Today's meeting of the Ministerial Council for Commonwealth-State Financial Relations noted the Statement of Estimated Payments to the States and Territories (which is reproduced at AttachmentA). The Statement indicates that GST and other funding provided to the State and Territory Governments will total more than $54.6billion in 2004-05 and more than $57.1billion in 2005-06. It also shows that total funding for each State and Territory government will increase from 2004-05 to 2005-06.
Adding payments made directly to local government and those which pass "through" the States to other bodies, the total funding of GST and payments provided by the Australian Government will be more than $61.5billion in 2004-05, increasing to more than $64.5billion in 2005-06.
GST Revenue Received by the States and their Gains from Tax Reform
The Ministerial Council noted that the States and Territories will receive an estimated total of $35.2billion in GST revenue in 2004-05 and $37.2billion in 2005-06. These estimates are based on the 2004-05 Mid-Year Economic and Fiscal Outlook (MYEFO) estimates of total GST revenue.
On the basis of these estimates, no State or Territory will require Budget Balancing Assistance (BBA) in 2004-05 or 2005-06, as each State's GST entitlement is estimated to exceed its Guaranteed Minimum Amount. The States and Territories are estimated to be better off by $1.9billion in 2004-05 and by $1.5billion in 2005-06 as a result of the Australian Government's tax reforms.
The estimated gains from tax reform for 2006-07 and beyond indicate that the States and Territories have the capacity to abolish further stamp duties.
Distribution of GST Revenue
In signing the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (the IGA), all States and Territories agreed that the GST would be distributed amongst them on the basis of HFE, according to the recommendations of the Commonwealth Grants Commission (CGC), which is the independent and expert arbiter on HFE.
The CGC's recommended relativities for the distribution of GST revenue in 2005-06 were discussed by the Ministerial Council and no State or Territory requested a change or variation to the CGC's recommended relativities.
Review of Horizontal Fiscal Equalisation (HFE) Methodology
Following this decision, the Ministerial Council discussed the outcome of a review by the Heads of Treasuries, commissioned at last year's Ministerial Council meeting, which examined aspects of the methodology used by the CGC to distribute GSTrevenue among the States and Territories. The review found the CGC's methodology, while generally robust, could be simplified without compromising the underlying principle of HFE.
All States and Territories, with the support of the Australian Government, agreed that the CGC be provided with a terms of reference to guide it in simplifying its methodology by 2010, and developing a continuous program of improvement, building on the work progressed by the Heads of Treasuries. This will place HFE on a sounder and more sustainable basis.
The CGC will report back to the 2006 Ministerial Council meeting according to the timetable outlined in the terms of reference on conclusions from its work programme, including in respect of implementation.
Specific Purpose Payments (SPPs)
The Australian Government has continued to maintain the aggregate level of SPP funding to the States and Territories, consistent with its commitment under the IGA.
On the basis of preliminary estimates, total SPPs will increase by around 4.6 per cent or around $1.2billion in 2005-06. After abstracting from SPPs which will be paid direct to local government, or which pass "through" the States and Territories to other bodies, SPPs "to" the States and Territories are estimated to increase by around 3.7 per cent, or $680.2 million. Detailed estimates of the proposed level of SPPs and their distribution among the States and Territories will be included in the Australian Government's 2005-06 Budget.
National Competition Policy Payments
The Australian Government will provide the final scheduled payments under the Agreement to Implement the National Competition Policy and Related Reforms to the States and Territories of up to approximately $724.1million in 2004-05 and $795.2 million in 2005-06, as specified in the Agreement.
Each State and Territory's receipt of its per capita share of Competition Payments will be determined once the Australian Government has considered recommendations from the National Competition Council's assessment of progress under the Competition Agreement.
Further competition reform in the crucial area of water will be progressed under the National Water Initiative.
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 endorsed a number of updates to the GST Administration Performance Agreement between the Australian Taxation Office and the States and Territories.
The Ministerial Council also discussed GST administration costs and related issues and agreed the ATO's GST administration budget of $603.6 million for 2005-06, consistent with the requirement of the IGA that the States and Territories compensate the Australian Government for the costs of administering the GST.
Australian Loan Council Allocations for 2005-06
Today's meeting of the Australian Loan Council endorsed the Loan Council Allocations nominated by the Australian Government and each State and Territory for 2005-06 (Attachment B).