NO.014

Today’s inaugural meeting of the Ministerial Council for Commonwealth-State

Financial Relations marks the start of a new era of Commonwealth-State

financial relations.

The meeting of Commonwealth, State and Territory Treasurers considered

expected revenue payments to the States and Territories in 2000-01,

as well as a range of GST administration issues.

The Ministerial Council was established by the Intergovernmental

Agreement on the Reform of Commonwealth-State Financial Relations

(IGA) which was signed by all jurisdictions last June. The IGA constitutes

a landmark reform to Commonwealth-State financial relations in:

• removing State and Territory reliance on financial assistance

  grants and revenue replacement payments from the Commonwealth;

• providing all GST revenue to the States and Territories, to be

  spent according to their own budgetary priorities;

• giving the States and Territories a direct role in determining

  the GST base and rate and related operational matters; and

• setting down a timetable for the abolition of a range of inefficient

  State taxes.

The new arrangements provide States and Territories with access to

a more robust tax base which will grow over time to ensure that State

and Territory budgets are substantially better off over the medium

term.

Commonwealth legislation provides the States and Territories with

balancing assistance to ensure that their budgets are no worse off

until such time as GST revenue exceeds current funding.

The attached Statement of Estimated Payments provides State-by-State

estimates of GST revenue and budget balancing assistance (Table 1),

general revenue assistance (Table 3) and specific purpose payments

(Table 5) payable to the States and Territories in 2000-01.

The Ministerial Council noted that, on the basis of current estimates,

States and Territories would receive in 2000-01:

• total GST revenue collections of $24,209.0 million; and
• total budget balancing assistance of $2,576.6 million, comprising

  interest free loans of $1,655.6 million and grants of $921.0 million.

The distribution of GST revenues amongst the States will be in accordance

with the recommendations of the Commonwealth Grants Commission (CGC)

in its Report on General Revenue Grant Relativities 2000 Update.

Each State will require budget balancing assistance in 2000-01. To

assist with the transition to the new arrangements, the full amount

of estimated budget balancing assistance will be paid up front to

the States on 4 July 2000.

The Ministerial Council noted long term projections of the State-by-State

impact of the IGA (attached). The projections are only indicative

guides. The actual impact of the IGA on each jurisdiction will be

significantly affected by GST revenue growth and the CGC’s annual

recommendations on the distribution of GST revenue.

On the basis of current preliminary estimates, total SPPs will increase

by around 4.5 per cent, or $792.8 million in 2000-01. After abstracting

from SPPs paid either direct to local government or which pass “through”

the States to other bodies, SPPs “to” the States are estimated

to increase by around 4.0 per cent, or $529.6 million. Detailed

estimates of the proposed level of SPPs and their distribution among

the States and Territories will be included in the Commonwealth’s

2000-01 Budget.

The Commonwealth reiterated its commitment under the IGA not to cut

aggregate SPPs to the States and Territories as part of the reform

processes.

The Commonwealth will also provide Competition Payments of up to $461.7 million

to the States and Territories in 2000-01, as specified in the Agreement

to Implement the National Competition Policy and Related Reforms.

Each jurisdiction’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.

In line with CGC recommendations, the ACT will receive $13.5 million

for transitional allowances and special fiscal needs in 2000-01.

Under the terms of the IGA, the Ministerial Council is charged with

overseeing the operation of the GST, including approving changes to

the GST base and rate, and monitoring the ATO’s performance in

GST administration.

As part of this process, the Ministerial Council is progressing a

number of Ministerial determinations, including the Division 81 determination,

gazetted on 1 March 2000, containing a list of Commonwealth, State

and Territory taxes and charges that will not be subject to the GST.

Under the IGA, the States and Territories agreed to assist first home

owners by funding and administering a new First Home Owners Scheme

(FHOS) in accordance with certain agreed criteria. The Ministerial

Council is responsible for ensuring that all jurisdictions meet their

commitments in this regard.

The Council noted that all jurisdictions have made considerable progress

in implementing the FHOS. States and Territories anticipate the passage

of the necessary legislation prior to the commencement date of 1 July

2000, and promotional activities have commenced to alert first home

buyers to the existence of the $7,000 grant for home purchases after

1 July 2000.

The IGA records the intention that the GST will apply to all levels

of government, including local government and their statutory corporations

and authorities.

The Ministerial Council noted the Commonwealth’s intention to

legislate to require the States and the Northern Territory to withhold

from any local government authority which does not register and pay

the GST a sum equivalent to the payments which ought to have been

made. It also noted the intention of States and the Northern Territory

to implement laws or procedures which will allow them to detect any

non-compliance by local government bodies and to determine the level

of local government financial assistance grants to be withheld in

such cases.

The majority of local government outputs will not be subject to GST

and local government bodies will generally be entitled to net refunds

of their input credits. Consequently it is expected that local governments

will voluntarily participate in the GST system, since it will be in

their financial interest to do so.

Under the IGA, Heads of Government indicated their intention to introduce

a National Tax Equivalent Regime (NTER) for income tax for State and

Territory government business enterprises. It was also agreed to progress

the reciprocal application of other Commonwealth, State and Territory

taxes on a revenue neutral basis as soon as practicable.

The Ministerial Council endorsed a target date for implementing the

NTER for income tax for State and Territory government business enterprise

of 1 July 2001 and agreed that implementation of the NTER should be

afforded priority ahead of the application of specified State and

Territory taxes to the Commonwealth.

The 139^th meeting of the Australian Loan Council was also

held today.

Loan Council endorsed the Loan Council Allocations (LCAs) nominated

by the Commonwealth and each State and Territory for 2000-2001 (attached).

Loan Council observed that economic growth in Australia is expected

to remain strong in 2000-01 and noted the importance of consolidating

the improvements in budgetary outcomes of recent years at this stage

in the economic cycle.

Containing the public sector’s call on financial markets, particularly

during periods of sound economic growth, maximises opportunities for

the private sector, lessens pressures on interest rates and helps

to ensure that the resources available to the government are used

efficiently. In addition, sustainable fiscal settings provide governments

with greater flexibility, contribute to national saving and help to

sustain financial market confidence, thereby enhancing the longer-term

growth prospects for the economy.

Against this background, Loan Council considered that the aggregate

of LCA nominations is consistent with current macroeconomic policy

objectives.

17 March 2000

CANBERRA

Under the terms of the Intergovernmental Agreement

on the Reform of Commonwealth-State Financial Relations (the Intergovernmental

Agreement) the States and Territories (the States) will receive all

of the revenue raised by the goods and services tax (GST) from 1 July

2000. GST revenues will be distributed amongst the States on the basis

of horizontal fiscal equalisation (HFE) principles.

Under the Intergovernmental Agreement, the Commonwealth

has guaranteed that in each of the transitional years following the

introduction of the GST, each States’ budgetary position will

be no worse off than had the reforms in the Agreement not been implemented.

To meet this commitment the Commonwealth will provide transitional

assistance, referred to as budget balancing assistance, which will

take the form of both one-year interest-free loans and grants to the

States in 2000-01 and quarterly grants in subsequent years. Budget

balancing assistance represents the difference between the Guaranteed

Minimum Amount (GMA) calculated for each jurisdiction and that jurisdiction’s

share of GST revenues.

Table 1 shows the latest available estimates of the

GMAs, GST revenues and budget balancing assistance. These estimates

will be subject to revision to account for parameter or estimate changes

between now and the date of the payment to the States (4 July 2000).

GST revenue estimates have been provided by the Commonwealth

Treasury. The distribution of GST revenues between States is in accordance

with the GST relativities recommended in the Commonwealth Grants Commission’s

(CGC’s) Report on General Revenue Grant Relativities 2000

Update (the 2000 Update) and the Methodology for Estimation

of Components of the Guaranteed Minimum Amount paper (the methodology

paper) referred to in Clause C8 of the Agreement.

The GMAs have been calculated according to the terms

of the Agreement and the methodology paper. The GMAs incorporate notional

financial assistance grants (FAGs) based on the FAGs relativities

recommended by the CGC in its 2000 Update. Table 2 provides

further detail of the calculation of the GMA for each State.

Table 3 provides a summary of the estimated general

revenue assistance and GST revenue provision to the States in 1999-2000

and 2000-01. Given the fundamental changes to Commonwealth State financial

relations under A New Tax System, comparisons between the two

years are not meaningful.

Table 4 provides details of the distributions of GST

revenue, taking into account projected populations, per capita relativities,

the distributions of unquarantined health care grants and the GST

growth dividend specified in the methodology paper.

Tables 5 and 6 show preliminary estimates of specific

purpose payments (SPPs) for 1999-2000 and 2000-01 on a no policy change

basis. Detailed estimates of the proposed level of SPPs and their

distribution amongst the States in 1999-2000 and 2000-01 will be included

in the Commonwealth’s 2000-01 Budget Papers.

Table 7 provides a summary of the States’ total

payments for 1999-2000 and 2000-01. It shows that an estimated $43,942.4

million will be paid to the States in 2000-01. (As noted above, the

fundamental change in Commonwealth State financial relations taking

place makes it difficult to make meaningful comparisons between 1999-2000

and 2000-01.)

Table 8 sets out repayments to the Commonwealth by

the States in 1999-2000 and 2000-01.

Table 1: Estimates of the Guaranteed Minimum Amount, GST Revenue and

Budget Balancing Assistance, $million

Click to enlarge Table 1

Table 2: Calculation of the Guaranteed Minimum Amount, 2000-01, $million

Click to enlarge Table 2

Table 3: GST Revenue and General Revenue Assistance, $million

Click to enlarge Table 3

1. The estimates of GST revenue are determined by distributing the

   pool of GST revenue and unquarantined health care grants (HCGs)

   on the basis of the relativities recommended by the Commonwealth

   Grants Commission (CGC), and then adding the GST growth dividend

   and deducting the HCGs estimate.

2. Budget balancing assistance consists of the grants only in this

   table. The States and Territories will also receive loans totalling

   $1,655.6 million in 2000-01 (see Table 1).

3. The estimates of financial assistance grants (FAGs) are determined

   by distributing the pool of FAGs and HCGs on the basis of the relativities

   calculated by the CGC, and then deducting the HCGs estimate.

4. These payments consist of transitional allowances and special

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

5. The Agreement to Implement the National Competition Policy and

   Related Reforms specifies that $400 million in 1994-95 prices be

   distributed between the States and Territories on an equal per

   capita basis in 1999-2000 and 2000-01. The receipt of payment is

   conditional on the obligations of the Agreement being met.

Table 4: Distribution of GST Revenue

Click to enlarge Table 4

1. 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 the period 1994-95 to 1998-99 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 population numbers are projections.

2. Includes per capita distribution of agreed $97.0 million estimated

   GST growth dividend. $30,204.1 million of the pool is distributed

   according to weighted population shares shown in column 4.

3. These estimates have been updated to reflect the Commonwealth’s

   announced intention to index the payments using Wage Cost Index

   No. 1.

Table 5: Estimates of Specific Purpose Payments, $million (a)

Click to enlarge Table 5

1. Specific purpose payment data are presented on an accruals basis

   in this table and abstract from the grants to the States under

   the Gun Buyback Scheme ($22.9 million in 1999-2000) and the Natural

   Disaster Relief Programme ($69.7 million in 1999-2000 and $33.0

   million in 2000-01).

Table 6: Estimates of Selected Specific Purpose Payments, $million

(a)

Click to enlarge Table 6

1. These accrual based estimates provide a guide to the major components

   of specific purpose payments and should not be taken as Commonwealth

   commitments. There are further Commonwealth budget processes and

   various parameter changes that could affect programme totals and

   the interstate distribution.

2. Roads Programme and Road Safety Blackspots Programme.
3. Home and Community Care and Supported Accommodation Assistance

   Programme.

Table 7: Total Payments (a)

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1. This table is presented on an accruals basis and abstracts from

   grants to the States under the Gun Buyback Scheme ($22.9 million

   in 1999-2000) and the Natural Disaster Programme ($69.7 million

   in 1999-2000 and $33.0 million in 2000-01). The tax liability measure

   (TLM) of accrual GST revenue is equivalent to cash collections.

   This approach is consistent with the accrual measures of Commonwealth

   tax revenues.

Table 8: Repayments, $million

 LOAN COUNCIL ALLOCATIONS –

2000-01 NOMINATIONS ($m) (a)

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Figures have been rounded. Discrepancies between totals and sums

of components reflect rounding.

1. LCA nominations for 2000-01 reflect current best estimates of

   non-financial public sector deficits/surpluses. Nominations have

   been provided on the basis of policies announced up to and included

   in jurisdictions’ mid year reports. 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 2000-01 LCA are

   designed, inter alia, to accommodate changes to the LCA resulting

   from changes in policy.

2. Memorandum items are used to adjust the non-financial 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 non-financial

   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.

3. The Victorian PTE sector deficit figure includes net advances

   paid, and excludes net advances received.

4. The Victorian non-financial public sector deficit figure includes

   non-financial public sector net advances paid.

5. South Australian non-financial public sector net advances paid

   for 1999–2000 include the proceeds received to date from the

   sale of South Australia’s electricity retail operations, and lease

   of electricity distribution assets.

NB Government contingent exposures under infrastructure

projects with private sector involvement are identified separately,

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.

ESTIMATED NET IMPACT OF INTERGOVERNMENTAL AGREEMENT ON THE REFORM

OF COMMONWEALTH-STATE FINANCIAL RELATIONS, $MILLION (a)

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These estimates are broadly indicative and subject to further revision.

They are based only on those impact items incorporated in the Guaranteed

Minimum Amount calculation. Additionally, the following assumptions

were used in their preparation: constant annual increases in GST revenue

of around 6 per cent after 2003-04; relative stability in Commonwealth

Grants Commission assessment of needs; debits tax is abolished from

1 July 2005; and business stamp duties are retained by the States

(the Ministerial Council will be reviewing the need for their retention

by 2005).