17 March 2000

Inaugural Meeting of Ministerial Council for Commonwealth-State Financial Relations and Outcome of Loan Council Meeting

Today’s inaugural meeting of the Ministerial Council for Commonwealth-State Financial Relations marks the start of a new era of Commonwealth-State financial relations.

The meeting of Commonwealth, State and Territory Treasurers considered expected revenue payments to the States and Territories in 2000-01, as well as a range of GST administration issues.

The Ministerial Council was established by the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (IGA) which was signed by all jurisdictions last June. The IGA constitutes a landmark reform to Commonwealth-State financial relations in:

  • removing State and Territory reliance on financial assistance grants and revenue replacement payments from the Commonwealth;
  • providing all GST revenue to the States and Territories, to be spent according to their own budgetary priorities;
  • giving the States and Territories a direct role in determining the GST base and rate and related operational matters; and
  • setting down a timetable for the abolition of a range of inefficient State taxes.

The new arrangements provide States and Territories with access to a more robust tax base which will grow over time to ensure that State and Territory budgets are substantially better off over the medium term.

Commonwealth legislation provides the States and Territories with balancing assistance to ensure that their budgets are no worse off until such time as GST revenue exceeds current funding.

The attached Statement of Estimated Payments provides State-by-State estimates of GST revenue and budget balancing assistance (Table 1), general revenue assistance (Table 3) and specific purpose payments (Table 5) payable to the States and Territories in 2000-01.

GST Revenue and Budget Balancing Assistance

The Ministerial Council noted that, on the basis of current estimates, States and Territories would receive in 2000-01:

  • total GST revenue collections of $24,209.0 million; and
  • total budget balancing assistance of $2,576.6 million, comprising interest free loans of $1,655.6 million and grants of $921.0 million.

The distribution of GST revenues amongst the States will be in accordance with the recommendations of the Commonwealth Grants Commission (CGC) in its Report on General Revenue Grant Relativities 2000 Update.

Each State will require budget balancing assistance in 2000-01. To assist with the transition to the new arrangements, the full amount of estimated budget balancing assistance will be paid up front to the States on 4 July 2000.

The Ministerial Council noted long term projections of the State-by-State impact of the IGA (attached). The projections are only indicative guides. The actual impact of the IGA on each jurisdiction will be significantly affected by GST revenue growth and the CGC’s annual recommendations on the distribution of GST revenue.

Specific Purpose Payments (SPPs)

On the basis of current preliminary estimates, total SPPs will increase by around 4.5 per cent, or $792.8 million in 2000-01. After abstracting from SPPs paid either direct to local government or which pass "through" the States to other bodies, SPPs "to" the States are estimated to increase by around 4.0 per cent, or $529.6 million. Detailed estimates of the proposed level of SPPs and their distribution among the States and Territories will be included in the Commonwealth’s 2000-01 Budget.

The Commonwealth reiterated its commitment under the IGA not to cut aggregate SPPs to the States and Territories as part of the reform processes.

Other Payments

The Commonwealth will also provide Competition Payments of up to $461.7 million to the States and Territories in 2000-01, as specified in the Agreement to Implement the National Competition Policy and Related Reforms. Each jurisdiction’s receipt of its per capita share of Competition Payments will be determined once the National Competition Council has released its assessment of progress under the Agreement.

In line with CGC recommendations, the ACT will receive $13.5 million for transitional allowances and special fiscal needs in 2000-01.

GST Administration Issues

Under the terms of the IGA, the Ministerial Council is charged with overseeing the operation of the GST, including approving changes to the GST base and rate, and monitoring the ATO’s performance in GST administration.

As part of this process, the Ministerial Council is progressing a number of Ministerial determinations, including the Division 81 determination, gazetted on 1 March 2000, containing a list of Commonwealth, State and Territory taxes and charges that will not be subject to the GST.

First Home Owners Scheme

Under the IGA, the States and Territories agreed to assist first home owners by funding and administering a new First Home Owners Scheme (FHOS) in accordance with certain agreed criteria. The Ministerial Council is responsible for ensuring that all jurisdictions meet their commitments in this regard.

The Council noted that all jurisdictions have made considerable progress in implementing the FHOS. States and Territories anticipate the passage of the necessary legislation prior to the commencement date of 1 July 2000, and promotional activities have commenced to alert first home buyers to the existence of the $7,000 grant for home purchases after 1 July 2000.

Local Government Compliance

The IGA records the intention that the GST will apply to all levels of government, including local government and their statutory corporations and authorities.

The Ministerial Council noted the Commonwealth’s intention to legislate to require the States and the Northern Territory to withhold from any local government authority which does not register and pay the GST a sum equivalent to the payments which ought to have been made. It also noted the intention of States and the Northern Territory to implement laws or procedures which will allow them to detect any non-compliance by local government bodies and to determine the level of local government financial assistance grants to be withheld in such cases.

The majority of local government outputs will not be subject to GST and local government bodies will generally be entitled to net refunds of their input credits. Consequently it is expected that local governments will voluntarily participate in the GST system, since it will be in their financial interest to do so.

Progress Report on Intergovernmental Taxation Agreement

Under the IGA, Heads of Government indicated their intention to introduce a National Tax Equivalent Regime (NTER) for income tax for State and Territory government business enterprises. It was also agreed to progress the reciprocal application of other Commonwealth, State and Territory taxes on a revenue neutral basis as soon as practicable.

The Ministerial Council endorsed a target date for implementing the NTER for income tax for State and Territory government business enterprise of 1 July 2001 and agreed that implementation of the NTER should be afforded priority ahead of the application of specified State and Territory taxes to the Commonwealth.

Loan Council Allocations for 2000-01

The 139th meeting of the Australian Loan Council was also held today.

Loan Council endorsed the Loan Council Allocations (LCAs) nominated by the Commonwealth and each State and Territory for 2000-2001 (attached).

Loan Council observed that economic growth in Australia is expected to remain strong in 2000-01 and noted the importance of consolidating the improvements in budgetary outcomes of recent years at this stage in the economic cycle.

Containing the public sector's call on financial markets, particularly during periods of sound economic growth, maximises opportunities for the private sector, lessens pressures on interest rates and helps to ensure that the resources available to the government are used efficiently. In addition, sustainable fiscal settings provide governments with greater flexibility, contribute to national saving and help to sustain financial market confidence, thereby enhancing the longer-term growth prospects for the economy.

Against this background, Loan Council considered that the aggregate of LCA nominations is consistent with current macroeconomic policy objectives.

17 March 2000
CANBERRA

 

STATEMENT OF ESTIMATED PAYMENTS TO THE STATES AND TERRITORIES

2000-01

MINISTERIAL COUNCIL FOR COMMONWEALTH-STATE FINANCIAL RELATIONS

17 MARCH 2000

Under the terms of the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (the Intergovernmental Agreement) the States and Territories (the States) will receive all of the revenue raised by the goods and services tax (GST) from 1 July 2000. GST revenues will be distributed amongst the States on the basis of horizontal fiscal equalisation (HFE) principles.

Under the Intergovernmental Agreement, the Commonwealth has guaranteed that in each of the transitional years following the introduction of the GST, each States’ budgetary position will be no worse off than had the reforms in the Agreement not been implemented. To meet this commitment the Commonwealth will provide transitional assistance, referred to as budget balancing assistance, which will take the form of both one-year interest-free loans and grants to the States in 2000-01 and quarterly grants in subsequent years. Budget balancing assistance represents the difference between the Guaranteed Minimum Amount (GMA) calculated for each jurisdiction and that jurisdiction’s share of GST revenues.

Table 1 shows the latest available estimates of the GMAs, GST revenues and budget balancing assistance. These estimates will be subject to revision to account for parameter or estimate changes between now and the date of the payment to the States (4 July 2000).

GST revenue estimates have been provided by the Commonwealth Treasury. The distribution of GST revenues between States is in accordance with the GST relativities recommended in the Commonwealth Grants Commission’s (CGC’s) Report on General Revenue Grant Relativities 2000 Update (the 2000 Update) and the Methodology for Estimation of Components of the Guaranteed Minimum Amount paper (the methodology paper) referred to in Clause C8 of the Agreement.

The GMAs have been calculated according to the terms of the Agreement and the methodology paper. The GMAs incorporate notional financial assistance grants (FA Grants) based on the FA Grants relativities recommended by the CGC in its 2000 Update. Table 2 provides further detail of the calculation of the GMA for each State.

Table 3 provides a summary of the estimated general revenue assistance and GST revenue provision to the States in 1999-2000 and 2000-01. Given the fundamental changes to Commonwealth State financial relations under A New Tax System, comparisons between the two years are not meaningful.

Table 4 provides details of the distributions of GST revenue, taking into account projected populations, per capita relativities, the distributions of unquarantined health care grants and the GST growth dividend specified in the methodology paper.

Tables 5 and 6 show preliminary estimates of specific purpose payments (SPPs) for 1999-2000 and 2000-01 on a no policy change basis. Detailed estimates of the proposed level of SPPs and their distribution amongst the States in 1999-2000 and 2000-01 will be included in the Commonwealth’s 2000-01 Budget Papers.

Table 7 provides a summary of the States’ total payments for 1999-2000 and 2000-01. It shows that an estimated $43,942.4 million will be paid to the States in 2000-01. (As noted above, the fundamental change in Commonwealth State financial relations taking place makes it difficult to make meaningful comparisons between 1999-2000 and 2000-01.)

Table 8 sets out repayments to the Commonwealth by the States in 1999-2000 and 2000-01.

Table 1: Estimates of the Guaranteed Minimum Amount, GST Revenue and Budget Balancing Assistance, $million

Table 2: Calculation of the Guaranteed Minimum Amount, 2000-01, $million

Table 3: GST Revenue and General Revenue Assistance, $million

  1. The estimates of GST revenue are determined by distributing the pool of GST revenue and unquarantined health care grants (HCGs) on the basis of the relativities recommended by the Commonwealth Grants Commission (CGC), and then adding the GST growth dividend and deducting the HCGs estimate.
  2. Budget balancing assistance consists of the grants only in this table. The States and Territories will also receive loans totalling $1,655.6 million in 2000-01 (see Table 1).
  3. The estimates of financial assistance grants (FA Grants) are determined by distributing the pool of FA Grants and HCGs on the basis of the relativities calculated by the CGC, and then deducting the HCGs estimate.
  4. These payments consist of transitional allowances and special fiscal needs paid to the ACT in accordance with CGC recommendations.
  5. The Agreement to Implement the National Competition Policy and Related Reforms specifies that $400 million in 1994-95 prices be distributed between the States and Territories on an equal per capita basis in 1999-2000 and 2000-01. The receipt of payment is conditional on the obligations of the Agreement being met.

Table 4: Distribution of GST Revenue

  1. Total weighted population differs from the total population in column 1 as the per capita relativities are calculated by the CGC using population numbers for the period 1994-95 to 1998-99 and are then rounded. It is the total population shown in column 1 that is used in determining an index factor for the FA Grants pool. Note also that population numbers are projections.
  2. Includes per capita distribution of agreed $97.0 million estimated GST growth dividend. $30,204.1 million of the pool is distributed according to weighted population shares shown in column 4.
  3. These estimates have been updated to reflect the Commonwealth's announced intention to index the payments using Wage Cost Index No. 1.

Table 5: Estimates of Specific Purpose Payments, $million (a)

  1. Specific purpose payment data are presented on an accruals basis in this table and abstract from the grants to the States under the Gun Buyback Scheme ($22.9 million in 1999-2000) and the Natural Disaster Relief Programme ($69.7 million in 1999-2000 and $33.0 million in 2000-01).

Table 6: Estimates of Selected Specific Purpose Payments, $million (a)

  1. These accrual based estimates provide a guide to the major components of specific purpose payments and should not be taken as Commonwealth commitments. There are further Commonwealth budget processes and various parameter changes that could affect programme totals and the interstate distribution.
  2. Roads Programme and Road Safety Blackspots Programme.
  3. Home and Community Care and Supported Accommodation Assistance Programme.

Table 7: Total Payments (a)

  1. This table is presented on an accruals basis and abstracts from grants to the States under the Gun Buyback Scheme ($22.9 million in 1999-2000) and the Natural Disaster Programme ($69.7 million in 1999-2000 and $33.0 million in 2000-01). The tax liability measure (TLM) of accrual GST revenue is equivalent to cash collections. This approach is consistent with the accrual measures of Commonwealth tax revenues.

Table 8: Repayments, $million

 

 LOAN COUNCIL ALLOCATIONS –
2000-01 NOMINATIONS ($m) (a)

Figures have been rounded. Discrepancies between totals and sums of components reflect rounding.

  1. LCA nominations for 2000-01 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 reports. 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 PTE sector. Updated LCA estimates will be provided through publication by each jurisdiction of its budget time LCA as part of its budget documentation. The 2 per cent (of total non-financial public sector revenue) tolerance limits around each jurisdiction’s 2000-01 LCA are designed, inter alia, to accommodate changes to the LCA resulting from changes in policy.
  2. 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. Overfunding and underfunding of emerging superannuation liabilities is also included as a memorandum item, as are interest earnings on employer superannuation balances.
  3. The Victorian PTE sector deficit figure includes net advances paid, and excludes net advances received.
  4. The Victorian non-financial public sector deficit figure includes non-financial public sector net advances paid.
  5. South Australian non-financial public sector net advances paid for 1999–2000 include the proceeds received to date from the sale of South Australia's electricity retail operations, and lease of electricity distribution assets.

NB Government contingent exposures under infrastructure projects with private sector involvement are identified separately, rather than included as a component of LCAs. These exposures, which are measured as the government’s contractual liabilities in the event of termination of the project, are unlikely to be realised and are thus materially different from actual borrowings undertaken to finance the public sector deficit. Government outlays under these projects, such as equity contributions and ongoing commercial payments to the private sector, continue to be included in the annual total public sector deficit, and hence the LCA.

ESTIMATED NET IMPACT OF INTERGOVERNMENTAL AGREEMENT ON THE REFORM OF COMMONWEALTH-STATE FINANCIAL RELATIONS, $MILLION (a)

These estimates are broadly indicative and subject to further revision. They are based only on those impact items incorporated in the Guaranteed Minimum Amount calculation. Additionally, the following assumptions were used in their preparation: constant annual increases in GST revenue of around 6 per cent after 2003-04; relative stability in Commonwealth Grants Commission assessment of needs; debits tax is abolished from 1 July 2005; and business stamp duties are retained by the States (the Ministerial Council will be reviewing the need for their retention by 2005).