Document Index Budget Paper 3

Chapter III: Commonwealth Payments to the
States and Territories

• General Revenue Assistance
  • Level of Financial Assistance Grants
  • Distribution of Financial Assistance Grants
  • National Competition Payments
  • Special Revenue Assistance
  • Changes in the Distribution of General Revenue Assistance
• Revenue Replacement Payments
• General Purpose Assistance to Local Government
• Specific Purpose Payments
  • Nature and Purpose
  • Trends in Level and Composition of Specific Purpose Payments

This chapter discusses trends in Commonwealth payments to the States and outlines the arrangements for payments to the States and local government in 1998-99 and 1999-2000.

Table 6 shows estimated Commonwealth total payments to the States after allowing for State fiscal contributions to the Commonwealth and payments associated with the Gun Buyback Scheme.

• Total payments to the States are estimated to be $34.8 billion in 1999-2000. General revenue assistance is expected to account for around 51 per cent of total payments to the States and SPPs for around 49 per cent.

Total payments are estimated to increase by $1,503.8 million or 4.5 per cent in nominal terms and 2.5 per cent in real terms in 1999-2000.

Table 6: Commonwealth Payments to the States, 1998-99 and 1999-2000 ($million, estimated)

1. Data excludes SPPs direct to local government authorities, deductions for State fiscal contributions and the Gun Buyback Scheme.
   
2. 1989-90 prices, based on forecast CPI growth.

Table 7 shows estimated total Commonwealth payments for each State in 1998-99 and 1999-2000.

In net terms, Commonwealth payments to the States are estimated to be $34.4 billion in 1999-2000, an increase of $2,337.0 million or 7.3 per cent on 1998-99. The estimated net increase incorporates SPPs direct to local government authorities ($241.0 million in 1998-99 and $258.3 million in 1999-2000) and total repayments to the Commonwealth by the States of $1,549.4 million in 1998-99 and $733.5 million in 1999-2000.

Table 7: Total Commonwealth Payments to the States, 1998-99 and 1999-2000 ($million, estimated)

1. Data exclude SPPs direct to local government authorities, deductions for State fiscal contributions in 1998-99 and SPPs for the Gun Buyback Scheme in 1998-99.
   
2. Payments `through' are payments that are made to the States to be passed on to local government, other bodies and individuals.

GENERAL REVENUE ASSISTANCE

In 1999-2000, general revenue assistance to the States will take the form of FAGs, SRA and NCPs. In contrast to most SPPs, general revenue assistance is `untied', that is, it is not required to be spent by the States in a specified area.

General revenue assistance is estimated to amount to $17.7 billion in 1999-2000, an increase of 4.2 per cent on the previous year. The estimates of general revenue assistance for 1999-2000 have varied from those presented at the 1999 Premiers' Conference in line with movements in the CPI.

• FAGs will account for nearly all of general revenue assistance in 1999-2000. The level of FAGs is indexed to movements in the CPI in the year to the March quarter and in accordance with projections of the population as at 31 December each year. A State's receipt of the per capita element of FAGs indexation is conditional upon compliance with the Agreement to Implement the National Competition Policy and Related Reforms.
• SRA in 1999-2000 will comprise payments to the Australian Capital Territory for transitional allowances and special fiscal needs.
• NCPs are provided in accordance with the Agreement to Implement the National Competition Policy and Related Reforms. A State's receipt of NCPs is conditional on compliance with the obligations of the Agreement.

Table 8 sets out general revenue assistance by type of payment and State for the period 1995-96 to 1999-2000.

Table 8: General Revenue Assistance to the States, 1995-96 to 1999-2000 ($million)

1. The table shows the gross level of FAGs to the States, without deductions for State fiscal contributions.
   
2. Estimates - final figures (except for transitional allowances and special fiscal needs for the ACT) will depend on the actual increase in the CPI in the four quarters to March 1999 and March 2000, and the Statistician's determination of the population as at 31 December 1998 and 31 December 1999. Final figures for FAGs will also depend on final figures for HCGs.
   
3. In 1997-98, these payments were absorbed into FAGs.

Table 9 sets out general revenue assistance by type of payment for the period 1998-99 to 2002-03.

Table 9: General Revenue Assistance to the States, 1998-99 to 2002-03 ($million, estimated)

1. See Chapter I for more information on this element of A New Tax System.
   
2. The States will receive interest-free loans, rather than grants in 2000-01, repayable the following year. The total of these loans is estimated to be $1,119 million.

Level of Financial Assistance Grants

At the 1999 Premiers' Conference, the Commonwealth maintained total FAGs for 1999-2000 in real per capita terms. In 1999-2000, FAGs to the States are expected to total $17,267.2 million with the real terms adjustment and the per capita adjustment estimated to contribute $293.2 million and $201.5 million respectively. Final amounts will depend on the actual increase in the CPI for the four quarters to March 1999 and March 2000, the Australian Statistician's determination of the population at 31 December 1998 and 31 December 1999 and final figures for HCGs.

The 1996 Premiers' Conference agreed that the untied funds, which were previously paid to the States as identified road grants, would be absorbed into the FAGs pool from 1997-98. Table 10 shows the equivalent amount of each State's FAGs in 1999-2000.

Table 10: Addition to FAGs from the Absorption of Untied Identified Road Grants, 1999-2000 ($million, estimated)

Distribution of Financial Assistance Grants

The distribution of FAGs among the States is based on the States' populations as at 31 December of each year and the corrected per capita relativities assessed by the Commonwealth Grants Commission (CGC) in the Report on General Revenue Grant Relativities 1999. (The CGC issued corrected relativities on 29 March 1999, which took into account revisions to State revenues.)

The per capita relativities are applied to the State populations in order to arrive at a weighted population share for each State. A State's FAGs are equal to its weighted population share of the combined pool of FAGs and unquarantined HCGs, less the unquarantined HCGs it receives.

Tables 11 and 12 set out the estimated distribution of FAGs for 1998-99 and 1999-2000, respectively.

The redistribution of the combined pool of FAGs and HCGs among the States implied by the 1999 relativities reflects a number of broad influences.

• Changes in States' grant shares arise from routine updating of the CGC's assessments, incorporating revisions and corrections to data and the advancement of the review period to replace 1992-93 data with 1997-98 data. These adjustments can affect both the composition of the CGC's standard budget and the assessment of revenue raising and expenditure disabilities by the CGC.
• Changes in States' grant shares also arise as a result of the CGC's five year review of the methodology underlying the HFE process. In particular, the new arrangements affect the structure of the CGC's standard budget and its assessments of disabilities (see Box 1 in Chapter II of this Paper).

Table 11: Financial Assistance Grants to the States, 1998-99 (estimated)

1. The projected population as at 31 December 1998 has been prepared by the ABS on the basis of assumptions agreed to by Treasury. These projections are subject to revision.
   
2. The per capita relativities adopted at the 1998 Premiers' Conference.
   
3. For ease of presentation, weighted population shares rounded to one decimal place are shown. However, in calculating row (5) unrounded shares are used in accordance with the States Grants (General  Purposes) Act 1994.
   
4. Estimated unquarantined health care grants (HCGs).
   
5. The table shows the gross level of FAGs to the States. The actual payments made to some States will be reduced by the amount of their fiscal contribution to the Commonwealth.
   

1. The projected population as at 31 December 1999 has been prepared by the ABS on the basis of assumptions agreed to by Treasury. These projections are subject to revision.
   
2. The corrected per capita relativities for 1999-2000 as adopted at the 1999 Premiers' Conference.
   
3. For ease of presentation, weighted population shares rounded to one decimal place are shown. However, in calculating row (5) unrounded shares are used in accordance with the States Grants (General Purposes) Act 1994.
   
4. Estimated unquarantined health care grants (HCGs).
   
   

• New South Wales gained the largest increase in grant share, benefiting most from the introduction of an assessment of depreciation costs.
• Victoria's decline in grant share is due mainly to the effects of data and methodology changes, although the impact was partly offset by a fall in Victoria's revenue raising capacity.
• The decline in Western Australia's grant share was largely due to strong growth in its revenue raising capacity relative to the other States.
• The decline in Queensland's grant share is largely attributable to the effects of data and methodology changes affecting revenue and expenditure assessments, although the effect is partly offset by a decline in their revenue raising capacity.
• The ACT became a recipient under the HFE process due to changes in method and data, including the CGC's decision to include a number of additional national capital factors and to adjust the payroll tax base to exclude the defence forces.

Further information is provided in Table 13 below and in the CGC's Report on General Revenue Grant Relativities 1999.

Table 13: Effects of the Commonwealth Grants Commission's 1999 Review Relativities ($million)^(a)(b)

1. From revised Table No. 5-6 (incorporating changes to the assessment of Land Revenue, Stamp Duty on Conveyances and Financial Transactions Taxes) of the CGC's Report on General Revenue Grant Relativities 1999.
   
2. Based on estimates of the level and distribution of the 1998-99 combined pool of FAGs and unquarantined HCGs.

National Competition Payments

At the April 1995 Council of Australian Governments meeting, the Commonwealth and the States concluded the Agreement to Implement the National Competition Policy and Related Reforms. Under the Agreement the States are eligible for three tranches of ongoing NCPs. The NCPs commenced in July 1997 at an annual level of $200 million and are scheduled to increase to $400 million and $600 million in July 1999 and July 2001 respectively, in 1994-95 prices. The Agreement specifies that the NCPs be paid quarterly and be distributed to the States on an equal per capita basis.

Each State's NCPs are subject to the State making satisfactory progress with the implementation of specified reform conditions in the Agreement. Prior to the scheduled payment of NCPs in 1999-2000, the National Competition Council (NCC) will assess whether each State has met these conditions and provide a report for consideration by the Commonwealth.

Subject to satisfactory progress in the areas to be reviewed by the NCC, the Commonwealth will provide the States with NCPs estimated to total $439.1 million in 1999-2000. Table 14 shows the allocation of NCPs in 1998-99 and 1999-2000.

Table 14: National Competition Payments, 1998-99 and 1999-2000 ($million, estimated)^(a)

1. Estimates. Figures will depend on actual increases in the CPI and the Statistician's determination of population as at 31 December 1998 and 31 December 1999.

Special Revenue Assistance

In 1999-2000 SRA will comprise funding to the Australian Capital Territory (ACT) in the form of transitional allowances and special fiscal needs. The level of these payments will reflect the recommendations of the CGC in its Report on General Revenue Grant Relativities 1999.

Transitional allowances are designed to assist with the ACT's transition to `State-like' funding from the generous levels of Commonwealth funding which existed before self-government. In 1999-2000, transitional allowances will amount to $9.3 million, a reduction of $1.8 million. This amount recognises that the ACT continues to have limited policy control over policing, and will be reassessed once Stage Two of the Commonwealth-ACT review of policing is completed around mid 1999.

Special fiscal needs are payments to the ACT in recognition that certain functions (for example, the Family Court) are not funded by the Commonwealth, whereas in other States funding arrangements exist between the Commonwealth and the State. In 1999-2000, special fiscal needs will amount to $3.9 million, a decrease of $10.0 million from 1998-99. This decrease reflects the CGC's decision not to continue assessing a special fiscal need for items of a capital nature. In the view of the CGC, the introduction of a depreciation assessment into its standard budget framework will take into account the ACT's need to fund recurrent expenditure associated with capital needs.

Changes in the Distribution of General Revenue Assistance

Table 15 sets out the impact on the distribution of general revenue assistance of revised population figures for 1999-2000, the 1999 per capita relativities, changes in the level of NCPs and changes in the distributions of HCGs and SRA.

Table 15: Factors Affecting the Change in General Revenue Assistance, 1998-99 to 1999-2000 ($million, estimated)

1. Total impact of change from the 1998 equalisation relativities to the 1999 relativities. This data may differ from Table 13 due to the use of the most recent estimates of the 1999-2000 FAGs/HCGs pool.
   
2. Estimated distribution of unquarantined HCGs based on the Commonwealth's health funding to the States under the Australian Health Care Agreements (AHCAs).
   
3. Reduction in transitional allowance and special fiscal needs payments to the ACT.

REVENUE REPLACEMENT PAYMENTS

On 5 August 1997 the High Court ruling on tobacco franchise fees in New South Wales (Ha and Lim v. New South Wales and Walter Hammond & Associates Pty Ltd v. New South Wales) cast into doubt the constitutional validity of all State business franchise fees (BFFs). BFFs on tobacco, alcohol and petroleum generated State revenues of around $5 billion annually.

On 6 August 1997, at the unanimous request of the States, the Commonwealth announced `safety net' arrangements to protect State finances. These arrangements provided for:

• an increase in the rate of Commonwealth customs and excise duty on tobacco and petroleum products and an increase in the rate of wholesale sales tax on alcoholic beverages; and
• a one hundred per cent windfall gains tax to protect the States from claims for refunds of past BFF payments.

All revenue collected by the Commonwealth under these arrangements is returned to the States (less administrative costs) as revenue replacement payments (RRPs).

The States have acknowledged that these arrangements represent State taxes imposed and collected by the Commonwealth at the request and on behalf of the States. The distribution of RRPs between the States was agreed among the States.

Details of estimated RRPs for 1998-99 and 1999-2000 are set out in Table 16. Actual RRPs in 1998-99 and 1999-2000 will be in accordance with formal determinations to be made by the Commissioner of Taxation and the Chief Executive Officer of the Australian Customs Service under the States Grants (General Purposes) Act 1994.

These `safety net' arrangements will cease from 1 July 2000 under the proposed reforms to Commonwealth-State financial relations.

Table 16: Revenue Replacement Payments, 1998-99 and 1999-2000 ($million, estimated)

1. The tobacco component of RRPs is based on projected full year collections under safety net surcharge arrangements which will apply prior to the introduction of a `per stick' excise regime on 1 November 1999.

GENERAL PURPOSE ASSISTANCE TO LOCAL GOVERNMENT

General purpose assistance to local government has been provided by the Commonwealth since 1974-75, but will become the responsibility of the States and the Northern Territory from 1 July 2000 under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (see Appendix B). Under current arrangements, the Commonwealth provides general purpose assistance to local government in the form of local government financial assistance grants and local government untied road funding. This assistance is paid to the States as an SPP on the condition that the funds are passed on to local government.

General purpose assistance is provided to local government authorities under the Local Government (Financial Assistance) Act 1995 (the Act). Under the Act, the Treasurer is responsible for determining the annual increase in Commonwealth general purpose assistance paid to local government. The Act provides for general purpose assistance to be increased each year by an escalation factor which reflects the underlying movement in general revenue assistance provided to the States. The escalation factor reflects the percentage increase in the States' FAGs pool in the current year, which in turn reflects indexation for population growth and the CPI.

The Commonwealth will provide $1,227.8 million in local government general purpose assistance in 1998-99. These payments have been based upon the estimated escalation factor of 3.0 per cent determined by the Treasurer and take into account an overpayment of $10.0 million in 1997-98. In June 1999, the Treasurer will determine the 1998-99 final escalation factor on the basis of the actual payments made to the States in 1998-99.

In 1999-2000, general purpose assistance to local government will be based upon an estimated escalation factor of 2.9 per cent determined by the Treasurer. The 1999-2000 escalation factor reflects both the estimated CPI increase and population growth. General purpose assistance to local government is estimated to be $1,263.3 million in 1999-2000, after allowing for an estimated overpayment of $5.7 million in 1998-99. The Treasurer will determine the final escalation factor for 1999-2000 in June 2000, on the basis of the actual payments made to the States in 1999-2000.

Table 17 sets out the payments of general purpose assistance to local government in 1998-99 and 1999-2000.

As in the past, the interstate distribution of local government FAGs for 1999-2000 will be on an equal per capita basis, using the State populations at 31 December in the previous financial year. Untied local government road funding is to be distributed between the States on the basis of the criteria established under the Australian Land Transport Development Act 1988. In both cases, State Grants Commissions determine the intrastate distribution of these payments to local governments on the basis of fiscal equalisation.

Table 17: General Purpose Assistance for Local Government, 1998-99 and 1999-2000, ($million, estimated)

1. Total general purpose assistance is the actual cash payment that the State receives on behalf of local government in the given year. It is equal to the estimated entitlement for the given year adjusted for an over or under payment from the previous year.

SPECIFIC PURPOSE PAYMENTS

Nature and Purpose

Specific Purpose Payments (SPPs) are payments for policy purposes related to particular functional activities (for example, health and education). SPPs are made under Section 96 of the Constitution, which states that the Parliament may grant financial assistance to any State on such terms as it sees fit.

There are around 120 SPPs which can be classified into three groups:

• SPPs paid to the States -- payments direct to State Governments, representing around 74 per cent of total SPPs;
• SPPs through the States -- payments to State Governments to be passed on to local government, other bodies and individuals, representing around 24 per cent of total SPPs. The main payments in this category relate to non-government schools and local government general purpose assistance; and
• a small number of SPPs made direct to local government, representing around 2 per cent of total SPPs. The main payments in this category relate to child care programmes administered by local governments on behalf of the Commonwealth and funding for aged and disabled persons' homes and hostels.

SPPs are reviewed every year in the Budget context. Indexation arrangements and the distribution of SPPs among States vary for each SPP.

In most cases SPPs are subject to conditions reflecting Commonwealth policy objectives or national policy objectives agreed to between the Commonwealth and the States. It is because of the conditions attached to SPPs that they are sometimes called `tied grants'. Such conditions may include:

• general policy requirements on States (for example, that the States provide free public hospital treatment to Medicare patients as a condition of receiving health care grants);
• a requirement that a payment be expended for a specific purpose (for example, housing assistance for homeless people);
• meeting broad Commonwealth-State agreements covering principles and programme delivery mechanisms (for example, the Commonwealth-State Housing Agreement); and
• conditions of joint expenditure programmes including project approval, matching funding arrangements and performance information.

SPPs also include some payments which are not subject to conditions. These typically relate to revenue sharing arrangements or compensation (either for the transfer of responsibilities or for other Commonwealth action). For example, compensation payments are made to the States for revenue forgone as a result of the national system of companies and securities regulation.

Trends in Level and Composition of Specific Purpose Payments

In 1999-2000 SPPs are estimated to total around $17.1 billion, an increase of $474.5 million or 2.8 per cent, on 1998-99. SPPs `to' the States are expected to increase by around $173.3 million in 1999-2000 or 1.4 per cent, after abstracting from SPPs associated with the Gun Buyback Scheme ($78.8 million in 1998-99) and deductions from Commonwealth-State Housing Agreement funding for State fiscal contributions ($69.1 million in 1998-99).

Measures in the 1999-2000 Budget have increased SPPs `to' the States by $94.0 million in 1999-2000 and by $716.8 million over the forward estimates period.

SPPs are expected to account for around 49 per cent of total gross payments to the States in 1999-2000. SPPs `to' the States are expected to total $12.9 billion or around 37 per cent of the total. Chart 7 shows trends in SPPs as a proportion of total gross payments `to' and `through' the States. The chart also 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 shows that although SPPs have increased as a percentage of total Commonwealth payments to the States by around 12 percentage points over the last twenty years, most of this increase occurred in the period to the early 1990s. In recent years, SPPs have declined as a percentage of gross payments to the States. In the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations which was signed by the Commonwealth and the States at the 1999 Premiers' Conference, the Commonwealth has indicated that it has no intention of cutting aggregate SPPs as part of the reform process set out in the Agreement.

Chart 7: Specific Purpose Payments as a Percentage of Total Gross Payments to the States, 1979-80 to 1999-2000

Chart 8 illustrates the composition of major specific purpose programmes (`to' and `through' the States) in 1999-2000. Health accounts for 51 per cent (or over $6.5 billion) of SPPs `to' the States. More detailed information on SPPs including estimated State splits for 1998-99 and 1999-2000 and data on repayments of advances, advances and interest payments are contained in Appendix A.

Chart 8: Composition of Estimated Specific Purpose Payments `To' and `Through' the States, 1999-2000

[2] Incorporates the reclassification of funding under higher education from SPPs through the States to grants to the multi-jurisdictional sector. Chart 7 also contains adjustments for reclassifications such as: payments to the States under the Vocational Education and Training Funding Act 1992; the transfer in 1989-90 of nominated housing advances into Commonwealth-State Housing Agreement grants; and significant changes in the structure of Commonwealth hospital funding (such as the 1988 decision to combine States' Medicare compensation grants (introduced in 1984) and identified health grants into a single new SPP). Adjustments have been made to the level of general purpose payments to account for Commonwealth policy decisions which transferred some taxing powers to the States.