intergovernmental financing in australia alan morris chairman, commonwealth grants commission...

INTERGOVERNMENTAL

FINANCING IN AUSTRALIA

Alan MorrisChairman, Commonwealth Grants Commission

Australia

April 2006

2

STRUCTURE OF PRESENTATION

a. Objectives of Intergovernmental Financing

b. Key Principle

c. Horizontal Fiscal Equalisation in Australia

d. Some Lessons

3

OBJECTIVES OF INTERGOVERNMENTAL

FINANCINGa. Economic growth

b. Derivation – return revenue to where it was generated

c. Support for poorer / less developed regions

d. Equity — people / communities / regions to have equal wealth (eg equal regional GDP)

e. Equalisation

4

KEY PRINCIPLE

Distribution of funding must be related to function:

a. Vertical — National / Provincial shares

b. Horizontal — across Provinces

5

State governments should receive funding from the pool of goods and services tax revenue and health care grants such that, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each would have the capacity to provide services at the same standard.

HORIZONTAL FISCAL EQUALISATION IN AUSTRALIA

6

FEATURES OF EQUALISATION

Equalisation has three pillars…

Capacity equalisation

Internal standards –equalise to what States, on average, actually do

Policy neutrality – a State’s own policiesdo not directlyinfluence its assistance

7

HFE does not seek to deliver:

a. Performance equalisation

b. Economic efficiency

c. Vertical equity between individuals

8

Aust Govt is responsible for national issues:

trade, defence,

foreign relations, immigration,communications,currency,social security(pensions etc)

States have responsibility for most service delivery:

education,health, housing, roads, and law and order

Federal Government imposes all major taxes

(income, company, excise, and GST)

States have relatively small taxes (payroll tax, land revenue)

THE AUSTRALIAN CONSTITUTION

9

Per cent of item at level

Item Federal State Local Total% % % % %

REVENUE (a)Income Tax Individuals 100.0 0.0 0.0 100.0 38.0 Enterprises 100.0 0.0 0.0 100.0 16.1 Non-residents 100.0 0.0 0.0 100.0 0.4Pay-roll Tax 25.2 74.8 0.0 100.0 5.6Taxes on property Land tax 0.0 100.0 0.0 100.0 1.2 Municipal rates 0.0 0.0 100.0 100.0 3.0 Financial & cap trans. 0.0 100.0 0.0 100.0 4.4 Other property taxes 0.6 99.4 0.0 100.0 0.8Taxes on provision of goods and services Sales Tax 100.0 0.0 0.0 100.0 0.4 Goods and Services Tax 100.0 0.0 0.0 100.0 13.1 Excise & Levies Commonwealth Excise Act 100.0 0.0 0.0 100.0 8.1 Agricultural Production 99.3 0.7 0.0 100.0 0.2 Levies on statutory corporations 100.0 0.0 0.0 100.0 0.1 Taxes on International Trade 100.0 0.0 0.0 100.0 2.2 Taxes on Gambling 0.0 100.0 0.0 100.0 1.6 Taxes on Insurance 0.0 100.0 0.0 100.0 1.2 Taxes from Public Enterprises 0.0 100.0 0.0 100.0 0.6Taxes on activities and use of goods Motor Vehicle Taxes 0.0 100.0 0.0 100.0 2.0 Franchise Fees 0.0 100.0 0.0 100.0 0.0 Other Taxes 64.0 36.0 0.0 100.0 0.5Mining Revenue(b) 0.0 100.0 0.0 100.0 0.6Total Revenue 80.3 16.7 3.0 100.0 100.0

Item as per cent

of total

AUSTRALIAN PUBLIC SECTOR REVENUE, 2003-04

10

6 per cent

17 per cent

80 per cent

33 per cent

61 per centFederalFederal

Vertical fiscal

Vertical fiscal imbalance

imbalance== need for

need for transfers

transfers

3 per cent

LocalLocal

StateState

RevenueRevenue OutlaysOutlays

GENERAL GOVERNMENT OWN-SOURCE REVENUE AND ADJUSTED OWN-PURPOSE OUTLAYS 2003-04

11

GST RECEIPTS AND TOTAL FEDERAL PAYMENTS AS A PROPORTION OF STATE

REVENUE, 2003-04

01020

30405060

708090

NSW Vic Qld WA SA Tas ACT NT

%

12

PROPORTION OF FEDERAL GOVERNMENT REVENUE TO

TRANSFERS, 2003-04

Goods and services

taxes16% Income

taxes - enterprises

20%

Excises10%

Other6%

Income taxes -

individuals48%

13

TRANSFERS TO STATES AS A PERCENTAGE OF TOTAL FEDERAL EXPENSES,

2000-01 TO 2003-04

25.2

25.4

25.6

25.8

26.0

26.2

26.4

26.6

26.8

27.0

27.2

27.4

2000-01 2001-02 2002-03 2003-04

14

AUSTRALIAN STATES AND TERRITORIES

Queensland Population 3,842,525

Gross prod $140,574 m Gross prod pc $36,603

Northern Territory Population 199,017

Gross prod $9,494 m Gross prod pc $47,783

Western Australia Population 1,966,673 Gross prod $88,935 m Gross prod pc $45,165 South Australia

Population 1,530,552 Gross prod $53,897 m Gross prod pc $35,194

New South Wales Population 6,707,570

Gross prod $283,067 m Gross prod pc $42,144

Tasmania Population 480,074

Gross prod $14,283 m Gross prod pc $29,757

Australian Capital Territory

Population 323,443 Gross prod $16,246 m Gross prod pc $50,359

Victoria Population 4,943,770

Gross prod $206,733 m Gross prod pc $41,782

15

STATE REVENUE RAISING

CAPACITIES 2003-04

92.87 88.9788.5

66.61

100115.57108.5

100.8977.87

020406080

100120140

NSW Vic Qld WA SA Tas ACT NT Aus

16

STATE COSTS OF SERVICE PROVISION 2003-04

227.26

99.1392.4699.38 100.32 98.23106.34106.99

0

50

100

150

200

250

NSW Vic Qld WA SA Tas ACT NT

%

17

CALCULATING STATE REQUIREMENTS FOR ASSISTANCE

Each State’s requirement is equal to:

a. Expenses it would incur to provide average level of services at average efficiency; less

b. Revenue it would raise if it applied average tax policies to its revenue base; less

c. Revenue from SPPs; less

d. Average budget outcome.

18

KEY CONCEPTSACTUAL: The actual amounts of revenue raised or

expenditures made by each State.

STANDARD: The national (ie all-State) average of actual State revenues and expenditures.

STANDARDISED: The Commission’s assessment of:

a. the revenue a State would raise if it applied an average revenue raising effort to its revenue base;

b. the expense a State would incur if it applied the national average policies on expenditures.

They differ from the actuals because they include the Commission’s allowance to reflect our assessment of States’ disabilities.

19

REVENUE ASSESSMENTS

a. Look at tax bases States can actually access

b. Look at tax rates actually levied: the average becomes the standard

c. Consider whether a State has an advantage / disadvantage (disability) for each tax

20

REVENUE DISABILITIES

Revenue disabilities include differences in economic circumstances that create differences in the level of transactions that are taxed. For example, differences in land values, payrolls, and the value of mineral production.

21

STATE REVENUE RAISING

CAPACITIES 2003-04

92.87 88.9788.5

66.61

100115.57108.5

100.8977.87

020406080

100120140

NSW Vic Qld WA SA Tas ACT NT Aus

22

EXPENSE DISABILITIES

Expense disabilities can:

a. Affect the use of services, for example, age distribution affects education and health use

b. Affect costs of services, for example, wage levels, diseconomies of small scale, remoteness

Differences in standards of service or operating efficiency are not disabilities.

23

DISABILITIES

a. Influences that are beyond the control of individual State governments that lead to differences between States in costs of providing services and revenue raising capacity

b. Generally arise from the physical, economic and demographic circumstances of the States

c. Differences in State policies on service standards or revenue effort are not disabilities.

24

STATE COSTS OF SERVICE PROVISION 2003-04

227.26

99.1392.4699.38 100.32 98.23106.34106.99

0

50

100

150

200

250

NSW Vic Qld WA SA Tas ACT NT

%

THE RESULTS

26

TOTAL OWN-SOURCE REVENUE PER CAPITA,ACTUAL AND STANDARDISED – 2003-04

0

500

1000

1500

2000

2500

3000

NSW VIC QLD WA SA TAS ACT NT

Actual Standardised

$pc

Standard

$2227

27

0

2000

4000

6000

8000

10000

12000

14000

NSW Vic Qld WA SA Tas ACT NT

Actual Standardised

$pc$pc

NET EXPENDITURES PER CAPITA 2003-04

Standard

$4876

28

RELATIVITIES

a. Revenue and expenditure assessments combined

b. Expressed per capita (per person)

c. The all-State average = 1

29

STATE RELATIVITIES, 2005-06

0.86846 0.87552 1.025001.043891.143001.20325

4.26682

1.55299

0

1

2

3

4

5

NSW Vic Qld WA SA Tas ACT NT

30

OUTCOME OF EQUALISATION

States receive unequal per capita amounts of GST because financial capacities of States are unequal, due to differences in:

a. costs of providing services, and b. capacity to raise revenue

31

DISTRIBUTION OF UNTIED ASSISTANCE PER CAPITA, 2004-05

$1,798 $1,793$2,186 $2,136

$3,232

$8,839

$2,340$2,495

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

NSW Vic Qld WA SA Tas ACT NT

32

GRANT SHARE vs. POPULATION SHARE, 2003-04

0

5

10

15

20

25

30

35

NSW Vic Qld WA SA Tas ACT NT

Grant SharePop Share%%

33

PER CAPITA RELATIVITIES OVER TIME

0.70

0.90

1.10

1.30

1.50

1.70

1.90

2.10

1981

-82

1982

-83

1983

-84

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

NT1982

Review1985

Review1988

Review1993

Review

1999 Review

NT

Tas

SA

WA

ACT

Qld

Vic NSW

2004 Review *

* GST relativities used from 2000-01

34

PROPORTION OF POOL REDISTRIBUTED, 1981–82 TO 2005–06

0

2

4

6

8

10

12

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

%

35

SIZE OF REDISTRIBUTION COMPARED WITH EQUAL

PER PERSON

a. Two-thirds to support the two financially weakest States

b. One-third accounted for by Indigeneity assessments

c. Two-thirds reflects assessed differences in expenditure needs

OTHER FEATURES

37

UNTIED GRANTS

a. The GST pool (affordability)

b. Collected by the National Government at a uniform rate (10%)

c. All GST revenue goes to the States

38

HISTORICAL APPROACH

a. 5-year moving average — data / relativities

b. Volatility vs. up-to-dateness (State budget management)

39

MAKE-UP OF FEDERAL ASSISTANCE

Untied grants Specific Purpose Payments

0%

20%

40%

60%

80%

100%

Prop

ortio

n

40

Per cent of item at levelItem Federal State Local Total

% % % % %EXPENDITURE (c)General Public Services 58.5 26.2 15.3 100.0 6.1Defence 100.0 0.0 0.0 100.0 4.4Public Order and Safety 17.6 79.2 3.2 100.0 4.6Education 30.7 69.1 0.2 100.0 14.8Health 61.6 37.8 0.6 100.0 17.5Social Security and Welfare 92.4 6.3 1.3 100.0 29.4Housing and Community Amenities 17.3 36.3 46.4 100.0 3.2Recreation and Culture 27.4 38.2 34.4 100.0 2.7Fuel and Energy 75.9 23.8 0.3 100.0 1.6Agriculture, Forestry, Fishing and Hunting 50.6 48.5 0.9 100.0 1.4Mining, Manufacturing Construction, etc. 68.4 19.6 12.0 100.0 0.8Transport and Communication 17.3 54.9 27.8 100.0 5.5Other Economic Affairs 57.8 32.7 9.4 100.0 2.5Nominal Interest on Superannuation 59.2 40.8 0.0 100.0 2.8Public Debt Transactions 63.9 30.6 5.5 100.0 2.2Other Purposes 97.8 -41.0 43.2 100.0 0.4Total Expenditure 61.0 32.8 6.2 100.0 100.0

(a) Aus tralian Bureau of Statis tics , Taxation Revenue Aus tralia, 2003-04, Catalogue No. 5506.0.

(b) Federal collections under petroleum rent taxes are included in com pany incom e tax;

State collections are sourced from Com m onwealth Grants Com m iss ion Report, 2005 Update

(c) Aus tralian Bureau of Statis tics , Governm ent Finance Statis tics Aus tralia, 2003-04

Catalogue No. 5512.0

Item as per cent

AUSTRALIAN PUBLIC SECTOR EXPENDITURE, 2003-04

41

DATA AND JUDGMENT

a. States expect assessments to be objective and data driven

b. Requires much data on State revenues and expenses, population (numbers, age, ethnicity, income, where they live), use of services, how services are provided, revenue bases

c. Data is incomplete and judgment is needed.

42

FISCAL EQUALISATION IS NOT THE ONLY FORM OF TRANSFER TO THE STATES

Other forms of payment support other objectives:

National Competition Payments – about $1billion to improve efficiency and competitive neutrality in areas such as power generation, water and transport.

Payments targeted to other national objectives – eg environment, support for natural disaster recovery.

But equalisation payments are much larger and more important to State budgets than other transfers.

43

THE COMMONWEALTH

GRANTS COMMISSION

AND ITS ROLE

44

MEMBERSHIP OF COMMISSION

a. Appointed by Governor-Generalb. States play role in nominating and

selecting membersc. Minimum appointment of one year,

maximum of five years, can be reappointed

d. Members appointed for expertise, not as advocates for States.

45

TERMS OF REFERENCE

a. Commission inquiries respond to terms of reference

b. Terms of reference are given by Federal Minister for Finance

c. Reference prepared with input from all States

d. References usually broad.

46

WORK CYCLE

a. Major reviews of methods every five years

b. In between major reviews are annual updates of relativities

i. Relativities are revised using the latest data and the methods from the last review.

47

A FIVE YEAR REVIEW PROGRAM

a. Agreement with States on work programb. Research on major issues with progress

reportsc. State submissions on their major concernsd. Conferences with Statese. Discussions in each State with officialsf. Rejoinder submissionsg. Preliminary resultsh. Final submissionsi. Report

48

Commission recommendations are considered by the Commonwealth / State Ministerial Council of Treasurers.

The Formal Decision is made by the Federal Treasurer.

49

PAPUA NEW GUINEA — A CUT-DOWN VERSION

a. The current systemi. Grants equal per head / area

ii. Revenue not counted: issue of mining royalties

iii. Payments not made: in full / on time

b. The resulti. Deteriorating service delivery

ii. 13 Provinces not able to meet costs of basic service delivery (some have 30% of what they need)

iii. 6 Provinces have more revenue than they need to meet service delivery costs

50

PAPUA NEW GUINEA — PROPOSED APPROACH

Principle of equalisation, not equal grants per person

a. Wide differences in costs of service delivery: area / terrain / roads

b. Wide differences in access to revenue (other than transfers from the National Government): mining royalties / GST

c. National Government to contribute additional funds

d. Equalisation pool to be created

51

e. Mining royalties not to be included (political opposition likely to prevent new system); local own-source revenue not to be included (incentive to raise revenue)

f. Additional funds to poorer Provincesg. ‘hold harmless’ provision — no Province to be

worse offh. Result: all Provinces would receive a minimum

of 70% of what is needed to meet costs of basic service delivery

i. Conditionality to be applied by National Government to transfers — to meet national priorities and development goals

52

SOME LESSONSa. Affordability — the level of fiscal transfers not

only has to reflect the legitimate needs of sub-national governments, it also has to reflect the nation’s fiscal capacity. A system which undertakes to provide resources which the country cannot afford will fail.

b. Reliability — delivering government services is an on-going process. Sub-national governments must have the confidence that funding levels will be consistent year-on-year so that service delivery programs they put in place can be maintained.

53

c. Timeliness — the system must deliver what it says it will deliver in a timely way, consistent with the need to delivery services throughout the year.

d. Equity — the system must be fair.e. Conditionality — whether transfers should

be conditional or unconditional depends on which level of government has policy responsibility, and on the extent to which national priorities rather than regional priorities need to be pursued.

54

f. Objectivity / non-discretionary — it is worth considering whether the mechanics of the system should be undertaken with some independence, and what limits there should be on political interference which moves transfers away from the stated objectives.

55

LOCAL GOVERNMENTDiversity of local governments:

a. Populations vary from 150 to 833,000

b. Areas vary from 2 square kms to 378,533 square kms

c. Population densities vary from 3 people per 1,000 square kms to 7,280 people per square km

d. Lengths of local roads vary from 9 kms to 5,427 kms

56

LOCAL GOVERNMENTLocal government functions:

a. Engineering services (roads, bridges, footpaths, drainage)

b. Community services (aged care, child care, fire prevention and fire fighting)

c. Environmental services (waste management, environmental protection)

d. Regulatory services (buildings, restaurants, animals)

e. Cultural services (libraries, art galleries, museums)

57

LOCAL GOVERNMENTREVENUE SOURCES, 1997-98

State grants7%

Commonwealth grants12%

Other revenue9%

User charges25% Municipal rates

47%

58

LOCAL GOVERNMENT OUTLAYS, 1997-98

Education, health, welfare

and public safety12%

General public services

13%

Housing and community amenities

19%Recreation and

culture18%

Services to industry

2%

Transport27%

Other purposes9%

59

LOCAL GOVERNMENTComposition of expenditure 1961-62 to 1997-98

0

10

20

30

40

50

60

70

80

90

100

61-6

2

62-6

3

63-6

4

64-6

5

65-6

6

66-6

7

67-6

8

68-6

9

69-7

0

70-7

1

71-7

2

72-7

3

73-7

4

74-7

5

75-7

6

76-7

7

77-7

8

78-7

9

79-8

0

80-8

1

81-8

2

82-8

3

83-8

4

84-8

5

85-8

6

86-8

7

87-8

8

88-8

9

89-9

0

90-9

1

91-9

2

92-9

3

93-9

4

94-9

5

95-9

6

96-9

7

97-9

8

%

0

10

20

30

40

50

60

70

80

90

100

Transport and Communication General Public Services

Education, Health, Welfare and Public Safety Recreation and Culture

Housing and Community Amenities Services to Industry

Other Purposes

60