wanted to do so, we could limp along with the existing system for a number of years by injecting some modest additional resources into it. Once the report was published we stood at a cross-roads. Did we stay on our existing course or did we change course? Everybody agreed that the system was not satisfactory. However, while we all agreed that there was a problem, there was little agreement, locally or nationally, on the right solution. This is a sensitive and contentious issue. There are no easy options.
The easy thing to do, and the thing the sceptics would have expected me to do, was nothing. Perhaps we could have commissioned a further study, to have an in-depth analysis undertaken on each of the funding options thrown out. That would have taken more time; paralysis by analysis. Perhaps for the benefit of the optics and even the sceptics we could have made one or two small changes while keeping the system ticking over as it was.
When I was appointed to the Custom House I said that, in addition to my title and responsibility as Minister for the Environment, I also saw myself as the Minister for local government. I committed myself to pushing ahead with local government reform and to putting local authorities on a sound financial footing, once and for all. As such, I was not prepared to take easy options that carried little political risk and amounted to a minimalist approach. Such a course of action would have proved the sceptics right but, even more seriously, it would have left the future of local government without scope or hope.
On 19 December last, and with Government approval, I launched a new programme for the development of local government entitled Better Local Government — A Programme for Change. I arranged to have the document widely circulated, including a copy for Senators. I hope they have had a chance to read it because I believe it to be the most ambitious, wide ranging and at the same time practical and concrete political agenda for local government to have been put forward for a long time.
Some Senators may think that I should be more humble about this programme. If so, I apologise, but I believe it is one in which the Government can take pride. It is a programme to take local government into the next millennium, with confidence and hope. Many Senators will also be aware that my own background is in local government. I have seen at first hand the problems that befall local government. I have also seen its potential and I believe it is the key to unlocking that local potential.
The programme is based on four core principles: first, enhancing local democracy and widening participation; second, serving the customer better; third, developing efficiency in local government and, fourth, providing a proper funding system for local government to enable it fulfil its role. Over the last few weeks, I have attended a number of regional seminars on the new programme to present and discuss it with local authority members and officials. Before I concentrate on the funding aspect, I will briefly share with Senators some of the ideas on the overall integrated package which I have brought to local authorities.
The first major plank of the programme is the enhancement of local democracy. Democracy demands more than simply holding elections every few years. It is about choice and empowerment, empowering people to govern themselves. The democratic process in Irish local government has its roots in the earlier part of this century. Unfortunately, it has not developed with the times to the extent that is demanded and required.
The new programme sets out to modernise and address the shortcomings of the local democratic process through a range of measures. For example, the Government will support constitutional recognition for local government for the first time; Ireland will ratify the European Charter on Local Self Government and measures are being taken to do that immediately; local government will be represented on the National Economic and Social Council for the first time; the corporate position of councillors within local government will be strengthened through the establishment of strategic policy committees which will enhance their political and community leadership role and involvement in local government will be broadened through the participation of community, consumer and other interest groups and local development bodies.
The programme also contains a number of specific measures to develop better links between local authorities, State agencies and Departments. Co-operation and partnership must become a feature of how we do our business if we are to succeed in improving the way our democracy works in practice.
Local government is a major player in the business of modern Ireland. It has some role to play in every acre of the country, whether that is in the planning or environmental control area, the provision of services or the development of infrastructure. It spends approximately £2 billion a year and employs 30,000 people. Any business of this magnitude must deliver high standards of service and achieve efficiency in the delivery of that service. The Government demands that of local government and the public expects and deserves it. Local government exists to serve the people and that is as it should be and it must do it in a way the people want, not in a way the authority wants or management requires.
Huge strides have been taken in recent years to make local government more people, more consumer and more citizen oriented. As I acknowledged at the regional seminars, local government, councillors, management and staff all work exceptionally hard and have a commendable public service ethos and a commitment to the betterment of the communities they serve. The new programme is designed to build on that commitment and to ensure that citizens, the local government customers, are provided with efficient and user friendly services.
All the measures in the programme are quality measures in the last analysis. These include the new tier of programme managers, plus the community and consumer representatives on the strategic policy committees; the performance indicators, service standards and one stop shops which will be created; the emphasis on co-ordinated services between town and county, county and city and county to county, and within local authorities themselves between different departments; the new Local Government Management Services Board which was created on 1 January 1997 and the increased investment in training and development. These measures are designed to improve the quality of service which is provided.
The initiatives in the new programme would be no more than a meaningless wish list if the necessary resources were not afforded to local authorities to provide the level and quality of service now expected of them. The new funding arrangement I am putting in place will ensure these initiatives can and will become a reality in a well resourced and financially sound local government environment for the future. One of the first things which must be said about the new funding system, and one of the principles which the Government accepted from the start of the process, is that there should be no major additional burden of taxation. The new system achieves that and does not involve any new tax. I emphasise that point for those who sometimes listen but do not always hear. It dedicates an existing tax income completely to local government and removes it from the Exchequer.
Under the revised arrangement, the power of local authorities to charge for domestic water and sewerage services has been abolished and the rate support grant is being terminated. The income to be foregone from these sources is being replaced by the proceeds of motor taxation. The KPMG study identified lack of buoyancy as one of the principal weaknesses of the existing system. This weakness will be addressed by the new system because motor tax income has proven over the years to have considerable in-built buoyancy. The early indications in 1997 are that car sales are again increasing at a significant rate and this is obviously good news for local authorities. It is a buoyant source of income for the future and our analyses show that it will remain so.
One of the major benefits in assigning a specific income source to local authorities is that it introduces a large degree of certainty as to the level of income an authority can expect from year to year — a characteristic lacking in the old system. An important element in any local funding system is that the local authorities should have a measure of discretion and, by extension, a measure of accountability, over the rates of tax levied.
Under the new system local authorities are being empowered to vary the national rate of motor tax on cars and motorcycles up to a maximum of 6 per cent. This is subject to a maximum of 3 per cent next year and 3 per cent the following year. The base for motor tax will be set centrally. Next year, each local authority can, if it chooses, vary it by 3 per cent and by a further 3 per cent the following year. However, the tax will stay at that level unless the base is increased centrally. The variation cannot exceed 6 per cent which will be the maximum increase allowable over the three years 1997-99. That is a reasonable and modest projected increase given that it has been a long time since there was an increase in motor tax and given the benefits for everyone who has been paying water or sewerage charges. It will be a considerable additional source of income for the local authorities.
The abolition of domestic water and sewerage charges was welcomed by many people. I do not have a problem with the principle of paying for services. Charges can be good; they may encourage the efficient use of resources, conservation and may be linked to environmental policy. However, I have a problem when the level of charges does not relate to the usage or the cost of provision. Charges for electricity, gas, telephones and public transport are all related to usage. Water charges were not, with the exception of the commercial sector where the water was metered.
Domestic water and sewerage charges did not bear a relationship to the cost of providing the service or to consumption. They were seen by many as a form of local tax. Under the charging system as it was, a luxury six bedroomed house with its own swimming pool would attract the same charge as a one bedroomed apartment accommodating one individual. That could not be considered equitable from any perspective.
Given that charges are not related to usage the Government took the view that they are, in effect, taxes and, accordingly, should be consolidated into general taxation. Charges will remain for commercial users of water as metering is economically feasible and users can be charged in accordance with consumption. Charges will also remain for domestic refuse collection services, which is important from an environmental protection perspective. It is important to establish the "polluter pays" principle and that there is a financial incentive for people to reduce the volume of refuse they generate.
While all local authorities have the same general functions, different local authorities have different expenditure requirements having regard to local demographic, economic, social and other factors. By the same token, the revenue generating potential of local authorities differs from area to area. The amount of the motor tax collected by the different authorities will vary, in some cases significantly, from the income levels generated by the rates support grant and domestic water and sewerage charges. Some local authorities will collect considerably more than others. All these factors meant that a transfer of resources is, and remains, necessary in order that every local authority, urban and rural, will benefit from these changes.
Under the proposed equalisation system, local authorities can retain 80 per cent of the proceeds of motor tax on cars and motorcycles and contribute all other motor tax revenues, including driver licence duties, to a newly established equalisation fund for redistribution.
The resources of this fund will be used in 1997 to ensure that the income lost through the abolition of water and sewerage charges and the rate support grant is made good, in full, to each local authority. The balance remaining will then be allocated as equitably as possible among local authorities, having regard to needs and resources. I want to stress that there will be no losers under the system. The size of the motor tax pool and its in-built buoyancy means that all local authorities will gain.
I will be deciding on the allocation from the equalisation fund later this year. However, it is my intention that within two or three years the Minister for the Environment and his Department will be relieved of this function. Instead, those who ultimately own the money in the fund, that is, the local authorities, should have responsibility for managing and sharing it. I am at present examining ways to see how this can be best achieved. I would hope that this fund would be administered separately from the Department of the Environment by an equalisation council in order that every local authority would get its fair share and be represented in the allocation. I hope no future Minister for Finance would view the fund as a pool of money to be dipped into.
Another proposal in the programme is the introduction of a community development contribution. This is an idea which was put forward in the report of the commission on town local government Towards Cohesive Local Government — Town and County published last June. The idea is that local authorities will be able to sponsor, whether on their own initiative or in partnership with the local communities or other groups, discretionary development projects or programmes which could not otherwise proceed within their normal available financial resources. For example, the contribution could operate where there is a project that the community wants to develop but where the local authority cannot afford to invest it, however deserving the cause. Such projects might include children's playgrounds, particular sports facilities, etc. For example, if somebody wants an all-weather track in their area and a local group has raised £200,000 but requires a further £250,000 towards the project, it would be possible for a partnership to be formed with the local authority which, with the agreement of the local community that would stand to benefit, would levy a charge to make up the shortfall over a number of years. It is an idea which has worked elsewhere. We are going to get legal power to do that.
The new funding system is but one of a range of reforms proposed in this programme. The thrust of the programme is to modernise the whole finance function in local authorities, to make it more transparent, more understandable and more accessible to the public. As a former member of two local authorities, on one of which I served with an eminent accountant, I can say that to read local authority accounts is a demanding occupation and one that even the most competent and literate of accountants would find challenging. We need to make them simple and understandable so that the public and the councillors understand every figure, dot and comma therein.
By way of illustration, I want to give three examples of measures contained in the programme which will be implemented to achieve the approach I have outlined. First, the revision of the existing accounting system which is based on legislation enacted almost 50 years ago to a more modern, business oriented, full accrual, double entry system. This will give authorities and their customers a better picture of the financial performance and true worth of their council.
Second, widening the scope and application of the local government value for money unit and giving it legal status. The idea is to move from the existing regulatory audit of local authority accounts to a more value for money approach that is the norm in business. Local authority auditors will now be empowered to examine the three E's — economy, efficiency and effectiveness, in local authority operations. This is, of course, similar to the enhanced role given to the Comptroller and Auditor General in 1993.
Third, a range of financial performance indicators will be introduced with the aim of improving local authority efficiency and performance. These indicators will also allow local authorities to demonstrate to their customers that they are cost effective organisations, using public money in an efficient and wise manner.
The document is a comprehensive one and I hope I have given Senators a flavour of where the Government is coming from, and hopes to go, on local government generally and on local government financing in particular. I am happy that the reforms we are implementing — and I want to stress these, they are not a further discussion document — are happening now, that the Bills are being drafted and I will be back later this session with the first of the local government reform Bills. I hope we have silenced the sceptics and that local government financing will no longer be talked about as a hot political potato or a hornet's nest. From now on, let us think in terms of opportunity and potential and let the area of local government financing become, dare I say it, a window of opportunity.
