The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

14 March 2008

NO.014

Treasurers Advance the Commonwealth-State Reform Agenda

Important progress was made today by Commonwealth, State and Territory Treasurers, who met to discuss the Commonwealth-State reform agenda central to our combined efforts to modernise the Australian economy.

As noted by the Council of Australian Governments, this reform agenda will increase the productive capacity of the economy, address the inflationary pressures that are emerging, and deliver a higher quality of service to the Australian community.

Reform of specific purpose payments

Today's meeting of the Ministerial Council for Commonwealth-State Financial Relations progressed a new framework for specific purpose payments (SPPs) to the States and Territories.

SPPs are a significant source of Commonwealth funding to the States, supporting almost all areas of state service delivery effort. The reform of SPPs will be a complex and difficult task that will require cooperation on all sides, and I welcome the progress made already.

Payments to the States and Territories

The Ministerial Council also noted the Statement of Estimated Payments to the States and Territories provided by the Commonwealth Treasurer (Attachment A).

The Statement indicates that total GST revenue and other Commonwealth payments to the States are estimated to be $73.1 billion in 2007‑08 (an increase of 7.4 per cent over 2006‑07) and $76.9 billion in 2008‑09 (an increase of 5.1 per cent over 2007‑08).

Of these total payments:

  • $64.9 billion will be provided in 2007‑08 to fund the States’ own activities and $68.1 billion will be provided in 2008‑09;
  • $2.4 billion will be provided for local governments in 2007‑08 and $2.5 billion will be provided in 2008‑09; and
  • $5.9 billion will be passed on to other bodies (such as private schools) in 2007‑08 and $6.2 billion will be provided in 2008‑09.

The Commonwealth has continued to maintain the aggregate level of SPP funding to the States, consistent with its commitment under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations.

Total SPPs will increase by around $737 million in 2008‑09. Detailed estimates of the proposed level of SPPs and their distribution among the States will be included in the Commonwealth Government’s 2008‑09 Budget.

Estimates for 2008‑09 include the effect of several SPPs which are lapsing and do not include the Government's election and other commitments, which will be announced in the Commonwealth's 2008‑09 Budget and are expected to result in an increase in SPPs in 2007‑08 and 2008‑09.

GST revenue

The Ministerial Council noted the progress made by the Commonwealth Grants Commission in improving its data usage and in simplifying its methodology used to calculate relativities for introduction in the 2010 Methodology Review.

The Ministerial Council also noted that the States will receive an estimated total of $42.2 billion in GST revenue in 2007‑08 (an increase of 6.8 per cent over 2006-07) and $45.3 billion in 2008‑09 (an increase of 7.2 per cent over 2007-08). These estimates are based on the 2007‑08 Mid‑Year Economic and Fiscal Outlook estimates of total GST revenue.

The Ministerial Council also discussed GST administration costs and agreed to the ATO's GST administration budget of $631.2 million for 2008‑09, consistent with the requirement in the Intergovernmental Agreement that the States compensate the Commonwealth for the costs of administering the GST.

Australian Loan Council Allocations for 2008-09

The Australian Loan Council met after the Ministerial Council. The Loan Council endorsed the Loan Council Allocations nominated by the Commonwealth and each State for 2008‑09 (Attachment B).

The Loan Council has explicitly placed infrastructure on its agenda for the first time in memory. Shortages of infrastructure can limit Australia's productive capacity, reduce growth and employment and exacerbate inflation over the medium term.

The Loan Council will continue to consider the infrastructure financing needs of the nation

Treasurers also noted that all jurisdictions are undertaking significantly expanded capital works programs to boost the productive capacity of the Australian economy.

Attachment A: Statement of Estimated Payments to the States and Territories provided to the Ministerial Council for Commonwealth‑State Financial Relations

Attachment B: Loan Council Allocations – 2008‑09 Nominations

14 March 2008

 


 

Attachment A

Statement of Estimated Payments to the States and Territories
Ministerial Council for Commonwealth-State Financial Relations
14 March 2008

Under the terms of the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 (the Act), the States and Territories (the States) receive all the revenue raised from the goods and service tax (GST) and the GST revenue is distributed among the States on the basis of horizontal fiscal equalisation principles. In addition, the Commonwealth provides substantial funding to the States through general revenue assistance and specific purpose payments (SPPs). Note that the estimates provided in this statement are subject to revision in the 2008-09 Commonwealth Budget.

Total payments to the States are estimated to be $73.1 billion in 2007-08 (an increase of 7.4 per cent over 2006-07) and $76.9 billion in 2008-09 (an increase of 5.1 per cent over 2007-08).

GST Revenue to the States

It is estimated that the States will receive GST revenue of $42.2 billion in 2007-08 (an increase of 6.8 per cent over 2006-07) and $45.3 billion in 2008-09 (an increase of 7.2 per cent). Each jurisdiction’s share of GST revenue in 2008-09 is shown in Chart 1.

Chart 1: GST revenue provision to the States, 2008-09

Chart 1: GST revenue provision to the States, 2008-09

Table 1: GST revenue provision to the States, 2000-01 to 2008-09 ($m)

Table 1: GST revenue provision to the States, 2000-01 to 2008-09 ($m)

  1. As only 11 monthly activity statements, 3 quarterly activity statements and no annual activity statements were payable in 2000-01, the calculated annual increases uses 2001-02 as the base year.

The GST revenue is distributed among the States on the basis of horizontal fiscal equalisation principles, as embodied in the GST relativities recommended by the Commonwealth Grants Commission, as shown in Table 2.

Table 2: GST relativities, 2000-01 to 2008-09

Table 2: GST relativities, 2000-01 to 2008-09

Table 3 contains further details of the calculation and distribution of GST revenue. In accordance with section 9 of the Act, the final relativity factors for 2007-08 will be determined by the Commonwealth Treasurer in June 2008.

Table 3: Distribution of GST revenue, 2007-08 and 2008-09 ($m)

Table 3: Distribution of GST revenue, 2007-08 and 2008-09 ($m)

General Revenue Assistance

Budget balancing assistance

In the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (the Agreement), the Commonwealth Government guaranteed that the financial position of each individual State would be no worse than it would have been had the reforms in the Agreement not been implemented.

The guaranteed minimum amount is an estimate of the revenue that each State would have received under the previous system of financial assistance grants and if their own inefficient state taxes had not been abolished as part of the reforms. Revenue foregone from the abolition of a tax is only included in the calculation of the guaranteed minimum amounts once all States have abolished the tax.

The Commonwealth Government provides budget balancing assistance during the transitional period if a State’s share of GST revenue is less than its guaranteed minimum amount. No State has required budget balancing assistance since 2003-04. As part of the agreement with the States to abolish the majority of the state taxes listed for review under the Agreement, the Commonwealth and State Governments have agreed to extend the transitional period in which budget balancing assistance may be paid from 30 June 2006 to 30 June 2009.

Table 4 contains the latest available estimates of the guaranteed minimum amount, GST revenue entitlement, budget balancing assistance and GST in excess of the guaranteed minimum amount for 2000-01 to 2010-11.

Table 4: Guaranteed minimum amount, GST entitlement and budget balancing assistance, 2000-01 to 2010-11 ($m)(a)

Table 4: Guaranteed minimum amount, GST entitlement and budget balancing assistance, 2000-01 to 2010-11 ($m)(a)

  1. Estimates from 2007-08 will be affected by variations in GMA components and GST revenue. Estimates from 2009-10 will be affected by recommendations by the Commonwealth Grants Commission on the distribution of GST provided to each of the States. Where GST revenue exceeds the GMA, no BBA is payable.
  2. As part of the agreement with the States to abolish the majority of the state taxes listed for review under the Intergovernmental Agreement, stamp duties on credit arrangements, instalment purchase arrangements, rental arrangements, leases and mortgages will be abolished by all States by 1 July 2009. The revenue foregone is included in the GMA from 2009-10.
  3. As part of the agreement with the States to abolish the majority of the state taxes listed for review under the Intergovernmental Agreement, all States will have abolished stamp duties on unlisted marketable securities by 1 July 2010. The revenue foregone is included in the GMA from 2010-11.

On the basis of the estimates provided in this report, all States will receive GST revenue in excess of their guaranteed minimum amount by $3.5 billion in 2007-08 and $5.0 billion in 2008-09.

Further detail on the estimation of the guaranteed minimum amount for each State in 2007-08 and 2008-09 is provided in Attachment A.

Changes in the guaranteed minimum amount since the March HoTs report reflect revised estimates of GST administration costs. These revisions are subject to further consultation with each State and the Commonwealth’s own budget processes. Table 5 is a reconciliation of changes in the components of the guaranteed minimum amount since the March HoTs report.

Table 5: Changes in the GMA between HoTs report and Statement of Estimated Payments ($m)

Table 5: Changes in the GMA between HoTs report and Statement of Estimated Payments ($m)

National Competition Payments

Between 1997-98 and 2005-06, the Commonwealth provided National Competition Policy payments to the States for implementing National Competition Policy and related reforms. In 2005-06, the Commonwealth suspended some payments, following advice provided by the National Water Commission. On 13 September 2007, these suspensions were lifted following a recommendation by the National Water Commission that there had been satisfactory progress by the States in implementing their water reform commitments.

Consequently, suspended payments of $43.2 million were paid in 2007-08, as shown in Table 6. These payments are the final payments under the National Competition Policy arrangements.

Table 6: National Competition Policy payments, 2007-08 ($m)

Table 6: National Competition Policy payments, 2007-08 ($m)

Specific Purpose Payments

Total SPPs

The States receive substantial SPPs from the Commonwealth Government to help fund areas such as education, health, social security, housing and transport. These payments are a financial contribution to important areas of state responsibility which the Commonwealth Government makes to pursue its own objectives.

Clause 5(v) of the Intergovernmental Agreement specifies that the Commonwealth will continue to provide SPPs to the States and has no intention of cutting aggregate SPPs as part of the reform process set out in the Agreement. This is consistent with its commitment in the Agreement that the States would be financially better off under the new arrangements.

Table 7 contains estimates of growth in aggregate SPPs from 2000-01 to 2008-09. SPPs in aggregate grew 8.1 per cent in 2007-08 and 2.4 per cent in 2008-09.

Note that these estimates include the effect of several SPPs which are lapsing and do not include most of the Government’s election and other commitments, which will be announced in the Commonwealth’s 2008-09 Budget and are expected to result in an increase in SPPs in 2007-08 and 2008-09.

Table 7: Total SPPs to the States ($m)

Table 7: Total SPPs to the States ($m)

These estimates include payments made ‘through’ the States and direct to local government.

SPPs to local government

The Commonwealth makes SPPs to local government both ‘through’ the States, in the form of financial assistance grants to local government, and direct to local government. The financial assistance grants to local government are untied and can be spent according to local government priorities. SPPs direct to local government are tied funding for specific projects in order to assist local government in providing these services.

In 2007-08, financial assistance grants to local government are estimated to be $1,766 million, and will increase to $1,841 million in 2008-09, an increase of 4.3 per cent, as shown in Table 8. In 2007-08, SPPs direct to local government are $588 million and will increase to $689 million in 2008-09.

Table 8: Commonwealth Government SPPs to local government ($m)

Table 8: Commonwealth Government SPPs to local government ($m)

Table 9 contains MYEFO estimates of aggregate SPPs for 2007-08 and 2008-09 assuming current arrangements continue. Detailed estimates of SPPs and their distribution among the States in 2007-08 and 2008-09 will be included in the Commonwealth Government’s budget papers.

Table 9: Estimates of aggregate SPPs by State ($m)

Table 9: Estimates of aggregate SPPs by State ($m)

Table 10 contains estimates of the major SPPs paid to the States for 2007-08 and 2008-09.

Table 10: Estimates of selected SPPs to the States ($m)(a)

Table 10: Estimates of selected SPPs to the States ($m)

  1. These accrual based estimates provide a guide to the major components of SPPs and should not be taken as Commonwealth Government commitments. There are further Commonwealth budget processes and various parameter changes that could affect program totals and the interstate distribution.

Total Payments to the States

Total payments to the States include GST revenue, SPPs and additional payments classified under general revenue assistance. It is estimated that total payments to the States will be $73.1 billion in 2007-08 (an increase of 7.4 per cent over 2006-07) and $76.9 billion in 2008-09 (an increase of 5.1 per cent over 2007-08). Table 11 is a summary of payments for 2007-08 and 2008-09.

Table 11: GST revenue and Commonwealth Government payments to the States, 2007-08 and 2008-09 ($m)

Table 11: GST revenue and Commonwealth Government payments to the States, 2007-08 and 2008-09 ($m)

From 2000-01 to 2008-09, total payments to the States have increased by 64.1 per cent. This includes a 58.9 per cent increase in SPPs ‘to’ the States, a 83.1 per cent increase in SPPs ‘through’ the States, a 76.1 per cent increase in SPPs to local government and a 63.8 per cent increase in GST and general revenue assistance. Table 12 contains the categories of total payments to the States and their growth from 2000-01 to 2008-09.

Table 12: Growth in Commonwealth Government payment categories, 2000-01 to 2008-09 ($m)

Table 12: Growth in Commonwealth Government payment categories, 2000-01 to 2008-09 ($m)

As a proportion of GDP, total Commonwealth Government payments to the States have averaged 6.7 per cent since 2000-01, compared with 6.4 per cent for the previous nine years.

 

Attachment A

Table A1: Calculation of the guaranteed minimum amount 2007-08 and 2008-09 ($m) Table A1: Calculation of the guaranteed minimum amount 2007-08 and 2008-09 ($m)

  1. Zero amounts for compensation for GST deferred reflects the decision to suspend future payments as a result of revised cost estimates for prior years. GMA treatment of these amounts is yet to be determined.

 

Attachment B

State tax reform

One of the objectives of the Intergovernmental Agreement was the elimination of inefficient taxes impeding economic activity. The abolition of these taxes will save taxpayers $5.8 billion in 2007-08, and $6.6 billion in 2008-09.

Table B1 indicates the value of State taxation revenue forgone from these reforms for 2007-08 and 2008-09.

Table B1: State tax revenues foregone as a result of reform(a)

Table B1: State tax revenues foregone as a result of reform(a)

  1. A not applicable (na) indicates that the State did not levy that particular tax at the time of the IGA. A zero indicates that the State levies that particular tax, but has agreed to abolish it at a later date. Revenue foregone from the abolition of a tax is only included in the calculation of the GMA once all States have abolished the tax.

 


 

Attachment B

Loan Council Allocations – 2008-09 Nominations ($m)

Loan Council Allocations – 2008-09 Nominations ($m)

  1. LCA nominations for 2008-09 reflect current best estimates of non-financial public sector deficits/surpluses. Nominations have been provided on the basis of policies announced up to and included in jurisdictions’ mid-year Budget updates and the Commonwealth Government’s pre-election fiscal outlook. Nominations are based on preliminary estimates of general government finances provided by jurisdictions for purposes of their mid year reports, and projected bottom lines for each jurisdiction’s public non-financial corporations (PNFC) sector, where actual estimates are unavailable. Each jurisdiction will publish an updated LCA estimate as part of its budget documentation.
  2. The sum of the surpluses of the general government and PNFC sectors may not directly equal the non-financial public sector surplus due to intersectoral transfers.
  3. This comprises net lending by governments with the aim of achieving government policy, as well as net equity sales and net lending to other sectors or jurisdictions. Such transactions involve the transfer or exchange of a financial asset and are not included within the cash deficit. However, the cash flow from investments in financial assets for policy purposes has implications for governments’ call on financial markets.
  4. Memorandum items are used to adjust the non-financial public sector deficit/surplus to include in LCAs certain transactions - such as operating leases - that have many of the characteristics of public sector borrowings but do not constitute formal borrowings. They are also used, where appropriate, to deduct from the non-financial public sector deficit/surplus certain transactions that Loan Council has agreed should not be included in LCAs - for example, the funding of more than employers’ emerging costs under public sector superannuation schemes, or borrowings by entities such as statutory marketing authorities. Where relevant, memorandum items include an amount for gross new borrowings of government home finance schemes.
  5. The 2 per cent (of non-financial public sector cash receipts from operating activities in each jurisdiction) tolerance limits around each jurisdiction’s 2008-09 LCA are designed, inter alia, to accommodate changes to the LCA resulting from changes in policy.