Local Government Cost Index
2012-13
Municipal Association of Victoria
June 2012
6
© Copyright Municipal Association of Victoria, 2012.
The Municipal Association of Victoria is the owner of the copyright in the publication
Local Government Cost Index 2012-13.
No part of this publication may be reproduced, stored or transmitted in any form or by
any means without the prior permission in writing from the Municipal Association of
Victoria.
All requests to reproduce, store or transmit material contained in the publication
should be addressed to Owen Harvey-Beavis on 9667 5584.
The MAV can provide this publication in an alternative format upon request, including
large print, Braille and audio.
Table of Contents
1
Introduction ............................................................................................................... 3
2
Interpreting the Local Government Cost Index .......................................................... 3
3
Methodology ............................................................................................................. 4
3.1 Apportionment of costs .......................................................................................... 4
3.2 Effect of the carbon price ....................................................................................... 5
4
2
Results...................................................................................................................... 6
MAV Cost Index Report 2012-13
1 Introduction
The Municipal Association of Victoria (MAV) has developed a broad forecast in the
movement of councils’ costs, the Local Government Cost Index (LGCI).
This index applies forecasted costs associated with wages and construction costs
broadly incurred by councils. The index has previously weighted wage costs at 80
per cent and construction costs at 20 per cent and this paper continues with this
approach.
For 2012-13, the index also includes a component reflecting non-construction related
cost increases resulting from the introduction of the carbon price on 1 July 2012. This
is a one-off change in the methodology.
For 2012-13, the MAV estimates that the LGCI is 3.9 per cent.
2 Interpreting the Local Government Cost Index
A cost index reflects the movement in input costs for a particular industry or sector.
For example, the Consumer Price Index – which measures the change in prices
associated with household expenditure – is a commonly used price index for general
consumption.
For the LGCI, this means that to provide the same services at the same quality to the
same number of people as the previous year, council costs are forecast to increase
by 3.9 per cent.
Any additional service expansion such as through a consequence of population
growth or improved service quality will result in additional costs.
It’s also important to note that a movement in costs does not necessarily equate to a
change in council rates. Many factors influence council rates, the most important
being the extent to which councils rely on external sources of funding and the relative
price movements in these other revenue sources. Councils strongly reliant on grants
which escalate at a pace below the LGCI will necessarily face rate increases above
the rate of the Cost Index or will be required to reduce their quality or level of
services.
Other factors influencing the movement in council rates over and above a cost index
include Victorian Government levies, such as the landfill levy and the fire services
levy; new responsibilities and functions required through Victorian Government
legislation or regulation; and decisions by councils to expand the number of services
they provide to the community.
The LGCI is a forecast of costs and should be only used with this limitation clearly
identified. Input data are sourced from reputable economic forecasters and apply to
the general economy, not the local government industry. Further, given the difficulty
in accurately forecasting economic performance the LGCI should be used with some
caution.
It should be noted that this figure is based on the expenditure pattern of the whole
Victorian local government sector and specific councils are likely to face differing cost
structures with a consequential difference in their cost increases.
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MAV Cost Index Report 2012-13
3 Methodology
3.1
Apportionment of costs
The MAV has continued with the previous methodology used in the calculation of the
LGCI.
This develops a weighted index encompassing both employment and construction
price movements. The proportion of council expenditure used for construction
purposes has remained stable at 20 per cent over previous periods. For this report, a
similar figure was adopted.
The remaining 80 per cent weighting is based on wage price movements. While
council employment costs consume a lower proportion of the sector’s expenditure,
this approach has been adopted for the following reasons:



Most council services are employee-based and the sector extensively uses
contracted services. As such, many of the ‘other’ costs incurred by councils
are wage based
Council costs per head of population have at least tracked average weekly
earnings, suggesting that historical movements in the sector’s cost are (at
least) correlated with broader wage movements
Identifying alternative price indexes would require detailed breakdown of
council costs and aligning these to their appropriate cost forecast. Given the
results are based on uncertain forecast cost estimates, this would result in a
cumbersome model that is likely to be unreliable and rely on too many
assumptions.
As such, the MAV supports the continued use of a price index that is simple and
easily understood.
In interpreting the results, it is important to note that wage movements per employee
in the sector have broadly matched average weekly earnings (AWE) rather than the
lower wage price index (WPI). The former measures average earnings and therefore
reflects structural shifts in the economy as lower skilled jobs are replaced by higher
skilled jobs (and vice versa). The latter considers the wage movements for specific
positions within the economy. AWE would be the preferable wage cost escalator in
the event that the structural shifts in councils’ employee base matched the broader
economy. If the skill and job mix within councils is relatively static, then a WPI index
would be more appropriate.
The average of the Victorian Government and Australian Government wage
forecasts are used in the calculation of the cost movements.
As such, the wage forecasts used in the table can be considered conservative.
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MAV Cost Index Report 2012-13
3.2
Effect of the carbon price
The carbon price is expected to have a material effect on cost movements for local
government.
The MAV has previously undertaken analysis (MAV 2012) of the major cost
implication of the carbon price on four areas of council activities:




waste management
construction
stationary fuel (electricity and gas usage), and
fuel
The analysis indicated that the median increase in costs associated with the carbon
price across the 38 surveyed councils is forecast at 0.8 per cent of total expenditure.
No allowance was made for costs except for those identified above. A majority of the
remaining council costs are associated with wages and the Australian Treasury
modelling does not expect any additional wage inflation as a result of the carbon
price.
Of the four cost areas identified above, carbon price costs associated with
construction activity are assumed to be included within the construction price index.
As such, the LGCI does not require a specific allowance for the increase related to
construction.
Previous MAV analysis estimated carbon price construction costs at 0.23 per cent of
total expenditure. As the total estimated increase related to the carbon price is 0.8
per cent, the remaining increase in costs associated with fuel, waste management
and stationary energy result in an increase of 0.57 per cent. This latter figure will be
incorporated into the index.
However, caution should be exercised in analysing these data. The financial
implications of the carbon price was shown to vary significantly between councils
depending on their reliance on green electricity, whether their receiving landfill for
municipal waste is a liable entity, and whether the landfill facility has good gas
capture facilities. Individual council cost increases are expected to depend on their
relative exposure to the carbon price.
Councils that participated in the MAV survey should refer to their results in
establishing the cost implications of the carbon price.
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MAV Cost Index Report 2012-13
4 Results
Taken together, the LGCI is forecast to increase by 3.9 per cent in 2012-13. This
includes a one-off carbon price movement of 0.57 per cent.
This represents a slight increase against the 2011-12 year, which can be wholly
attributed to the carbon price.
Table 1: Cost movements for 2010-11 to 2012-13 for wages and construction (per cent)
2010-11
Commonwealth WPI
State WPI
Average WPI
Construction prices
(Construction
Forecasting Council) (a)
LGCI (b)
Carbon price
LGCI (c)
2011-12
2012-13
3.80
3.80
3.80
2.30
3.50
3.50
3.50
2.25
3.75
3.00
3.38
3.15
3.50
0.00
3.50
3.25
0.00
3.25
3.33
0.57
3.90
Notes: (a) In previous years, construction price movements have been divided into non-residential and
engineering price indexes. No disaggregated construction price data are now available and hence the
above construction cost movements are for all construction activity, including engineering, nonresidential and residential. (b) Excludes the effect of the carbon price. (c) Includes the effect of the
carbon price
Source: Australian Budget 2012-13; Victorian Budget 2012-13; Construction Forecasting Council
construction price index data; Financial Implications of the Carbon Price on Local Government, MAV
2012.
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MAV Cost Index Report 2012-13