The States will receive revenue and payments totalling an estimated $54.2 billion in 2002-03 (Table 1) and $56.2 billion in 2003-04 (Table 2). These amounts include GST revenue, Budget Balancing Assistance, National Competition Policy Payments and Specific Purpose Payments including payments direct to local government.
All GST revenue is paid to the States under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations. The GST revenue pool is distributed to the States on the basis of recommendations by the Commonwealth Grants Commission, which applies the principles of Horizontal Fiscal Equalisation to help determine state revenue shares.
The Government pays the States Budget Balancing Assistance to cover any difference between GST revenue and States' Guaranteed Minimum Amounts. This is designed to ensure that States' budgetary positions are no worse off after the changes made to Commonwealth-State financial relations as part of the Commonwealth Government's implementation of The New Tax System in 2000-01.
In addition, the Government provides the States with National Competition Policy Payments to implement National Competition Policy and related reforms, as well as Specific Purpose Payments, including Financial Assistance Grants to local government, to contribute towards the costs of state and local government responsibilities.
Other features of Commonwealth-State financial relations include the First Home Owners Scheme and mirror tax arrangements.
Table 1: GST revenue provision and total Commonwealth payments to the state/local sector, 2002-03 (estimated)
- The GST estimate has been adjusted to account for the final 2001-02 outcome, reflecting that GST payments in 2001-02 exceeded final collections in that year. Further details are provided under 'Adjustments' on page 15.
All GST revenue collected is received by the States. Consequently, the States have a secure, growing and broad-based revenue source. States can spend the GST revenue according to their own budgetary priorities. Table 3 shows the growth in the States' GST revenue since tax reform in 2000-01.
GST revenue is estimated in accrual terms for the years 2002-03 to 2005-06 (Table 4). These estimates have been revised since the 2002-03 Budget and the Mid-Year Economic and Fiscal Outlook 2002-03 (MYEFO) to account for policy decisions and parameter variations. GST revenue is also estimated in cash terms (Table 5).
Since the 2002-03 MYEFO, estimates of GST receipts have been revised up in all years, reflecting stronger than expected growth in the revenue base.
Estimated GST revenue in 2002-03 has been revised upwards by around $1.3 billion in accrual terms, due to higher than anticipated collections in the year to date primarily as a consequence of continued strength in the dwellings sector. Although dwelling investment is still forecast to weaken, the slowdown is now expected to be later and more moderate than anticipated at MYEFO - providing the States with an additional fillip to GST revenue in the forward years.
GST revenue measures
Policy decisions affecting GST revenue estimates include: the decision to make Languages Other Than English courses provided by non-profit ethnic schools GST-free; amendments to the application of GST to Compulsory Third Party insurance; and the Government's response to the report of the Inquiry into the Definition of Charities. The revenue effect of these GST measures is estimated for 2003-04 to 2006-07 (Table 6). Detailed information on each measure is in Appendix A.
Table 6: GST revenue measures since the 2002-03 Budget (estimated)
GST revenue provision
The Government will distribute 2003-04 GST revenue among the States in accordance with the 2003 recommendations of the Commonwealth Grants Commission.
The Commission recommends state revenue sharing relativities for distributing the GST revenue pool by applying the principles of Horizontal Fiscal Equalisation. Broadly, the Commission recommends relativities so 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 could provide services at the same standard.
The Commission takes into account differences in States' capacities to raise revenues and differences in the costs incurred by the States in providing an average standard of government services. The Commission's recommended state revenue sharing relativities reflect these differences. GST relativities, which help determine the distribution of the GST pool, are shown for 2002-03 and 2003-04 (Table 7).
The Commission also estimates Financial Assistance Grants forgone relativities (Table 7), used for the calculation of States' Guaranteed Minimum Amounts (Table 11).
The GST relativities are applied to state populations to determine a weighted population for each State. The Government uses the weighted populations to distribute the GST revenue pool. Each State receives a share of the GST revenue pool equal to its weighted population share of combined GST revenue and unquarantined Health Care Grants, less its unquarantined Health Care Grants. This calculation determines the distribution of GST revenue in 2002-03 and 2003-04 (Tables 8 and 9).
- Total weighted population differs from the total population in column 1 as the per capita relativities are calculated by the Commonwealth Grants Commission using population numbers for the period 1996-97 to 2000-01 and are then rounded.
- Total weighted population differs from the total population in column 1 as the per capita relativities are calculated by the Commonwealth Grants Commission using population numbers for the period 1997-98 to 2001-02 and are then rounded.
The Effect of Horizontal Fiscal Equalisation
To view the effect of the Commonwealth Grants Commission's application of Horizontal Fiscal Equalisation, compare the distribution of the GST revenue/Health Care Grants pool with the distribution on an equal per capita basis for each State. In 2003-04, approximately $2,747.2 million (7.1 per cent) of the total GST revenue/Health Care Grants pool will be redistributed among the States, compared with an equal per capita distribution (Table 10).
New South Wales, Victoria and Western Australia receive less than equal per capita shares under the Horizontal Fiscal Equalisation arrangements because the Commission has assessed their fiscal capacity to be relatively strong. For example, the Commission assessed that New South Wales has a relatively stronger capacity to raise revenue from land tax and stamp duty on property transfers; Victoria has a relatively lower cost of providing state government services; and Western Australia has a relatively strong capacity to raise revenue from mining activities. The remaining States receive more than an equal per capita share of funding because the Commission has assessed their fiscal capacity to be lower and/or their costs of service delivery to be higher.