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Represents a pioneering attempt to comprehensively explore and assess financial sustainability in Australian local government. While the emphasis falls squarely on Australian local government, Funding the Future draws on extensively on both the international conceptual and empirical literature

The multi-faceted problem of local government finance has attracted increasing attention in the new millennium. The reasons for the renewed interest in this thorny question are comparatively straightforward. In the first place, for the past two decades all public sector institutions have been profoundly affected by the twin revolutions simultaneously sweeping the world – the globalization of the international economy and the information revolution wrought by the computer age – and local government is no exception. Not only have these inexorable forces had dramatic implications for the structure of government as a whole, and relationships between the different tiers of government, but also for service provision and public finance, including local public finance. Secondly, substantially heightened demands on local government, together with limited access to adequate funding, have seen the genesis of a deepening crisis in the financial sustainability of local government entities.

The vigorous debate surrounding local government amalgamation in Australia remains unresolved. In an attempt to break the current stalemate Percy Allan (2001) has proposed a model of 'virtual local government' that seeks to combine the service appropriateness and effectiveness purportedly associated with demographically small councils with the service efficiency of large municipalities. This paper attempts to place his model in the context of the literature on the theory of public sector policy reform. It then goes on to examine virtual local government in the light of new institutional economics, public choice theory and the characteristics of Australian local government.

ABSTRACTThe development of New Institutional Economics (NIE), and especially its core components agency theory, property rights economics and transaction costs economics, appears to have provided policy analysts with powerful tools for the analysis of public sector organisational behaviour and design. In particular, the adoption by NIE of the concept of "bounded rationality" and its employment of a "comparative institutions" approach to the question of economic efficiency seems especially applicable to public bureaucracies. However, NIE is difficult to define with any degree of precision and may well possess an inherent bias towards normative policy prescription favouring market solutions to public sector problems.