Deficit – the challenge for Local Government

Slowing revenues and increasing costs drive significant challenges for councils

Take-aways

• Local councils are grappling with rising costs, reduced State Government support, and rate caps, leading to growing financial shortfalls
• In 2023 many councils – including large ones – reported operating deficits, contributing to higher debt levels
• There is an urgent need for stronger financial discipline and long-term planning to address these challenges
• Key priorities include reviewing cost structures, aligning organisational focus with future goals, building internal efficiency capabilities, and implementing scalable, cost-effective initiatives

Council economics are in decline

Historically, councils have relied on surpluses as a means of providing the capital needed to invest back into community services and infrastructure. This income has been topped up by Government, and in many cases, developer contributions which can only be spent on the projects they were paid to support.

However, in recent years many councils have struggled to maintain financial sustainability. While councils received additional financial support during the Covid years, State Government funding has since declined, and rate caps have limited income growth, even as expenses continue to rise.

An aggregated view of council finances highlights a growing income shortfall (see below). ¹

Major councils are not immune

Even the largest councils, those with “own-revenue” turnover exceeding $200 million, are struggling (see figure below). An analysis of financial results and debt levels reveals that many of these councils are operating at a deficit while carrying high levels of debt. This trend poses significant risks to long-term financial health, underscoring the need for immediate action.

Indebtedness patterns show concerning trends

Over the past few years, council indebtedness has generally increased. While a small number of councils have reduced their levels of indebtedness (as defined by the Victorian Auditor General’s office) the majority have seen rising debt.

This pattern is not encouraging – council’s cannot continue deferring financial recovery indefinitely. At some stage, they will need to revert to bringing in a surplus to ensure that they can meet community commitments and asset-investment requirements.

A change of approach is needed

The reality facing councils today is one of financial discipline. To ensure they remain financially sustainable, councils will need to deploy a number of changes to help them weather the twin storm of rising costs and constrained revenue.

Some of the tactics council will need to examine include:

How SPP can help

SPP has extensive experience assisting organisations that are seeking to improve – through organisational focus, and an empathy for the need for public sector organisations to continue their “for purpose” mission.

Some of the skills we can bring to bear:

• A strong understanding of organisational cost levers;
• An appreciation of both community and for-purpose needs;
• Experience in helping organisations navigate towards a very focused future state;
• A strong project management DNA to assist organisations setting up their transformation capability

Please reach out to our team if you would like to discuss your Council’s drivers for transformation.

1. ”Own-sourced” revenue excludes government grants and developer contributions, and reflects untied income which the council can use at its discretion.
   **Surplus margin is calculated as (Own-sourced Revenue minus Expenses) / Own-sourced Revenue ↩︎