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SA Local Government Price Index (LGPI)

This page provides information on the LGPI, why it varies from the Consumer Price Index (CPI) and how the LGPI may be used by Local Government. It also contains a link to the South Australian Centre for Economic Studies website where you will find latest quarterly and annual results for the Local Government Price Index. To view or download the current LGPI results Click here

Note: this page can be bookmarked as  www.lga.sa.gov.au/goto/priceindex


Overview

Unlike most households, Local Councils spend a large proportion of their budgets on road construction materials; other construction costs (e.g. drains, environmental projects, footpaths etc); salaries for staff who provide services such as librarians and inspectors; contractors (such as for recycling and waste management), and on governance/administration. The prices of these items move in different ways to how average household prices move and this will be reflected in Council budgets, along with changes in standards, efficiency gains, expansion of services, cuts in services, new services and major projects.

To improve information available to Councils, the public and other interested parties, the South Australian Local Government Financial Management Group in conjunction with the Australian Bureau of Statistics (ABS) developed a Local Government Price Index (LGPI). Funding to support its development was made possible with the assistance of the Local Government Research and Development Scheme.

The LGPI is a reliable and independent measure of the inflationary effect on price changes in the South Australian Local Government sector. It is prepared and updated on a quarterly basis by the South Australian Centre for Economic Studies.

The index is similar in nature to the Consumer Price Index (CPI), however it represents the movements of prices associated with the goods and services consumed by local government in South Australia as opposed to the basket of goods and services consumed by the 'average metropolitan household'. Unlike the CPI, the LGPI is not an "official" ABS publication (the LGPI was prepared by the ABS up to the December quarter 2008).

The lack of relevance of CPI (which is a measure of household costs) as an indicator of changes of Council costs has been noted by many in the sector over a number of years. Despite the CPI not being relevant for the Local Government sector, many ratepayers and the media continue to use the CPI as a reference point when evaluating Council rate rises.


Local Government Price Index

What is it ?

The LGPI provides Councils with a useful reference regarding the inflationary effect of price changes of goods and services consumed by Local Government.

The index reflects, over time, the movement in prices for a number of cost components as well as the aggregate spend on these components. The index includes both operating and capital expenditure on a state average basis.

The model which is used to generate the LGPI can function at two levels:-

  • 1. providing indexes for the whole Local Government sector, based on aggregated annual financial data provided by the SA Local Government Grants Commission, and commodity weights determined from a survey of SA councils conducted by the SA Local Government Financial Management Group,
  • 2. providing indexes for individual Councils based on their financial data (both annual and quarterly expenses), and the commodity weights determined from the councils' spending patterns.

The LGPI should be treated as one of the many items referenced when developing annual budgets. The LGPI is a better reflection (compared to the CPI) of the changing cost (or price) of the inputs used by councils to deliver services. The LGPI is a valuable tool for Councils, the LGA and the sector as a whole and maybe a useful reference in a number of situations. For example, it would/could be relevant when:-

  • 1. Preparing annual budgets and developing long-term financial plans,
  • 2. Undertaking cost/benefit analysis on various projects,
  • 3. Seeking better funding from state/federal governments,
  • 4. Assisting with explaining to ratepayers (and the media) one of the reasons why Council rates have moved in different ways to CPI increases, and
  • 5. Analysing the underlying trend in past expenditure levels and thereby better forecasting the future cost of goods and services purchased by the sector.

It is important to note that the ABS price indexes used in the model are estimates, based on a sample of goods and services from a sample of retailers, wholesalers and employing organisations.  Therefore the Local Government Price Indexes which are calculated using ABS price indexes are also estimates.

What it is not?

It is important to note that the ABS price indexes used in the model are estimates, based on a sample of goods and services from a sample of retailers, wholesalers and employing organisations.

The LGPI is not an official ABS publication and should NOT be used for contract fixing purposes.

The LGPI does not represent a quasi-indication of how Council Rates should change in any given year. Ultimately, Council budgets (and rates) must be set in the context of a Council's Strategic Management Plan, Community Consultation, and decisions about the level of services and revenue required each year.

The LGPI addresses only changes in the costs of existing services and does not address issues such as required changes in standards (for example the Disability Discrimination Act's requirements to upgrade access to buildings or to the standards for bus stops/shelters). It also does not address needs for improved infrastructure maintenance, infrastructure backlogs, expansion of existing services (e.g. growth in the number of food premises requiring more food safety inspections which are only partly covered by fees) or new services or major projects. Equally it does not address efficiency gains or cuts to services.

When assessing the impact on communities and their capacity to pay Council rates, it is more appropriate to refer to various other indicators, such as 'average weekly earnings' (see below).

How is the LGPI calculated ?

The LGPI is calculated using a model developed by the ABS.

Data sources for the model includes:-

  • Local Government Grants Commission - Aggregated expenditure data
  • Australian Bureau of Statistics - Price Indexes
  • Finance Managers Group - Weights

The LGPI is compiled from a set, or a basket, of commodities (goods and services) that is deemed to be representative of the major spending categories of SA councils.  These commodities are weighted according to their relative contributions to the total spending on goods and services. The basket of commodities and their weights are said to reflect the spending behaviour for a given period.  While the basket of commodities is open to variation by the owners of the model, the weights will be measured each year, (commencing 2006-07), from data supplied by councils in the LGPI form of the Local Government Grants Commission's Supplementary Data to the Financial Statements (Supp.) forms.  The weights are calculated automatically in the LGPI model when the Supp. data is included.

From these weights, and from price indexes published by the ABS, a chained Laspeyres method is used to calculate price indexes for each commodity, and more importantly for total current expenditure, total capital expenditure, and total expenditure.  The latter three are usually referred to as LGPIs. The measure of the impact of commodity price changes is then expressed as a percentage change for the period of interest.

Thus the LGPIs provide a guide to the change in expenditure that would arise from the effects of price changes only, with spending behaviour remaining constant.  In other words, if Council's spending behaviour was exactly the same as for the previous period, how much extra would it cost due to price rises.

The cost components included in the model are:-

Operating:-

  • Salaries: & Wages - Managerial, Admin & Clerical, and labour.
  • Superannuation
  • Contractual Services (Excluding Waste Management)
  • Waste Management
  • Electricity
  • Gas
  • Water & Sewerage
  • Fuel
  • Motor Vehicle Expenses
  • Printing, publishing & recorded media
  • Other Operating Expenses
  • Insurance
  • Property Expenses
  • Consultancy Expenses, and
  • Telecommunications Expenses

Capital:-

  • Construction of Buildings
  • Construction of Infrastructure
  • Purchase of Plant & Equipment


When will the index be available ?

As the LGPI relies on the publication of a number of ABS indexes, each quarter's LGPI will be published approximately eight weeks after the end of the quarter as follows:-

  • September quarter - late November
  • December quarter - late February
  • March quarter - late May
  • June quarter - late August.

To view or download the current LGPI Click Here


Consumer Price Index

The CPI measures quarterly historic changes in the cost of a typical metropolitan household 'basket' of goods and services, including a wide range of goods and services in ten categories; food, alcohol, tobacco, clothing, housing, household furnishings and services, health, transport, communication, recreation and education (further information on the CPI is available on the ABS website http://www.abs.gov.au/ ).

Most government personal benefit payments are linked to CPI and a significant number of ratepayers are on such benefits. This proportion will vary Council to Council. Again, CPI is not a complete measure of the capacity of this group as it does not take into account other benefits (e.g. additional State electricity concessions) and the fact that some benefit recipients receive other income and may be affected by changes to income tax rates.


Ratepayer Capacity

(refer LGA Circular 24.7)

It has been noted that Councils have ratepayers of three broad types:

  • Families with salary earners and individual salary earners
  • Businesses, Primary Producers and organisations
  • Those on some form of government benefit payments

Different indicators may assist Councils in making judgements regarding capacities of those in each group. This may assist in judgements regarding the adoption of the budget and the overall level of rates revenue as well as mechanisms which deal with the distribution of rates among ratepayers (including such options as differentials, caps, rebates and remissions).

It must also be remembered that the actual changes in capacity in such groups will vary across the State as will the proportion of each group within each Council area.

Average Weekly Earnings

In most Council areas, Average Weekly Earnings will be the most relevant indicator in terms of understanding the capacity of the majority of ratepayers. This is not a perfect indicator for this purpose - for example it does not factor in the income tax rate changes which may occur from time to time which will affect the capacity of such ratepayers.

Average Weekly Earnings, Australia - http://www.abs.gov.au/

Gross State Product (GSP)

The overall rate of State economic growth is known as Gross State Product (GSP). This is the broadest measure of State economic activity.

As an example, GSP was estimated to be 3.0 per cent in 2005-06, up from 2.6 per cent in 2004-05. In 2006-07 economic growth was forecast to be 2.5 per cent.  GSP growth was expected to be affected by predicted lower crop output resulting from poor winter rainfall.  A slowing in housing construction was also predicted.  Employment growth was forecast to be 1.5 per cent for 2006-07. In the years 2007-08 to 2009-10 economic growth was projected to be 2.75 per cent per annum.

Source: State Budget 2006/07 ( http://www.statebudget.sa.gov.au/)

State Government annual indexation of fees and charges

The State Government Budget 2006-07 indicates another example in relation to variations of pricing policies, whereby the annual indexation of fees and charges (revenue) was set at 3.8 per cent reflecting the average increase in the cost of providing the relevant services (http://www.statebudget.sa.gov.au/). It is understood that this figure is established by incorporating a weighting for CPI and a weighing for salary movements reflecting the major cost factor in provision of State services. It should be noted that this indexation figure is not applied to State taxation (such as land or payroll taxes) but to user-pays service fees.

For further information regarding the LGPI, please contact David Hitchcock - Assistant Director, Environment & Development on 8224 2052 or email david.hitchcock@lga.sa.gov.au

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