Balancing Municipal Budgets

Kevin Cox
Kevin Cox
Jul 24, 2017 · 2 min read

Local Governments throughout the world are suffering from debt repayments. They find it difficult to raise rates to pay for local infrastructure. Communities demand infrastructure and municipalities take out loans as a way to do it without the immediate pain of paying for it. Communities go into debt and they are on the debt treadmill. They pay a lot of interest with little or no reduction in their debt.

There is a solution as described in this letter to the editor to my local paper.

Letter to the Canberra Times

Today I received my rates invoice. I was happy to pay it as the services my family receives in municipal services are good value. I was also pleased that I can get a discount of 1% if I pay within a month.

I would be even happier if the ACT government allowed me to pay my rates years in advance and gave me an accumulating inflation adjusted 6% per year rates discount. The government could use my prepayments to repay part of their existing loans which appear to average 5% compound per year. If the government allowed rate payers the option of prepaying their rates, it can be the equivalent to the rate payer receiving a 6% inflation adjusted annuity. The best the money market can offer me is about 2% fixed term inflation adjusted annuity with high entry and exit fees.

Prepayment of rates would improve the government bottom line as, over the long term, a 5% compound interest rate costs much more than a 6% non-compounding discount. It would improve the ACT credit rating as the government could have no debts except to ratepayers. The ACT budget would be in balance with the removal of capital repayments and interest charges.

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