NO.016

MEETING OF THE MINISTERIAL COUNCIL FOR COMMONWEALTH-STATE FINANCIAL RELATIONS

AND OUTCOME OF THE AUSTRALIAN LOAN COUNCIL

All the States and Territories will abolish Bank Account Debits tax by 1 July

2005 as a result of an agreement between the Australian Government and the State

Governments today. The abolition of this narrow, inefficient tax will save taxpayers

around $1 billion a year. The abolition of this tax will be funded by the growing

GST revenue to the States.

Agreement has also been reached to review a range of State and Territory business

stamp duties. The review will report to the Ministerial Council in 2005.

A further outcome of the meeting is that GST revenue in 2004-05 will be distributed

in accordance with the recommendations of the Commonwealth Grants Commission

(CGC). This is supported by all States and Territory Governments other than

NSW and Victoria. A majority of the States and Territories, with the support

of the Australian Government, have agreed to a work program on simplification

of the CGC’s methodology.

Payments to the States and Territories

The Ministerial Council noted the Statement of Estimated Payments to the States

and Territories (which is reproduced at Attachment A). The Statement indicates

that the Australian Government will provide State and Territory governments

with total funding of more than $50.3billion in 2003-04 and more than $52.8billion

in 2004-05. It also shows that total funding for each State and Territory government

will increase from 2003-04 to 2004-05.

Adding payments made directly to local government and those which pass “through”

the States to other bodies, the total funding provided by the Australian Government

will be more than $56.7billion in 2003-04, increasing to more than $59.4billion

in 2004-05.

GST Revenue Received by the States and their Gains from Tax Reform

The Ministerial Council noted that the States and Territories will receive

an estimated total of $32.5 billion in GST revenue in 2003-04 and $34.1billion

in 2004-05. These estimates are based on the MYEFO estimates of GST revenue.

On the basis of these estimates, only New South Wales and Victoria require

Budget Balancing Assistance (BBA) in 2003-04. The other six States and Territories

are estimated to be better-off, by in excess of $590 million, as each of their

GST entitlement is expected to exceed their Guaranteed Minimum Amount(GMA).

The estimates also indicate that Victoria will no longer require BBA from 2004-05.

In 2004-05 on current estimates, the States will share a GST windfall of $953

million with only New South Wales requiring Budget Balancing Assistance.

As part of the Intergovernmental Agreement, all States and Territories

agreed that all of the GST revenue would be distributed among them on a Horizontal

Fiscal Equalisation (HFE) basis, based on recommendations of the CGC, which

is the independent and expert arbiter on matters relating to HFE.

The CGC’s recommended relativities were discussed by the Ministerial

Council and all States and Territories put forward their views.

The CGC’s methodology is developed by the CGC in consultation with all

the States and Territories and is based on the long-standing principle that

all State and Territory governments should have the same capacity to provide

quality services to their citizens.

The States’ complaints about funding are a dispute between the States

and Territories over the distribution of their own revenue source – the

GST. Every dollar of GST revenue goes to the States and Territories. If all

States and Territories come united to the Australian Government and want the

formula changed, I will consider their proposal. However as this has not occurred

today, I will be accepting the decision of the independent umpire.

A majority of the States and Territories, with the support of the Australian

Government, agreed to a work program on the CGC’s methodology, which is

used to distribute the GST revenue between the States and Territories.

This work will be undertaken by Heads of Treasuries, and will draw upon the

expertise of the CGC.

The review will consider:

• whether the present approach,which is based on a comprehensive assessment

  of virtually all receipts and expenses in the operating statements of States,

  is appropriate and necessary;

• the size and trend of the redistributions;
• simplification; and
• data issues.

This work program will not, however, be examining the underlying principles

of HFE.

Specific Purpose Payments (SPPs)

On the basis of preliminary estimates, total SPPs will increase by around 4.9

per cent or $1,153.5 million in 2004-05. After abstracting from SPPs which will

be paid direct to local government, or which pass “through” the

States and Territories to other bodies, SPPs “to” the States and

Territories are estimated to increase by around 5.1 per cent, or $861.5 million.

Detailed estimates of the proposed level of SPPs and their distribution among

the States and Territories will be included in the Australian Government’s

2004-05 Budget.

National Competition Policy Payments

The Australian Government will also provide National Competition Policy Payments

of up to approximately $775 million to the States and Territories in 2004-05,

as specified in the Agreement to Implement the National Competition Policy

and Related Reforms.

Each State and Territories’ receipt of its per capita share of Competition

Payments will be determined once the Australian Government has considered recommendations

from the National Competition Council’s assessment of progress under the

Competition Agreements.

GST Administration Issues

As the Australian Taxation Office (ATO) collects all GST revenue on behalf

of the States and Territories, the Intergovernmental Agreement provides that

accountability and performance arrangements will be established between the

State and Territory governments and the ATO. The Ministerial Council endorsed

a number of updates to the GST Administration Performance Agreement between

the Australian Taxation Office and the States and Territories.

The Ministerial Council also discussed GST administration costs and related

issues and agreed the ATO’s GST administration budget for 2004-05, consistent

with the requirement of the Intergovernmental Agreement that the States

and Territories compensate the Australian Government for the costs of administering

the GST.

Loan Council Allocations for 2004-05

Today’s meeting of the Loan Council endorsed the Loan Council Allocations

nominated by the Australian Government and each State and Territory for 2004-05

(Attachment B).

Contact: David Alexander

02 6277 7340