NO.017

In reaching agreement today on general revenue assistance to the States and

Territories in 1999-2000, the Premiers’ Conference recognised that the continuation

of sound fiscal policies by all levels of government remains fundamental to maintaining

economic and employment growth in an uncertain international environment.

The substantial programme of fiscal consolidation implemented by the Federal Government

during its first term has played a central role in boosting international investor

confidence in Australia and creating the conditions for strong and sustainable economic

growth, notwithstanding the sharp downturn in the Asian region.

Despite the need for ongoing fiscal restraint, the agreement reached today sees a

substantial increase in Commonwealth payments to the States and Territories in 1999-2000.

• General revenue assistance to the States and Territories is expected to increase by

  $843 million (4.9 per cent) in 1999-2000. Allowing for the fact that States

  and Territories will no longer be making State fiscal contributions, which totalled

  $313.4 million in 1998-99, general revenue assistance will rise by

  6.9 per cent in 1999-2000, or 4.4 per cent in real terms.

• Total payments to the States – which include general revenue assistance and specific

  purpose payments – are estimated to rise by $988 million or 3.0 per cent.

The Commonwealth will maintain Financial Assistance Grants (FAGs) to the States and

Territories in real per capita terms in 1999-2000, resulting in an estimated increase in

total FAGs of some $628 million, or 3.7 per cent.

The distribution of FAGs between the States and Territories will be based on the

corrected Commonwealth Grants Commission’s (CGC) 1999  recommended per capita

relativities, using a five year assessment period and including an allowance for

depreciation costs of the States.

A State or Territory’s receipt of the per capita element of FAGs growth will

remain conditional on meeting the obligations of the Agreement to Implement the

National Competition Policy and Related Reforms.

The Commonwealth will also provide Competition Payments to the States and Territories

as specified in the Agreement to Implement the National Competition Policy and Related

Reforms.

These payments will be worth up to $443.3 million in 1999-2000, more than double

their estimated 1998-99 level of $216.2 million. A State’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.

The ACT will receive Special Revenue Assistance from the Commonwealth totalling

$13.2 million in 1999-2000, comprising transitional allowances of $9.3 million

and $3.9 million for special fiscal needs. These amounts are in accordance with the CGC’s

recommendations and will be funded directly by the Commonwealth.

Details of the estimated general revenue assistance to the States and Territories in

1998-99 and 1999-2000 are set out in Tables 1 and 2.

The actual 1999-2000 payments for FAGs and Competition Payments will reflect the

outcome for the CPI and the determination of population by the Australian Statistician

during the year.

Table 3 shows estimated total payments, comprising general revenue assistance and

specific purpose payments, to the States and Territories in 1999-2000. The estimates of

specific purpose payments are cash based estimates as at the time of the

Commonwealth’s Mid-Year Economic and Fiscal Outlook and are prepared on a no policy

change basis. In accordance with normal budgetary procedures, specific purpose payments

will be subject to consideration in the Commonwealth’s 1999-2000 Budget processes.

Detailed estimates of the proposed level and distribution of specific purpose payments

will be included in the 1999-2000 Budget papers.

1999-2000 will be the final year in which FAGs payments are made to the States and

Territories. From 2000-01, States and Territories will receive the full proceeds of the

GST. This historic reform to Commonwealth-State financial relations will provide States

and Territories with a more robust tax base which can be expected to grow over time, while

at the same time permitting the elimination of a range of existing inefficient taxes which

are impeding economic activity.

Over time, these new arrangements will substantially improve the overall financial

position of all States and Territories, while in the transitional period, the Commonwealth

has undertaken to ensure that the budgetary position of each State and Territory is no

worse off than it would have been had the reforms not been made.

Loan Council endorsed the Loan Council Allocations (LCAs) nominated by the

Commonwealth and each State and Territory for 1999-2000. These are shown in Table 4.

Loan Council noted that the Australian economy has remained resilient in the face of

the international slowdown and, in particular, the downturn in many of our Asian trading

partners. Loan Council considered that the process of fiscal consolidation has been

important in helping to shield the domestic economy from the instability experienced in

our region and noted the need for continued perseverance with sound fiscal policies.

Against this background, Loan Council considered that the aggregate of LCA nominations

is consistent with current macroeconomic policy objectives.

(a) The estimates of financial assistance grants (FAGs) are determined

by distributing the pool of FAGs and unquarantined health care grants

on the basis of the per capita relativities recommended by the Commonwealth

Grants Commission (CGC), and then deducting the estimate of unquarantined

health care grants. The FAGs estimates do not include offsets for State

fiscal contributions in 1998-99.

FAGs for 1999-2000 have been derived by indexing estimated FAGs for 1998-99 by

3.74 per cent (an increase of $627.7 million). The final outcome for

1999-2000 will depend on the actual increase in the CPI to March 2000 and the

determination of the Statistician as to population as at 31 December 1998 and

31 December 1999, as well as the final level of FAGs for 1998-99.

(b) For 1998-99 and 1999-2000, these payments only consist of transitional allowances

and special fiscal needs paid to the ACT in accordance with CGC recommendations.

(c) The Agreement to Implement the National Competition Policy and Related Reforms

specifies that $200 million in 1994-95 prices is to be distributed between the States on

an equal per capita basis in 1998-99 and $400 million in 1994-95 prices in 1999-2000.

The receipt of the payment is conditional on a State meeting the obligations of the

Agreement.

Note: All numbers in this table have been rounded. Any discrepancies in the totals are

due to rounding.

(a) Total weighted population differs from the total population in column 1 as the per

capita relativities are calculated by the CGC using population numbers for a lagged

assessment period and are then rounded. It is the total population shown in column 1 that

is used in determining an index factor for the FAGs pool. Note also that the population

numbers are projections.

(b) As specified under the AHCAs.

Note: All numbers in this table have been rounded. Any discrepancies in the totals are

due to rounding.

TABLE 3: ESTIMATED TOTAL PAYMENTS TO THE STATES AND

TERRITORIES, 1998-99 & 1999-2000 ^(a)

(a) Specific purpose payment data are presented on a cash basis in this

table and abstract from grants to the States under the Guns Buyback Scheme

($78.8 million in 1998-99).

Note: All numbers in this table have been rounded. Any discrepancies in the totals are

due to rounding.

Figures have been rounded. Discrepancies between totals and sums of

components reflect rounding.

(a) LCA nominations for 1999-2000 reflect current best estimates of 1999-2000 public

sector deficits/surpluses. Nominations have been provided on the basis of policies

announced up to and included in jurisdictions’ mid year reports. With the exception

of Victoria (see footnote 2) 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 PTE 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 total non-financial public sector revenue)

tolerance limits around each jurisdiction’s 1999-2000 LCA are designed, inter alia,

to accommodate changes to the LCA resulting from changes in policy.

(b) Memorandum items are used to adjust the 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 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. Overfunding and underfunding of emerging superannuation liabilities is

also included as a memorandum item, as are interest earnings on employer superannuation

balances.

(c) Government contingent exposures under infrastructure projects with private sector

involvement are identified in the attachment to this report, rather than included as a

component of LCAs. These exposures, which are measured as the government’s

contractual liabilities in the event of termination of the project, are unlikely to be

realised and are thus materially different from actual borrowings undertaken to finance

the public sector deficit. Government outlays under these projects, such as equity

contributions and ongoing commercial payments to the private sector, continue to be

included in the annual total public sector deficit, and hence the LCA.

1. New South Wales’ 1999-2000 allocations and latest 1998-99 estimates incorporate the

impact of its superannuation conversion offer.

2. Victoria updated its 1999-2000 LCA nomination, and its latest estimate of 1998-99

LCA, on 7 April 1999. These changes were mainly due to significant privatisation receipts,

which occurred after their Mid Year Report.

3. Changes in the measurement of overfunding of superannuation have led to a

substantial upward revision in South Australia’s memorandum items and in the LCA

surplus estimated for 1998-99.

4. The revision in the Commonwealth’s 1998-99 estimate since Budget time mainly

reflects a change in the timing of the sale of the Government’s remaining equity in

Telstra.