Analysis: In the run-up to local elections, what services do local authorities provide, how are they funded, and what is their financial position?
By Gerard Turley and Stephen McNena, University of Galway
The elections to our local councils will be held on Friday 7th of June. Although voters have many questions about local government, from an economics perspective much of the knowledge can be distilled into three fundamental issues. One, what services do local authorities provide? Two, how is this funded? Three, how do local authorities perform financially? Respectively, these are the functions, funding, and finances of local councils, or simply the three Fs.
Functions
The first question relates to the responsibilities of local councils as providers of public services. Known as the expenditure assignment question, it addresses the delivery of services by local government as compared to central government. According to economic theory, local governments should provide services where benefits accrue primarily to local residents.
That is the case in Ireland and elsewhere, where local government provides municipal services such as local roads and street cleaning, library and fire services, parks and playgrounds, planning and local development. However, unlike local government in many other countries, our local authorities have virtually no role in education, health, or social care. These functions are all assigned to central government, making local government in Ireland focused mainly on 'physical-related' services as opposed to ‘person-related’ services.
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It also makes for a local government system that has currently fewer powers and less autonomy than before (e.g. water services, administration of education grants), and certainly less than most other local governments in EU member states. For these reasons, commentators such as David McWilliams, Fintan O’ Toole, and Diarmaid Ferriter have referred to local government in Ireland in disparaging terms, using language such as ‘stupid’ and ‘useless’. Of course, the problem is not with local government per se, but with central government and its desire to retain power despite the efficiency gains that can accrue from decentralisation.
According to the 2023 local council budgets, the top ten spending items by the local authorities nationwide are, in decreasing order, 1. housing supports (Housing Assistance Payment and Rental Accommodation Scheme) 2. maintenance of local and regional roads 3. fire service 4. homeless service 5. maintenance of local authority housing 6. water supply and waste water treatment 7. leisure operations 8. library & archival service 9. sports and arts programmes 10. planning and development management. These account for 66% of total current spending by the 31 local authorities, with the top two items accounting for one third of spending.
Funding
Once functions are assigned to local government, the next question is the funding of these expenditures. Known as the revenue assignment question, it is said that funding should follow function, and not the reverse. Unlike capital expenditure (e.g. building of local roads or social housing) which can be funded from capital grants or borrowing from a state agency or capital markets, there are two broad sources for funding current expenditure.
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They are own-source revenues where the local authority has direct control, and funding from central government using grants. In turn, own-source revenue is in the form of charges/fees for a good or service (e.g. planning fees, car parking charges) or local taxes. Good local taxes are taxes that are relatively immobile, stable, visible, and borne mainly by local residents.
As property taxes are considered an ideal local tax, local councils worldwide are often funded – albeit only partially - by taxes on commercial and residential properties. Ireland is no different, with commercial rates and the local property tax (LPT).
Although there are differences in the income shares of local authorities’ funding, nationwide the breakdown in 2023 was as follows: central government grants 42%, commercial rates 27%, charges/fees 24%, and the LPT 7%, with central government grants accounting for an increasingly growing share of council income. For more details on council income and spending, see our website www.localauthorityfinances.com
Finances
The third question relates to the financial performance of the local council, in terms of income and expenditure, its balance sheet and its overall financial position. Related to the borrowing and debt question in the intergovernmental finance literature, local governments are treated differently than central government. More specifically, due to the nature of subnational (local or regional) government, local authorities in Ireland are statutorily required to balance their adopted budgets. Furthermore, any actual borrowing must be approved by the respective Minister.
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Due to these reasons, combined with oversight by the National Oversight and Audit Commission (NOAC) but also the narrow remit of the local authorities, the finances of Irish local authorities are in reasonably good shape, with some in better financial health than others. Contrast this to the fiscal crisis in 2008/09 when the perilous state of the country’s public finances at the central government level ultimately led to the €85bn international bailout in 2010. More recently, in England a number of councils in financial distress, including Croydon, Nottingham, Woking, and Birmingham, in issuing Section 114 notices, have effectively declared bankruptcy.
What is similar to central government is the need for local governments to be financially prudent and fiscally transparent. After all, it is the elected councillors and not the appointed executive that are responsible for the adoption of the council budget.
One positive development in this space is the election of a Directly Elected Mayor (DEM) for Limerick. For those who support more decentralisation and greater autonomy for our local governments, this could be the first step in designing a system of intergovernmental relations that better allows for the preferences of local residents and supports the importance of place. It is now up to the voters to decide.
Dr Gerard Turley is a lecturer at the J.E. Cairnes School of Business and Economics at the University of Galway. He is the co-manager of the Local Authority Finances website. Stephen McNena is a lecturer in Economics at the J.E. Cairnes School of Business and Economics and Whitaker Institute at the University of Galway.
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The views expressed here are those of the author and do not represent or reflect the views of RTÉ
