Will some local authorities go bankrupt in 2010?

Nat O'Connor: It has been suggested today that property tax will not be introduced any time soon: “Ministers believe that the introduction of a property tax would prove politically impossible in the current climate”.

It may be political suicide for the Government to introduce property tax, but if they don’t do so, they had better have a Plan B for the funding of local government.

The Tax Commission "envisage that the annual property tax will be an important component in the future financing of local government".

There is a broad range of things that local authorities do, and we have a tendency to take them for granted: drinking water, sewerage, waste collection, road maintenance, social housing, recreation, and much more. Some of their functions, like planning, can have a massive impact on the social and economic fabric of the area.

Since the introduction of the Local Government Fund in 1999, the system of funding for these services has not worked. Every year there is a large gap between what local authorities can raise in revenue and what they need to spend in order to fulfil their roles and functions. An Indecon report in 2005 made the huge gap (estimated to be up to €1.5 billion by 2010) abundantly clear and called for more mechanisms to raise local revenue.

In 2009, the Minister of the Environment, Heritage and Local Government signed off on over €935 million in discretionary General Purpose Grants to local authorities to “meet the gap between the cost to them of providing a reasonable level of day-to-day services and the income they obtain from other sources”. It is important to realise that this discretionary grant is on top of any planned, regular Government grants given to local authorities to carry out various functions (such as the capital for building social housing). In other words, the Minister has been plugging the local funding gap every year since the current funding system was introduced.

It is highly likely that as the state runs out of money, one of the first casualties will be the General Purpose Grant. This means a general degradation of municipal services and local areas. It could also mean increased pressure on commercial rate payers, who continue to be unhappy that they are heavily leaned on by local authorities for revenue, in the absence of other local taxation.

The Government failed to act on local government funding during the boom years and it has only itself to blame if the funding mechanism for local authorities does not work.

In Ireland, all politics really is local politics. So a failure to address local government funding as part of the current crisis will come back to haunt the central government.