policy instrument. In general, the rationale for rate-capping is to restrict the spatial monopoly power of local government to raise property taxes as it sees fit. In the Australian local government milieu, at present only New South Wales (NSW) has a comprehensive rate-pegging regime, although the Northern Territory (NT) caps mining and pastoral rates. In NSW, rate-pegging remains contentious. For instance, the recent Independent Local Government Review Panel observed that ‘changes to the rating system and are essential to generate the revenues needed to fund infrastructure and services, and – equally as important – to make the system more equitable.’ The NSW Government promised to conduct a review of the rating system in response to the ILGRP recommendations. However, rate-capping has considerable populist appeal in Australia, as evidenced in the recent South Australian and Victorian state elections. It is thus important to empirically investigate the effects of rate-capping. Accordingly, in this paper we analyse the likely impact of rate-pegging on Victorian local government. Following the electoral victory of the Australian Party (ALP) in Victoria in late 2014, the new Minister for Local Government Natalie Hutchins announced that rate-capping - linked to the Consumer Price Index (CPI) - will be introduced into Victorian local government from the 2016/17 fiscal year onwards. Victorian Premier Daniel Andrews (2014) justified the introduction of rate-pegging on grounds that ‘councils will be forced to limit rate rises and detail where every dollar will be spent, because ratepayers deserve a fair go’, adding that ‘this policy also sends a clear message that we expect councils to keep their rates in line with CPI’. The timing of the Victorian Government’s foray into is not propitious. Not only has the Commonwealth Government announced a three-year freeze on Financial Assistance Grants (which represent a significant proportion of Victorian municipal income), but Victorian councils have also
from essential infrastructure to other projects’, especially outlays on ‘marginal services’ better provided by private firms. Two additional arguments for rate-pegging were advanced in the Independent Inquiry into the Financial Sustainability of NSW Government. Firstly, compared with other Australian local government systems, NSW rate-pegging had been effective in its primary aim of restraining increases in rates. Secondly, rate-pegging had obliged NSW councils to become more efficient, especially in limiting overheads and administrative costs. Dollery, and Byrnes proposed a public choice case for rate-capping in Australian local government. Drawing on Wittman, they argued that the ubiquity of ‘local government failure’ in Australia had simulated a demand by ratepayers for strict regulatory oversight of councils by state regulatory agencies, especially in financial matters. Accordingly, in NSW rate-capping, ‘“watchdog” institutions will form an agency relationship with local government voters to demystify fiscal illusion by monitoring council revenue and expenditure decisions on behalf of voters’. However, rate-pegging in NSW has also come under sharp criticism. For example, IPART has pinpointed four lines of attack: it ‘limits councils’ capacity to provide local services, it prevents ‘infrastructure backlogs from being addressed’, it has caused municipalities to impose ‘higher user pays charges which could result in pricing inequities, and it runs counter to ‘local democracy’. The NSW Local Government and Shires Association – now known as Local Government NSW – proposed a more general argument against rate-pegging. In particular, rate-capping has created ‘public expectations about maximum rate increases, placing political pressure on councils to stay within the limit and not seek special variations’. Similarly, rate-pegging enables NSW local councils to engage in politically expedient ‘blame