Meeting Of The Ministerial Council For Commonwealth-State Financial

Today’s meeting of the Ministerial Council for Commonwealth-State Financial Relations is the first since the landmark reforms to Commonwealth-State financial relations took effect on 1 July 2000. These reforms include:

• providing all GST revenue to the States and Territories (States), on a monthly basis, to be spent according to their own budgetary priorities;
• abolishing narrow and inefficient State taxes, for example, bed taxes which were abolished on 1 July last year and Financial Institutions Duty (FID) and stamp duty on marketable securities which are to be abolished from 1 July 2001; and
• removing State and Territory reliance on financial assistance grants and revenue replacement payments from the Commonwealth.

Under the new arrangements, the States and Territories have access to a stable and growing source of revenue that will substantially benefit State and Territory budgets over the medium term.

At the meeting, Commonwealth, State and Territory Treasurers considered expected revenue payments to the States and Territories in 2000-01 and 2001-02, and discussed a range of GST administration issues. These payments fulfil the Commonwealth’s guarantee that the budgetary position of each individual State and Territory will be no worse off as a result of tax reform.

The Statement of Estimated Payments (Attachment A) includes current State-by-State estimates of the Guaranteed Minimum Amounts, GST revenue and budget balancing assistance (Tables 1, 2, 3 and 4), general revenue assistance (Table 5), specific purpose payments (Table 8) and total payments payable to the States and Territories in 2000-01 and 2001-02 (Table 10).

GST Revenue and Budget Balancing Assistance

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

• total GST revenue of $26,302.6 million in 2000-01 and $28,029.2 million in 2001-02; and
• total budget balancing assistance of $794.2 million in 2000-01 and $1,775.9 million in 2001-02.

The distribution of GST revenues amongst the States will be in accordance with the final recommendations of the Commonwealth Grants Commission (CGC) after accounting for technical issues raised by Western Australia at the meeting.

Each State and Territory, except the Northern Territory, will require budget balancing assistance in 2000-01. In 2001-02, budget balancing assistance is required by all States and Territories, and will take into account the cost of the removal, from 1 July 2001, of FID and stamp duty on marketable securities.

The Ministerial Council noted long term projections of the State-by-State impact of the reforms to Commonwealth-State financial relations (Attachment B). The projections are only indicative guides. The actual impact on each jurisdiction will be significantly affected by GST revenue growth and the CGC’s final recommendations on the distribution of GST revenue.

Specific Purpose Payments (SPPs)

On the basis of current preliminary estimates, total SPPs will increase by around 4.2 per cent, or $805.6 million in 2001-02. 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 3.7 per cent, or $532.2 million. Detailed estimates of the proposed level of SPPs and their distribution among the States and Territories will be included in the Commonwealth’s 2001-02 Budget.

National Competition Policy Payments

The Commonwealth will also provide National Competition Policy Payments of up to $715.8 million to the States and Territories in 2001-02, 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.

Doubling of the First Home Owners Scheme Grant

The Ministerial Council noted that all States and Territories have implemented the First Home Owners Scheme (FHOS) in accordance with the agreed criteria in the Intergovernmental Agreement (IGA).

The Council noted that the Commonwealth will be providing funding for an additional $7,000 grant to first home owners contracting to buy or build new homes between 9 March and 31 December of this year.

GST Administration Issues

As the Australian Taxation Office (ATO) collects all GST revenue on behalf of the States and Territories, the IGA provides that accountability and performance arrangements will be established between the State and Territory Governments and the ATO. The Ministerial Council noted that an Interim Performance Agreement for the 2001-02 financial year has been developed by the States, Territories and the ATO, and is to be signed by their representatives in May this year.

The Ministerial Council also discussed GST administration costs and related issues, consistent with the requirement of the IGA that the States and Territories compensate the Commonwealth for the costs of administering the GST.

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.

The Ministerial Council endorsed the detailed arrangements for the NTER to come into effect from 1 July 2001. The NTER will largely replace the current State and Territory tax equivalent regimes and promote competitive neutrality and economic efficiency in respect of State and Territory business enterprises. The ATO will administer the NTER in return for the NTER administration costs being paid for by the States and Territories.

Loan Council Allocations for 2001-02

Loan Council endorsed the Loan Council Allocations nominated by the Commonwealth and each State and Territory for 2001-02 (Attachment C).

30 March 2001
CANBERRA

Contact: David Alexander
6277 7340

Attachment A

Statement of estimated payments to the states and territories
Provided to the
Ministerial council for commonwealth-state financial relations
30 march 2001

Under the terms of the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 (the Act), 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 on the Reform of Commonwealth-State Financial Relations (the 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 provides transitional assistance, referred to as budget balancing assistance (BBA). BBA represents the difference between the Guaranteed Minimum Amount (GMA) calculated for each jurisdiction and that jurisdiction’s entitlement to GST revenues.

Tables 1 and 2 show the latest available estimates of the GMAs, GST revenue entitlement and BBA for 2000-01 and 2001-02 respectively. These estimates will be subject to revision to account for parameter or estimate changes in the 2001-02 Commonwealth Budget. Furthermore, the Treasurer will determine the GMA for 2000-01 by 10 June 2001, and the determination of GST revenue for 2000-01 is to be made by the Commissioner of Taxation by 15 June 2001.

Since MYEFO, estimated BBA for 2000-01 has increased by $117.5 million, due to an identical increase in the 2000-01 GMA. The GST revenue estimate has not been revised since MYEFO (and will not be revised prior to the 2001-02 Budget). The MYEFO estimates show that GST revenue in 2000-01 will be substantially higher than the 2000-01 Budget estimate as a result of a number of transitional factors. GST revenue estimates for 2001-02 and subsequent years were unchanged.

The reduction in estimated 2000-01 BBA at MYEFO was assumed to reduce the loan component to zero and the grant component to $677 million.

Estimated BBA and GMA in 2001-02 have increased by $2.2 million since MYEFO. The substantial decline in both aggregates between the 2000-01 Budget and MYEFO was largely a result of the impact of increased GST revenue on BBA loans in 2000-01 and the resulting reduction in loan repayments included in the 2001-02 GMA.

Tables 3 and 4 provide further detail on the estimation of the GMA for each State in 2000-01 and 2001-02 respectively. These tables show the following changes in the components of GMA since the 2000-01 MYEFO estimates:

• estimates of FAGs foregone decreased by $37.2 million in 2000-01 and $26.5 million in 2001-02 (due to updated population estimates that have decreased population growth and the publication of the December quarter 2000 CPI that has decreased the estimated CPI growth);

• estimates of RRPs foregone decreased by $51.8 million in 2000-01 and $83.7 million in 2001-02 (due to updated parameters, latest 2000-01 payments relating to 1999-2000 and the December quarter 2000 CPI outcome);

• estimated State First Home Owners Scheme (FHOS) expenditure increased by $106.5 million in 2000-01. FHOS expenditure estimates were updated in 2000-01 for those States who claim they will expend more on FHOS than the MYEFO estimates suggested (i.e. NSW, SA and Tas);
• the States’ estimated cost of adjusting their gambling arrangements increased by $39.0 million in 2000-01 and $38.2 million in 2001-02. States and Territories are required to agree with the Commonwealth a method for confirming these amounts; and
• estimated off-road diesel subsidy scheme expenditure decreased by $61.0 million in 2000-01 and $74.1 million in 2001-02 (mainly due to the updated Queensland estimate).

Table 5 provides a summary of the estimated general revenue assistance and GST entitlement to the States in 2000-01 and 2001-02. While the total GST revenue estimates are unchanged since MYEFO, the interstate distribution has changed due to updated population figures and the release of recommended GST relativities for 2001-02 by the Commonwealth Grants Commission (CGC). Estimated Special Revenue Assistance (SRA) to the ACT for 2001-02 also reflects the CGC recommendation.

Total estimated National Competition Policy (NCP) payments for 2000-01 fell by $0.4 million to $462.6 million compared to MYEFO estimates reflecting a lower CPI outcome for the December quarter 2000. Changes in the distribution of NCP payments reflect changes in each State’s estimated population.

Tables 6 and 7 provide further details of the distribution of GST revenue based on the CGC’s 2000 and 2001 Updates. The 2000 Update of relativities was agreed at the March 2000 Ministerial Council meeting. The incorporation of the relativities recommended by the CGC in its 2001 Update should not be interpreted as an endorsement of those relativities by the Commonwealth Treasurer. In accordance with clause B2 of the Intergovernmental Agreement, the final relativity factors for each State and Territory will be determined by the Commonwealth Treasurer after consultation with each State and Territory.

Tables 8 and 9 show MYEFO consistent estimates of specific purpose payments (SPPs) for 2000-01 and 2001-02 on a no-policy-change basis. Detailed estimates of the proposed level of SPPs and their distribution amongst the States in 2000-01 and 2001-02 will be included in the Commonwealth’s 2001-02 Budget Papers.

Table 10 provides a summary of the States’ total payments for 2000-01 and 2001-02. It shows that an estimated $46,562.8 million will be paid to the States in 2000-01. $50,330.7 million is estimated to be paid in 2001-02.

Attachment A contains an estimate of the distribution of funding for the additional FHOS grant for new homes announced by the Prime Minister on 9 March 2001. The Commonwealth has indicated it will fund the full cost of the extension.

(Small differences between sums and components are due to rounding.)

Table 1: Estimates of the Guaranteed Minimum Amount, GST Revenue Entitlement and Budget Balancing Assistance, $million 2000-01

(a) Increases in Budget Balancing Assistance since MYEFO have been added to the grant component of Budget Balancing Assistance.

Table 2: Estimates of the Guaranteed Minimum Amount, GST Revenue Entitlement and Budget Balancing Assistance, $million 2001-02

Table 3: Calculation of the Guaranteed Minimum Amount, 2000-01, $million

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Table 4: Calculation of the Guaranteed Minimum Amount, 2001-02, $million

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Table 5: GST Entitlement and General Revenue Assistance, $million

1. The GST entitlements are determined by distributing the pool of GST revenue (including the GST growth dividend) and unquarantined health care grants (HCGs) on the basis of the relativities recommended by the Commonwealth Grants Commission (CGC), and then deducting the HCGs estimate. A further adjustment incorporates the redistribution of GST revenue required by the transitional arrangements (where necessary).
2. These payments consist of transitional allowances and special fiscal needs paid to the ACT in accordance with CGC recommendations.
3. The Agreement to Implement the National Competition Policy and Related Reforms specifies that $400 million and $600 million in 1994-95 prices be distributed among the States and Territories on an equal per capita basis in 2000-01 and 2001-02 respectively. The receipt of payment is conditional on the obligations of the Agreement being met.
4. The growth in total payments is not shown for 2000-01, due to marked changes in the system of federal financial relations.

 

Table 6: Distribution of GST Entitlements 2000-01

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(a) Includes the GST growth dividend.

(b) See Table 1 for calculations underpinning the redistribution of GST revenue resulting from the transitional arrangements.

Table 7: Distribution of GST Entitlement 2001-02

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(a) Includes the GST growth dividend.

Table 8: Estimates of Specific Purpose Payments, $million (a) (b)

1. This table does not include State splits for FBT transitional grants for public hospitals since estimates of the distribution to each State are not currently available. They are, however, included in the national totals.
2. Specific purpose payment data are presented on an accruals basis in this table and abstract from the grants to the States under the Natural Disaster Relief Programme ($64 million in 2000-01 and 2001-02).

Table 9: 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. These estimates are for total health care grants (i.e. quarantined health care grants plus the unquarantined health care grants reported in Tables 6 and 7).
3. Roads Programme and Road Safety Blackspots Programme.
4. Home and Community Care and Supported Accommodation Assistance Programme.

Table 10: Total Payments, 2000-01 and 2001-02 (a)

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1. This table does not include State splits for FBT transitional grants for public hospitals since estimates of the distribution to each State are not currently available. This biases the change in total payments to each State downwards.
2. This comprises: Special Revenue Assistance, National Competition Payments and Budget Balancing Assistance.
3. The growth in total payments is not shown for 2000-01, due to marked changes in the system of federal financial relations.

Attachment A
(Of Statement Of Estimated Payments)

Distribution of additional FHOS grants (a) (b)

1. Total has been distributed in proportion to each State’s estimated share of FHOS expenditure in Tables 4 and 5 above (for 2000-01 and 2001-02 respectively).
2. The Commonwealth has indicated it will fund the full cost of the extension.

Attachment B

Projected Net Impact of the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, $million

These projections are broadly indicative and subject to further revision. They are based only on those items incorporated in the Guaranteed Minimum Amount calculation. Projections from 2002-03 have been prepared by the States and Territories on the basis of parameters acknowledged by the Heads of Treasuries. The following assumptions were included 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 2005; and business stamp duties are retained by the States (the Ministerial Council will be reviewing the need for their retention by 2005). Totals may not add due to rounding.

Attachment C

LOAN COUNCIL ALLOCATIONS - 2001-02 NOMINATIONS ($m) (a)(b)

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

1. LCA nominations for 2001-02 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 PNFC 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 non financial public sector cash receipts from operating receipts in each jurisdiction) tolerance limits around each jurisdiction’s 2001-02 LCA are designed, inter alia, to accommodate changes to the LCA resulting from changes in policy.
2. Tasmania and the Northern Territory’s LCAs are not strictly comparable with the other jurisdictions as they continue to report on a cash basis, while other jurisdictions report on an accrual basis. For example, the general government sector cash deficit(+)/surplus(-) which is used in the accrual presentation is not calculated in the same manner as the general government sector underlying deficit(+)/surplus(-) used in the cash presentation. However, the difference is minimal.
3. 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.
4. 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.
5. 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.