2003-04 Commonwealth Budget – Budget Paper No. 3

Budget Balancing Assistance

The Government also provides the States with Budget Balancing Assistance. On the basis of current estimates, the States will receive total Budget Balancing Assistance of $1,004.0 million in 2002-03 and $820.1 million in 2003-04 (Tables 11 and 12).

Budget Balancing Assistance is paid under the Intergovermental Agreement on the Reform of Commonwealth-State Financial Relations to ensure that, in the transitional years following the introduction of The New Tax System in 2000-01, each State's budgetary position will be no worse off than had the reforms to Commonwealth-State financial relations not been implemented.

The Guaranteed Minimum Amount is an estimate of the amount of funding each State would have had if tax reform had not been implemented. Components of the Guaranteed Minimum Amount comprise estimates of state taxes abolished by tax reform and other items (Tables 11 and 12). Narrow and inefficient state taxes that were abolished include Financial Institutions Duty, stamp duty on quoted marketable securities, and accommodation taxes (bed taxes).

To meet its guarantee, the Government pays the States Budget Balancing Assistance to cover any shortfall of GST revenue compared with each State's Guaranteed Minimum Amount.

The GST is a strong, growing revenue base and already, in some States, GST revenue exceeds the Guaranteed Minimum Amount. Current estimates show that in 2002-03, Queensland and the Northern Territory do not require Budget Balancing Assistance. Their GST revenue will exceed their Guaranteed Minimum Amounts by a combined total of $88.7 million in 2002-03 (Table 11).

Even more States will benefit in 2003-04. Current estimates show that Queensland, Western Australia, Tasmania, the Australian Capital Territory and the Northern Territory will not require Budget Balancing Assistance in 2003-04. Their GST revenue will exceed their Guaranteed Minimum Amounts by a combined total of $269.6 million in 2003-04 (Table 12).

Table 11: Guaranteed Minimum Amount components, GST revenue provision and Budget Balancing Assistance, 2002-03 (estimated)

Reflects revisions to components of the 2001-02 GMA of each State made after the 2001-02 financial year, but exclusive of the $204.9 million GST overpayment.
Adjusted for the $204.9 million GST overpayment in 2001-02.

Table 12: Guaranteed Minimum Amount components, GST revenue provision and Budget Balancing Assistance, 2003-04 (estimated)

Adjustments in 2002-03

GST revenue provision in 2002-03 has been adjusted to account for the final 2001-02 outcome (Table 1). In 2001-02 the final GST cash collections outcome was $204.9 million lower than the amount determined by the Commissioner of Taxation in June 2002 and provided to the States in 2001-02 under the terms of the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 (the Act).

Consistent with the provisions of the Act, the amount of GST revenue determined by the Commissioner and provided to the States in 2002-03 will take account of this variation. The Budget Balancing Assistance entitlements for 2002-03 have also been calculated to account for this variation (Table 11).

Adjustments in 2003-04

Consistent with the terms of the Intergovermental Agreement, the Government has advanced Budget Balancing Assistance to the States in four quarterly instalments in 2002-03. These advances were based on the estimated Budget Balancing Assistance entitlements of the States at the time of each advance. The upward revision to GST revenue estimates in the Budget has resulted in lower than previously estimated Budget Balancing Assistance entitlements of the States. On the basis of the current estimates, the advances to the States in the year to date exceed the States' entitlements to Budget Balancing Assistance in 2002-03 by $534.8 million (Table 13).

Consistent with the provisions of the Act, the Commonwealth will deduct the amount of excess Budget Balancing Assistance paid in 2002-03 from payments to be made to the States under the Act in 2003-04. The final amount to be deducted from State payments in 2003-04 will be known when the final determination of each State's Budget Balancing Assistance entitlement is made under the Act in June 2003.

Table 13: Overpayment of Budget Balancing Assistance (BBA) in 2002-03 (estimated)

First Home Owners Scheme

Eligible home buyers have received over $3.5 billion through original and additional First Home Owners Scheme grants since July 2000.

The First Home Owners Scheme, introduced on 1 July 2000, is funded out of GST revenues and guaranteed by the Commonwealth Government through Budget Balancing Assistance. The scheme provides all eligible first home buyers with a $7,000 grant. The scheme is administered by the States and has provided over 450,000 grants since its introduction. The First Home Owners Scheme is ongoing and the cost of the scheme to the States is part of the Guaranteed Minimum Amount (Tables 11 and 12).

In March 2001, the Commonwealth made an additional $7,000 grant available to first home owners building or purchasing new homes before 31 December 2001. The Commonwealth fully funds the additional First Home Owners Scheme with a Specific Purpose Payment through the States to meet the cost of grants. The Government extended the additional First Home Owners Scheme at a rate of $3,000 for new homes built or purchased between 1 January and 30 June 2002. The additional First Home Owners Scheme has provided over 65,000 grants to eligible home buyers.

Although the additional First Home Owners Scheme has ended, some payments continue to be made to eligible applicants. Estimates of payments are shown in the Specific Purpose Payments tables (Appendix B).

National Competition Policy Payments

The Government makes National Competition Policy Payments to the States for implementing National Competition Policy and related reforms. These reforms include a commitment to review legislation that restricts competition, to apply competitive neutrality to government business activities and to introduce specific reforms in electricity, gas, water and road transport.

National Competition Policy Payments commenced in July 1997 with the first of three tranches of payments. The third tranche commenced in July 2001 at an annual level of $600 million in 1994-95 prices. The payments are subject to States' satisfactory progress in implementing reform commitments. Before the payments are made, the National Competition Council assesses whether each State has met the specified conditions and provides a report for consideration by the Government.

National Competition Policy Payments are estimated for 2003-04 and the forward years (Table 14).

Table 14: National Competition Policy Payments (estimated maximum)

Provision has been made for National Competition Policy Payments in 2006-07, however the final amounts will not be disclosed until after the conclusion of negotiations.

Specific Purpose Payments

Specific Purpose Payments constitute a significant amount of Commonwealth funding to the States. In 2003-04, the Government will provide the States with $22.9 billion in Specific Purpose Payments. The Government makes Specific Purpose Payments to the States as a contribution to areas of state responsibility. In 2003-04, there are over 80 different payments covering a broad range of policy areas such as education, health, social security, housing, safety, transport and communication (Chart 3).

Chart 3: Composition of Specific Purpose Payments to and through the States, 2003-04 (estimated)

More detailed information, including payments on a state-by-state basis for 2002-03 and 2003-04 is in Appendix B.

Specific Purpose Payments can be classified into three groups:

Specific Purpose Payments paid to the States - payments direct to state governments, totalling $16.6 billion in 2003-04;

Specific Purpose Payments paid through the States - payments to state governments to be passed on to local governments and others, such as payments to non-government schools and Financial Assistance Grants to local government. This category totalled $5.9 billion in 2003-04; and

Specific Purpose Payments paid direct to local government to help fund roads, child-care programmes administered by local government, and aged and disabled people's homes. These payments totalled $397.9 million in 2003-04.

Specific Purpose Payment agreements often include agreed national objectives; however, in making these payments, the Commonwealth does not seek to take over responsibility for state functions.

Specific Purpose Payment agreements generally contain conditions to help ensure the Commonwealth-State objectives are achieved. These may include:

general policy requirements (for example, the provision of free public hospital access for Medicare patients);

matching funding arrangements; and

reporting of performance information (see box).

Accountability for Specific Purpose Payments

The Government is seeking greater accountability in Specific Purpose Payment agreements to improve policy outcomes and deliver better value for money.

All new and renegotiated Specific Purpose Payment agreements will include statements of key objectives and the respective responsibilities of the Commonwealth and the States, combined with agreed reporting of financial information and detailed performance indicators.

To encourage increased accountability, an amount appropriate to each Specific Purpose Payment will be contingent on States' timely reporting of the agreed financial and performance information to the satisfaction of the responsible Commonwealth Minister.

Special Revenue Assistance

In 2003-04, Special Revenue Assistance to the Australian Capital Territory will be paid as a Specific Purpose Payment. Details of this Specific Purpose Payment are in Appendix B.

Financial Assistance Grants to local government

The Commonwealth Government provides financial assistance to local government for roads and other local government services. Assistance is paid in the form of general purpose assistance and untied local road funding. Local governments are able to spend both forms of funding according to their own priorities.

The Government is providing a total of $1,468.6 million in Financial Assistance Grants to local government in 2002-03 and an estimated $1,508.4 million in 2003-04 (Table 15). The annual increase in funding is based on an escalation factor, which the Treasurer determines with reference to population growth and CPI.

Financial Assistance Grants are paid to the States as a Specific Purpose Payment, on the condition that all of the funds are passed on to local government. In 2003-04, as in previous years, the general purpose component of local government assistance will be distributed between the States on an equal per capita basis and untied local road funding will be distributed on the basis of historical shares (Table 15). State grants commissions determine the intra-state distribution of the grants to local governments.

Table 15: Financial Assistance Grants to local government, 2002-03 and 2003-04 (estimated)(a)

Total Financial Assistance Grants are the cash payments that the State receives on behalf of local government. It is equal to the estimated entitlement for a given year adjusted for an over or underpayment from the previous year.
The 2002-03 figure takes into account an underpayment of $19.5 million in 2001-02. The 2002-03 escalation factor is currently estimated to be 1.0413. The Treasurer will determine the final 2002-03 escalation factor in June 2003.
The 2003-04 figure includes an estimate of the amount necessary to adjust for the difference between the 2002-03 escalation factor estimated in June 2002 and used to calculate payments in 2002-03 and the final factor for 2002-03, to be determined in June 2003. On the basis of the current estimate of the 2002-03 escalation factor, this adjustment is estimated to be an increase of $2.9 million. The 2003-04 escalation factor is currently estimated to be 1.0368. Financial Assistance Grants in 2003-04 will be paid on the basis of the escalation factor that the Treasurer will estimate in June 2003. The Treasurer will determine the final escalation factor for 2003-04 in June 2004.

Mirror tax arrangements

The Government introduced mirror tax arrangements in 1998 to ensure the States are not financially disadvantaged by the High Court decision in Allders International Pty Ltd v Commissioner of State Revenue (Victoria), which invalidated state taxes on Commonwealth places.

The Government introduced taxes to mirror certain state taxes, including payroll taxes, debits tax, land tax, and stamp duties on activities on or in Commonwealth places.

The States collect these mirror taxes on behalf of the Government and bear the administrative costs of collection. All mirror tax revenues are automatically credited to the Government and automatically appropriated to the States at the same time. Hence, mirror taxes are recorded as both Commonwealth revenue and negative revenue, with no net impact on the Budget. Accrued mirror taxes are estimated for 2002-03 to 2006-07 (Table 16).

Table 16: Accrued mirror taxes on behalf of the States, 2002-03 to 2006-07 (estimated)