Part 3: Australia's Federal Relations
This part provides information on payments for specific purposes and general revenue assistance, including GST payments, provided to the States and Territories (the States).
On 29 November 2008, the Council of Australian Governments agreed to a new Intergovernmental Agreement on Federal Financial Relations (Intergovernmental Agreement) which provides the overarching framework for collaboration between the Commonwealth and the States.
The Intergovernmental Agreement, which commenced on 1 January 2009, involves significant reforms to payments for specific purposes. Under the new framework, some payments for specific purposes under the previous arrangements have been: incorporated into the new National Specific Purpose Payments (National SPP); deemed to be National Partnership payments; or paid as general revenue assistance since 1 January 2009. This affects the presentation of these payments in 2008-09, which is a transitional year for Commonwealth payments to the States.
More detailed information on the Intergovernmental Agreement is provided in Budget Paper No. 3, Australia's Federal Relations 2009-10.
Overview of payments to the States
The States receive significant financial support from the Commonwealth. In 2008-09, the Commonwealth provided the States with payments for specific purposes of $41.7 billion and general revenue assistance, including GST payments, of $42.4 billion, totalling $84.0 billion, as shown in Table 24. This represents a 12.8 per cent increase compared with 2007-08.
Table 24: Commonwealth payments to the States, 2008-09
Chart 1 shows the State shares of total payments from the Commonwealth in 2008-09.
Chart 1: State shares of Commonwealth payments, 2008-09
Payments for specific purposes
The Commonwealth provides payments to and through the States for specific purposes in order to pursue policy objectives in areas that may be administered by the States and local governments. Payments to the States for specific purposes constituted a significant proportion of Commonwealth expenditure — 12.8 per cent of total Commonwealth expenditure in 2008-09.
These payments cover most functional areas of state and local government activity — including health, education, community services, housing, infrastructure and environment — as illustrated in Chart 2.
Chart 2: Composition of payments for specific purposes, 2008-09(a)
- Payments to local government include general revenue assistance components only. Other payments to local government are categorised under the relevant sector.
National Specific Purpose Payments and National Partnership payments
Under the Intergovernmental Agreement, many payments for specific purposes were rationalised into one of the five new National SPPs. These new National SPPs are the primary way that the Commonwealth supports the States' efforts in delivering services in the major sectors of health, schools, skills and workforce development, disability services and affordable housing. The National SPPs for schools, skills and workforce development, disability services and affordable housing commenced on 1 January 2009 and the National Healthcare SPP commenced on 1 July 2009.
These new National SPPs replaced a number of existing payments that were paid up to 31 December 2008 (or 30 June 2009 in the case of healthcare). Payments made throughout the year for National SPPs are advances based on Commonwealth estimates of the growth factors. A balancing adjustment in respect of the advances is made after the end of the financial year once outcome data are available.
The National SPPs are distributed among the States according to population shares based on the Australian Statistician's determination of States' population shares as at 31 December of each financial year. In recognition that distributing National SPPs according to population shares would result in a shift in payment shares, the new method of distribution will be phased in over five years from 2009-10.
- In the case of the government schools component of the National Schools SPP, the relevant population is each State's share of full-time equivalent student enrolments in government schools.
In addition to National SPPs, the Commonwealth provides National Partnership payments to the States to support the delivery of specific projects (project payments), to facilitate reforms (facilitation payments), or to reward those jurisdictions that deliver on nationally-significant reforms (reward payments). Previous payments for specific purposes that were not rolled into the National SPPs and election commitments have become National Partnership project payments where they support national objectives and provide a financial contribution to the States to deliver specific projects. Furthermore as noted previously, several payments which were previously classified as specific purposes payments were paid as general revenue assistance from 1 January 2009.
In 2008-09, the States received $41.7 billion in payments for specific purposes, an increase of 30.0 per cent compared with the $32.0 billion the States received in 2007-08. Total payments for specific purposes, including new National SPPs and National Partnership payments are shown in Table 25.
Table 25: Payments for specific purposes to the States, 2008-09(a),(b)
- National SPPs were paid from 1 January 2009, with the exception of the National Healthcare SPP that commenced on 1 July 2009.
- National Partnership payments include all payments for specific purposes except payments formally paid as National SPPs from 1 January 2009.
- Includes general revenue assistance components of payments to local government. Other payments to local government are categorised under the relevant sector.
Chart 3 shows the State shares of payments for specific purposes from the Commonwealth in 2008-09.
Chart 3: State shares of payments for specific purposes, 2008-09
Financial assistance grants to local governments
The Commonwealth provided $2.4 billion in financial assistance grants to local governments in 2008-09. Table 26 provides details of these grants, which are provided to the States to be distributed to local governments in each State. An analogous payment is made to the Australian Capital Territory.
Financial assistance grants are increased annually on the basis of an escalation factor determined each year by the Treasurer. The 2008-09 grants were based on an estimated escalation factor of 1.0497 and incorporated recovery of an underpayment of $19.6 million in respect of 2007-08.
In the 2009-10 Budget, the Commonwealth decided to make the first quarter financial assistance grants payment for 2009-10 in the 2008-09 financial year with a corresponding reduction in 2009-10. This accelerated the provision of funding to local government and assisted the Government's strategy of supporting economic growth and jobs.
To account for the bringing forward of these payments, the Treasurer determined an adjusted final escalation factor for 2008-09 of 1.3128. This adjusted factor was applied to the 2007-08 financial assistance grants entitlement to calculate total funding for 2008-09. Over the two years of 2008-09 and 2009-10, local governments will still receive their full financial assistance grants entitlement. For this reason, an adjusted estimated escalation factor for 2009-10 of 0.6210 has been determined.
Table 26: Financial assistance grants to local government, 2008-09
- There was an underpayment in 2007-08 because the estimated escalation factor of 1.0455 was lower than the unadjusted final factor of 1.0571. A balancing adjustment of $19.6 million was made in 2008-09.
- Total financial assistance grants are the actual cash payment that each State receives on behalf of local government. They are equal to the estimated entitlement for a given year, adjusted for an overpayment or underpayment from the previous year. The difference between the estimated entitlement and the final entitlement for the current year will be adjusted in the following year.
General revenue assistance
General revenue assistance is a broad category of payments, including GST payments, which are provided to the States without conditions, to spend according to their own budget priorities.
In 2008-09, the States received $42.4 billion in general revenue assistance from the Commonwealth, as shown in Table 27, comprising $41.2 billion in GST payments and $1.2 billion of other general revenue assistance. This is a 0.2 per cent decrease in general revenue assistance, compared with the $42.5 billion the States received in 2007-08. In 2008-09, total general revenue assistance to the States represented 13.0 per cent of total Commonwealth expenditure.
Table 27: General revenue assistance, 2008-09
GST payments
Reconciling GST revenue and GST payments to the States
The Commonwealth makes GST payments to the States based on the revenue received from the GST. In 2008-09, GST revenue was $42.6 billion — a decrease of $1.8 billion (4.0 per cent) from 2007-08.
However, GST revenue for a financial year varies from the amount of GST payments to the States for that year for several reasons including:
- GST revenues which are recognised on a Commonwealth whole-of-government basis, but are not recognised by the Commissioner of Taxation in his June determination because the revenues will not be remitted to the Australian Taxation Office until the following financial year; and
- penalties, other than general interest charge penalties, which are not included in the definition in the Intergovernmental Agreement of GST to be paid to the States.
In June 2009, the Commissioner of Taxation determined the amount of GST payable to the States in 2008-09. That estimate forms the basis of GST payments to the States for the financial year. This is the last year that the Commissioner will determine the amount of GST payable to the States. From 2009-10, that amount will be based on the final GST outcome rather than the Commissioner's determination. To ensure that the States receive their correct entitlement of GST payments for the 2008-09 financial year, a balancing adjustment for each State will be made in the 2009-10 financial year.
The reconciliation of GST revenue and GST payments to the States is provided in Table 28.
Table 28: GST revenue and GST payments to the States, 2008-09
- General interest charge (GIC) penalties are defined in the Intergovernmental Agreement as being a part of the Commonwealth's GST revenue that is paid to the States. However, while other GST related penalties are also recognised in the Commonwealth's GST revenue, non-GIC penalties are not defined in the Intergovernmental Agreement as being a part of the GST revenue that is paid to the States.
- This is the GST component of sales by Commonwealth agencies which has been collected by those agencies but which, as at 30 June in each year, will not have been remitted to the Australian Taxation Office, because it is not due to be paid until the next Business Activity Statement is lodged (typically on 21 July in the following financial year).
- The Commissioner's determination for 2008-09 was $19 million lower than the final outcome. This underpayment will be paid in 2009-10.
- The Commissioner's determination for 2007-08 was $49 million lower than the final outcome. This underpayment was paid in 2008-09.
Distribution of GST payments among the States
As agreed by COAG in the Intergovernmental Agreement, the Commonwealth distributes GST payments among the States and Territories in accordance with the principle of horizontal fiscal equalisation and having regard to the recommendations of the Commonwealth Grants Commission.
State shares of GST payments for 2008-09 are shown in Chart 4.
Chart 4: State shares of GST payments, 2008-09
GST relativities
The Commission recommends GST relativities to be used in calculating each State's share of GST payments. The relativities determine how much GST revenue each State receives compared with an equal per capita share and are determined such that, if each State made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each State would have the capacity to provide services at the same standard.
The GST relativities for 2008-09 were endorsed by the Ministerial Council for Commonwealth-State Financial Relations in March 2008. The relativities for 2008-09 are shown in Table 29.
Table 29: GST relativities, 2008-09
Applying the GST relativities to the GST pool
The GST relativities were applied to estimated state populations in order to determine an adjusted population for each State. Each State received its adjusted population share of the combined pool of GST payments and unquarantined health care grants, provided by the Commonwealth under the Australian Health Care Agreements, to estimate adjusted shares of the GST pool. The final distribution of GST payments is determined by deducting the unquarantined health care grants, which are separately provided to the States, from each State's share of the GST pool. The calculations for the distribution of the GST pool are shown in Table 30.
Table 30: Distribution of the GST pool, 2008-09
The new Intergovernmental Agreement has significantly changed the scope of the revenue sharing relativities the Commission is asked to recommend. 2008-09 was the last year that the Commission was asked to recommend a relativity to distribute a pool of GST payments plus health care grants. From 2009-10, the Commission is asked to recommend a relativity to distribute only GST payments. Health care grants are now treated in the same way as other payments which have been rationalised into the new National SPPs.
GST administration costs
The Commissioner of Taxation administers the GST law and the States compensate the Commonwealth for the agreed costs incurred by the Australian Taxation Office in administering the GST, including costs incurred by the Australian Customs Service, as shown in Table 31.
Table 31: GST administration, 2008-09
- Preliminary outcome for 2008-09 pending confirmation by the Australian National Audit Office.
In March 2008, the Ministerial Council for Commonwealth-State Financial Relations agreed to a GST administration budget of $631.2 million for 2008-09. This was subsequently revised up to $631.9 million owing to a revised estimate of the costs.
The preliminary outcome for the 2008-09 GST administration expenses of $602.0 million differs from the amount paid by the States and the prior year adjustment by $29.9 million. Once the outcome for GST administration in 2008-09 is audited, any adjustment required because of this difference will be incorporated into the States' administration costs for 2009-10.
Other general revenue assistance
Budget balancing assistance
The Commonwealth paid budget balancing assistance to the States in 2008-09 where a State's share of GST payments in the financial year was less than its guaranteed minimum amount for that year. No budget balancing assistance is payable when GST revenue exceeds the guaranteed minimum amount. The guaranteed minimum amount for four States — New South Wales, South Australia, Tasmania and the Northern Territory — exceeded those States' shares of the GST payments, as shown in Table 32. Consequently, the Commonwealth provided total budget balancing assistance of $275 million.
Table 32: Guaranteed minimum amount, GST payments and budget balancing assistance, 2008-09
Taxation compensation in respect of Snowy Hydro Limited
There is lower than expected expenses of $415 million in 2008-09 owing to New South Wales and Victoria choosing not to accept the Commonwealth's offer to cash out the Snowy Hydro Ltd company tax compensation.
GST compensation for small business concession
The Government proposed in the 2009-10 Budget that it will recover, in 2009-10, the net overpayment of compensation for the deferral of GST revenue resulting from the 2004-05 decision to allow small businesses and non-profit organisations that voluntarily registered for the GST to pay and report GST on an annual rather than monthly or quarterly basis. The overestimate of the cost of the measure led to an overpayment of compensation to the States, which is estimated to be $309 million at the end of 2008-09.
The amount to be recovered is the present value of the overpayment less the present value of the stream of future annual payments. This arrangement will extinguish all current and future Commonwealth and state commitments in respect of this measure. Western Australia and South Australia elected to repay their overpayment in 2008-09.
Payments to the States
This attachment provides accrual estimates of Commonwealth payments to the States and local governments. This includes Commonwealth advances (loans) to the States, including new advances, interest on advances and repayments of advances. Most of these advances were funded from borrowings made on behalf of the States under previous Australian Loan Council arrangements.
The Intergovernmental Agreement which commenced on 1 January 2009 is reflected in the tables in this attachment. This affects the presentation of these payments in 2008-09 as most payments were moved to the new financial arrangements from 1 January 2009. For example, Table 36 reflects the payments to support housing services (paid by the portfolio agency until 31 December 2008), and the transition of these terminating payments into the National Affordable Housing SPP (paid from 1 January 2009 by the Treasury).
The tables present estimated payments to the States for 2008-09:
Table 33 — health;
Table 34 — education;
Table 35 — community services;
Table 36 — housing;
Table 37 — infrastructure;
Table 38 — environment;
Table 39 — other purposes;
Table 40 — contingent liabilities;
Table 41 — general revenue assistance;
Table 42 — advances, repayment of advances and interest payments; and
Table 43 — payments presented on the Australian Bureau of Statistics Government Finance Statistics (GFS) functional basis.
Table 43 is comparable to Table 34 of the Final Budget Outcome 2007-08 which presented payments for specific purposes at a GFS functional level (for example, general public services, public order and safety, education and health).
Table 33: Payments for specific purposes to support state health services, 2008-09
Table 33: Payments for specific purposes to support state health services, 2008-09 (continued)
- The service delivery component of essential vaccines has been rolled into the National Healthcare SPP from 1 July 2009.
- Payments for OzFoodNet and Torres Strait Islander health protection strategy mosquito control made prior to 31 December 2008, were paid under the national public health program. Individual line items for these initiatives show the total amount paid for the 2008-09 financial year. The total amount listed under the national public health program has been adjusted accordingly.
- This payment is reclassified as a Commonwealth own-purpose expense with effect from 1 July 2009.
Table 34: Payments for specific purposes to support state education services, 2008-09
Table 34: Payments for specific purposes to support state education services, 2008-09 (continued)
- Non-government schools payments are net of GST.
Table 35: Payments for specific purposes to support community services, 2008-09
Table 36: Payments for specific purposes to support housing services, 2008-09
Table 37: Payments for specific purposes to support state infrastructure services, 2008-09
Table 38: Payments for specific purposes to support state environmental services, 2008-09
Table 39: Contingent payments to the States, 2008-09
Table 40: Payments to support other state services, 2008-09
Table 41: General revenue assistance payments to the States and Territories, 2008-09
Table 42: Other financial flows — estimated advances, repayment of advances and interest payments, 2008‑09
Table 42: Other financial flows — estimated advances, repayment of advances and interest payments, 2008‑09 (continued)
Table 43: Total payments to the States and Territories by GFS function, 2008-09
- Payments for 'Other purposes' includes general revenue assistance to the States and local governments.
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