Sustainable local government built for the future: comparison of international financial systems to find the key ingredients

This article is part of LGIU’s new Future Local Lab – a holistic programme of resources aimed at helping you to prepare for and respond to the emerging challenges facing local government everywhere.

Our extensive international research of local government financial systems highlights five key ingredients for building a resilient and sustainable public sector landscape fit for the future. By examining systems across countries like England, Scotland, Germany, Italy, Japan, Australia and Ireland, we aim to illuminate the interplay between finance, governance, and power, offering valuable guidance for developing innovative solutions to long-standing challenges.

Research project background

Local governments worldwide are defined by their variety. In size, purpose, and organisation, they could hardly be more different. However, one uniting factor is that they all need resources from somewhere. For nearly two years, we’ve been conducting extensive work on local government financial systems through a large-scale, unique international comparison project. Working with experts at the University of Northumbria, led by Dr Kevin Muldoon-Smith, we’ve explored different systems for funding local government and have found practical insights and guidance to drive forward the debate on sustainable local government funding.

Our research has sought to illuminate the understanding of local government as a system and help the sector develop new approaches and solutions to long-standing problems. By taking that system-wide view, we have a clear and detailed picture of the interplay between finance, governance and power that has deepened our understanding of how to build a resilient and sustainable public policy landscape. No single system of local government is perfect, but there are elements that seem increasingly essential for success.

Our reports have examined England, Germany, Italy, and Japan in depth so far, and we will soon publish ones on Australia and Ireland. This article teases the insights from the new report and summarises what we’ve learned so far. Here are our five important ingredients for making the local government sector fit for the future.

Lesson 1: Constitutionally defined roles

Australian local government, like its counterpart in the UK, does not have a constitutional grounding, which means that its purpose, function, and powers are limited and defined by higher tiers of government. In the Australian case, state and territory-level government defines what local government does, and there is a real need to move towards parity of esteem. There have been two referendums over the issue of constitutional recognition for local government in Australia, in 1974 and 1988, neither of which passed.

Research in Germany, Italy and Japan found that having constitutionally defined roles for local government provides a solid foundation, clarity and purpose. This enables greater levels of trust and accountability which can put the system on a coherent and sustainable footing.

The positioning of local government in wider governance is also key, especially when it comes to new legislation and policy responsibilities. In Germany, constitutionally guaranteed financial autonomy provides the “right of municipalities to a source of tax revenues based upon economic ability and the right to establish the rates at which these sources shall be taxed” (German Basic Law). While principles like subsidiarity and the prevention of unfunded mandates are a common success factor.

Lesson 2: Revenue-raising and spending options

Resilience and sustainability depend on a range of revenue raising options and flexibility around spending locally. German municipalities benefit from local business profit tax and property taxes, and can set a multiplier from a minimum level. While in Italy, funding streams include property tax, vehicle tax, and charges on waste, water, and street cleaning.

The important point is not that one or the other measure is the right one but that local areas should have the autonomy to design an approach that works locally and solves local issues. In some jurisdictions, including Australia, there is a limited range of options available for councils to raise revenue. This hampers place-shaping and can make innovation more challenging, locking local government into a narrow debate about property tax levels. In our upcoming report we recommend that proportions of taxes currently held at state, territory or commonwealth levels in Australia should be considered for local government control.

Lesson 3: Subsidiarity

In Germany, the principle of subsidiarity means that everything should be done at the most local level and is only passed up to the next tier of government if it cannot be achieved at a more local level. It is written into the governance system and enables a very different kind of politics and policy making.

Though we argue that in the Australian system there should be some standardisation of certain important elements, like audit and land tax valuation, there is scope for a great deal more power and responsibility to be held at the most local level. There ought to be scope for a place-based funding model that builds capacity for tackling challenging social issues like housing, infrastructure, climate and community engagement and social cohesion.

Lesson 4: Territorial Equalisation

There is bound to be diversion in some form within local government systems. Our new report highlights the ways this plays out in Australia’s federal system. However, some form of equalisation to redress imbalances has been shown to be an effective instrument in many places. From Germany to Japan, the territorial equalisation of funds is a statutory requirement and is delivered through mechanisms and funds that put flesh on the bones of a needs-based approach.

This takes into account the variation between places and is sensitive to the capacity for local authorities to raise revenue, their spending commitments, service demand and so on.

Lesson 5: Central-local communication

Formalised networks for local government and central government to convey priorities and communicate decision-making are fundamental for an effective system of local government. This does not exist in systems like Australia.

In Italy, there are several standing conferences which serve to maintain contact between authorities at various levels, build trust, and collaborate on policy challenges. Comprising representatives from Italian municipalities and the central government, the standing conference is designed to safeguard local government interests and autonomy. It also allows local governments to raise issues and negotiate with central government to find consensus around finance and administration.

The crucial outcome here is trust and understanding. Where these are lacking there is usually dysfunction in the system, as well as duplication of work, fragmentation and inefficiencies.

Potential for change?

As the research continues, we will ask new questions of the evidence. One thing the reports demonstrate is that systems can be reformed. The Italian example demonstrates the potential of financial autonomy and local government resilience, but this is the product of a relatively recent journey. At the same time, Japan went through a process of significant and widespread constitutional/financial/political change in the early 2000s.

There is certainly scope for change that our new reports on Australia and Ireland highlight. Structure, history and politics all have an important shaping function that can both constrain and open up potential for change.

There is great value in drawing lessons like this from around the world. And the outcome is more than academic. It should open space for looking afresh at the potential for local government to help us solve the big, global challenges, from climate change to anti-democratic movements.

Want even more insights?

Watch our latest fireside chat: LGIU’s Head of Research, Andrew Walker, sits down with Dr Kevin Muldoon-Smith, the lead researcher behind this international comparison project, to dig further into the details and the key takeaway lessons.

Navigate the interview here:

• 02:10 Short introduction to Kevin’s career and work on local government governance and finance issues
• 04:29 Built environment – the nexus of policy, politics and power
• 07:19 LGIU’s international local government finance project, a summary of what we know and how those structures help local gov respond to global challenges
• 15:27 – What does it take to enable change to take place in an existing system
• 19:43 – The LGIU’s upcoming paper on the local government finance system in Australia
• 25:35 – What do the different systems around the world mean for the experiences of residents and local government staff
• 30:15 – The role for academics and think tanks in promoting the argument for change

More from LGIU

Explore LGIU’s new Future Local Lab – a holistic programme of resources aimed at helping you to prepare for and respond to the emerging challenges facing local government everywhere.

Read the full reports from the Local Democracy Research Centre’s international funding system comparison project.

Check out LGIU’s Local Democracy Research Centre where we bring together experts, practitioners and academics to investigate the key challenges for local democracy around the world.