SPECIFIC PURPOSE PAYMENTS

Nature and Purpose

SPPs are made under Section 96 of the Constitution, whereby the Parliament may grant financial assistance to any State on such terms and conditions as it sees fit. There are three types of SPPs:

payments 'to' State governments - these are made direct to State governments for funding expenditures by the States;
payments 'through' State governments - payments to State governments to be passed on to other bodies or individuals. The main payments in this category relate to higher education, non-government schools and local government general purpose assistance; and
a small number of SPPs made direct to local government.

Most SPPs are paid to the States on the condition that policy objectives set by the Commonwealth, or national policy objectives agreed between the Commonwealth and the States, are met. It is because of the conditions attached to SPPs that they are sometimes called 'tied grants'.

The conditions imposed on individual SPPs vary considerably in both degree and form. They may involve:

a requirement that the payment be expended for a specified activity, with varying degrees of budgetary discretion available to the States according to conditions placed on payments; or
general policy requirements on States (for example, that the States provide free public hospital treatment to Medicare patients as a condition of receiving hospital funding grants).

The Commonwealth can attach conditions to SPPs to reflect policy objectives in programme areas often including requirements for certain levels of spending by the States. The conditions attached to SPPs can thus limit the ability of State governments to set their own spending priorities.

The balance to be set between the Commonwealth's policy objectives and the desirability of maximising the States' flexibility on SPPs is not easily resolved and depends on the circumstances pertaining to particular areas of expenditure and policy. For example, the extent to which an SPP may restrict State budget flexibility depends on the degree to which States would have undertaken the expenditure concerned anyway, had they received the same level of funding through general purpose payments. For some large State expenditure items funded through SPPs, it could be expected that all of these funds would be directed to the same purpose regardless of the form of funding.

SPPs that are paid 'through' the States account for around 40 per cent of total SPPs. These SPPs have a minimal impact on State budgets as they are essentially Commonwealth own-purpose outlays, with the States acting as the Commonwealth's agent.

Some SPPs include conditions which influence State own-purpose outlays through the use of 'matching' funding requirements. These conditions are commonly expressed in terms of inputs (that is expenditure levels) rather than outcomes. These arrangements have been questioned on the grounds that they may reduce the incentive for the States to pursue efficiency measures because a State cannot direct productivity gains to other expenditure priorities or use them to improve its fiscal position. Nevertheless, expenditure is often used as a proxy for a performance indicator because of the difficulty inherent in defining and agreeing an output or outcome indicator for a programme.

Trends in Level and Composition of Specific Purpose Payments

In 1997-98, SPPs are estimated to total around $18.1 billion, which represents a decrease of $809 million, or 4.3 per cent, on 1996-97. However, this fall is distorted by very large extraordinary SPPs associated with the Guns Buyback Scheme ($329 million in 1996-97 and $167 million in 1997-98), the Petroleum Resource Rent Tax settlement with Victoria ($556 million in 1996-97) and deductions from Commonwealth State Housing Agreement funding for State fiscal contributions ($142 million in 1996-97). After abstracting from these items, the decline in SPPs in 1997-98 is $235 million or 1.3 per cent and is mainly due to non-policy influences. For example, payments of debt redemption assistance are expected to fall by $158 million reflecting changes in the volume of debt maturing on behalf of the States and the inclusion in the 1996-97 payment of compensation relating to optional early debt repayments by some States. After allowing for the fall in debt redemption assistance, total SPPs are expected to decline by $77 million, or 0.4 per cent, in 1997-98.

Table 19 shows estimated SPPs for 1996-97 and 1997-98.

Table 19: SPPs 'To' and 'Through' the States and Territories, 1993-94 to 1997-98 ($million)

(a) Estimates.

At the 1996 Premiers' Conference the Commonwealth advised the States that there would be a reduction in SPPs in 1996-97 of no more than 3 per cent against the forward estimates as a result of the budget processes in that year. In the event, the reduction in SPPs to the States was 2.5 per cent against the forward estimates. At the 1997 Premiers' Conference the Commonwealth advised the States that the reduction in SPPs through the budget processes would be a maximum of 1.3 per cent against the forward estimates in 1997-98. The measures contained in the Budget resulted in a reduction in SPPs to the States of $49 million, or around 0.5 per cent, against the forward estimates in 1997-98.

SPPs are expected to account for around 52 per cent of total gross payments to the States in 1997-98. SPPs 'to' the States are expected to total $10.9 billion or 31 per cent of total gross payments, while SPPs 'through' the States are expected to be $7.2 billion or 21 per cent of the total. Chart 7 shows trends in SPPs as a proportion of total gross payments to the States since 1977-78, including trends in payments 'to' and 'through' the States. The chart contains adjustments for a number of classification changes and large one-off factors so as to allow comparisons on a consistent basis. [2]

Chart 7: Specific Purpose Payments as a Percentage of Total Gross Payments to the States, 1977-78 to 1997-98

Chart 7 shows that SPPs have increased as a percentage of total Commonwealth payments to the States by around 7 percentage points over the last twenty years. This reflects, in part, the relatively generous escalation arrangements which have applied to SPPs compared to general purpose payments. Although the escalation arrangements for SPPs are diverse, a number have had agreed escalation formulae based, for example, on population growth and price movements.

Chart 8 illustrates the composition of major specific purpose programmes ('to' and 'through' the States) in 1997-98. Education and health account for the great bulk of payments.

Chart 8: Composition of Estimated Specific Purpose Payments 'To'
and 'Through' the States, 1997-98

More detailed information on SPPs including State splits for 1997-98 and data on repayments, advances and interest is contained in the Appendix.