Introductory Info
Date introduced: 18 October 2018
House: House of Representatives
Portfolio: Treasury
Commencement: Clauses 1 to 4 commence on Royal Assent. Schedule 1 commences on the day after Royal Assent.
Purpose of
the Bill
The purpose of the Treasury Laws Amendment (Making Sure
Every State and Territory Gets Their Fair Share of GST) Bill 2018 (the Bill) is
to amend the Commonwealth
Grants Commission Act 1973 (the CGC Act) and Federal Financial
Relations Act 2009 (the FFR Act) to change the nature of untied
payments made by the Commonwealth to states and territories (the states) from
goods and services tax (GST) revenues. These proposed changes will:
-
implement an updated fiscal equalisation standard, from ‘full
equalisation’ to ‘reasonable equalisation’
-
provide transitional arrangements between the current and updated
equalisation systems
-
introduce a GST revenue sharing relativity floor
-
create a GST revenue pool top-up and
-
define additional financial assistance to enable a ‘no state is
worse off’ guarantee.
Structure
of the Bill
The Bill includes four clauses and one Schedule.
The clauses are primarily machinery provisions but include
one substantive clause that requires a review of the impact of implementation
of the Bill.
Schedule 1 sets out:
-
amendments to the CGC Act to create new obligations on the
responsible Minister in setting terms of reference for the Commonwealth Grants
Commission (CGC). In particular it implements a new definition of horizontal
fiscal equalisation (HFE) and
-
amendments to the FFR Act that define a new adjusted GST
pool, a transitional funding model for all states, the introduction of a
relativity floor and mathematical representations of future adjusted pool
indexation.
Background
The financial relationship between the Commonwealth and the
state and territory (the states) governments has been established under a
number of constructs since Federation. The relationship is constantly evolving.
There are significant complexities in the relationship that are beyond the
scope of this Digest. For practical purposes this Digest considers federal
financial relations since the introduction of the Goods and Services Tax (GST).
Particular focus is given to the debates and evidence generated between
2012—when the current system was reviewed in detail for the first time since
2000—and the introduction of the Bill.
Federal financial relations
The Australian Constitution
allows that ‘the Parliament may grant financial assistance to any State and on
such terms and conditions as the Parliament thinks fit’ (section 96).
Since 2000, financial assistance
from the Commonwealth to the states has been made in two ways:
- general revenue assistance: payments that are made without
obligations on the states, which can be used for any purpose. This includes the
transfer of the GST receipts and compensation for matters usually outside the
control of the state and
- payments for a specific purpose: payments from the
Commonwealth to or through states for a purpose agreed with the recipient
through a body like the Council of Australian Governments (COAG) or a COAG
council.
The purpose of these payments is to reduce a vertical
fiscal imbalance (VFI) that arises from the Commonwealth having relatively more
revenue raising power compared to the states, while comparatively fewer
expenditure requirements.
Total payments in 2018–19 are estimated to be $126.751
billion, of which $68.196 billion is general revenue assistance and $58.554
billion is payments for specific purposes.[1] The GST component of the
general revenue assistance is $67.320 billion.
The Bill deals only with the distribution of the GST
entitlement or ‘pool’.
Distributing the GST pool
The distribution of the GST pool is governed by the FFR
Act and the Intergovernmental
Agreement on Federal Financial Relations (IGA FFR).
The FFR Act sets out the
provision of ongoing support for the states including providing ‘general
revenue assistance’, part of which is a ‘GST revenue grant’. This provision
also provides for a range of payments for specific purposes (section 3).
The amount of GST provided to
each state is referred to in the FFR Act as a ‘GST Revenue Grant’, which
is calculated under section 5 as follows:
Subject to this Act, each State is entitled to the payment,
by way of financial assistance, for a payment year, of a grant worked out using
the formula:
Adjusted State
population x GST revenue
Adjusted total population
where:
adjusted State population means
the estimated population of the State on 31 December in the payment year
(see section 7) multiplied by the GST revenue sharing relativity (see section
8) for the State for that year.
adjusted total population means
the sum of the adjusted State populations of all of the States for the payment
year.
GST revenue means the GST
revenue for the payment year (see section 6).
The meaning of GST revenue, from which the
GST pool is derived, is set out under section 6 of the FFR Act, and includes:
(3)[...] (a) the amount that is the total of the following:
(i) the
GST that was collected;
(ii) the
payments made to the Commissioner of Taxation representing amounts of GST that
would have been payable if the Constitution did not prevent tax from being
imposed on property of any kind belonging to a State and section 5 of the GST
Imposition Acts had not been enacted;[2]
(iii) the
additional GST that would have been collected if the Commonwealth and
Commonwealth entities could be made subject to taxation by a Commonwealth law
and section 177‑1
of the GST Act made those entities actually liable rather than notionally
liable;[3] and
(b) the
amount of general interest charge that was collected to the extent that it is
attributable to:
(i) unpaid GST; or
(ii) unpaid general interest
charge payable in respect of unpaid GST; and
(c) the
amount, determined in a manner agreed by the Commonwealth and all of the
States, that represents amounts of voluntary GST payments that should have, but
have not, been paid by local government bodies.[4]
Under the FFR Act, the Commonwealth Treasurer ‘may
determine’ the GST revenue sharing relativity (subsection 8(1)), and ‘must
consult each of the States’ before making a determination (subsection 8(2)). In
addition, the Act is clear that the Minister—the Treasurer—‘must have regard to’
the IGA FFR in making a determination (paragraph
21(a)).
The IGA FFR says that the ‘objective of the
framework for federal financial relations is the improvement of the well-being
of all Australians through... the equalisation of fiscal capacities between
States and Territories’ (paragraph 5(f)) and that ‘the Commonwealth will
distribute GST payments among the States and Territories in accordance with the
principle of horizontal fiscal equalisation’ (clause 26).
Neither the current FFR Act nor IGA FFR define
‘horizontal fiscal equalisation’ or ‘fiscal capacity’.
The ‘GST revenue sharing relativity’ is set by a
Determination made by the Commonwealth Treasurer under the FFR Act. The Determination is a legislative instrument, but is not
disallowable (FFR Act section 8).
Calculating a relativity
The IGA FFR sets out, in Schedule
D, that ‘[t]he Commonwealth Treasurer will determine the GST revenue
sharing relativities, which embody per capita financial needs based on
recommendations of the Commonwealth Grants Commission, after consulting with
each State and Territory’ (paragraph D65).
The Commonwealth Grants Commission (CGC) is created and
regulated by the CGC Act. Under that Act, the role of the CGC includes
inquiring into and reporting to the Commonwealth Treasurer on:
- ‘any
application made by a State for the grant, under section 96 of the
Constitution, of special assistance to the State’ (paragraph 16(a))
-
matters relating to a grant of assistance, or the making of a
grant of assistance, under section 96 to a State, that are referred to the
Commission by the Treasurer (paragraphs 16(b) and (c)).
GST relativities are not described in the CGC Act.
Special assistance means ‘...the grant of financial assistance to a State for the
purpose of making it possible for the State, by reasonable effort, to function
at a standard not appreciably below the standards of other States’ (section 5).
To determine relativities the CGC undertakes modelling of each state’s
revenue, expenditure, investment and net borrowing efforts to determine an
‘average’ level of effort, and then calculates the
relative position of each state to that average before determining adjustments
to bring each state to the same standard as a strongest state.
In addition to the CGC Act, the IGA FFR
provides guidance on how the CGC should treat certain other payments from the Commonwealth
in its recommendations to the Treasurer. Relevant to untied or ‘general
revenue’ payments, the CGC is advised:
... general revenue assistance, excluding GST payments, will be
treated by ‘inclusion’, recognising that these payments are available to
provide untied general budget support to a State or Territory, however, the
Commonwealth Grants Commission may treat, on a case by case basis, any
component of general revenue assistance as ‘out of scope’ if it considers such
treatment is more appropriate (IGA FFR, Schedule
D—paragraph D66(c)).
The methodological approaches are updated annually, and
reviewed in detail every five years, or as frequently as the Treasurer
determines.[5] The modelling is used to
inform recommendations to the Treasurer about the relativity that should be
applied to each state.
The basis upon which the CGC has determined the
relativities from the modelling has been Horizontal Fiscal Equalisation (HFE),
which it has defined as:
State governments should receive funding from the pool of goods
and services tax revenue such that, after allowing for material factors
affecting revenues and expenditures, each would have the fiscal capacity to
provide services and the associated infrastructure at the same standard, if
each made the same effort to raise revenue from its own sources and operated at
the same level of efficiency.[6]
While this version of HFE is not legislated or otherwise
defined, it reflects a definition that has evolved since 1933. This version of
the definition was first identified in the CGC 2004 review report on revenue
sharing relativities.[7]
Institutional arrangements
The institutional arrangements for all aspects of managing
the GST, questions arising in relation to the institutional arrangements, or
amendments to payment arrangements are set out in the IGA FFR, in
relation to the functions of the Standing
Council on Federal Financial Relations (the Council, also referred to as
the Council on Federal Financial Relations or CFFR). The Council includes the Commonwealth
Treasurer and all state and territory Treasurers as members. The IGA FFR
Schedule
A states, relevantly for the Bill:
Schedule A—Institutional Arrangements
A4 The functions of the Standing
Council include:
(c) the oversight of the
operation of the Goods and Services Tax (GST), including:
(i) approving changes to the GST base
and rate;[8]
(ii) maintaining a performance agreement
with the Australian Taxation Office in respect of its efficient and
cost-effective administration of the GST;
(iii) considering reports of the GST
Administration Sub-Committee on-
(1)
proposed changes to the GST base;
(2) the performance of the Australian Taxation Office in
GST administration;
(3)
other matters of operational significance;
(d) discussion of Commonwealth Grants Commission
recommendations regarding GST revenue sharing relativities prior to the
Commonwealth Treasurer making a determination;
(i) reviewing funding adequacy under this Agreement,
not less than every five years, with an on-going role of monitoring the
reporting of outcomes to identify issues that might trigger earlier
consideration of funding adequacy and related outcomes
(j) considering on-going
reform of federal financial relations.
A6 All questions arising in the
Standing Council will be determined by unanimous agreement unless otherwise
specified in this Agreement.
Reviews of the HFE system
Since the introduction of GST in 2000, the HFE system has
been subject to regular methodological reviews, annual updates and several
systematic reviews. Over the same time, there has been considerable stakeholder
debate about the HFE system. This is considered elsewhere in this digest.
The most prominent systematic reviews include:
-
a review of Commonwealth-State Funding in 2002. Undertaken by
Garnaut and FitzGerald, this review was commissioned by the governments of New
South Wales, Victoria and Western Australia. Among other findings, the review
recommended a move to a system where the GST was primarily distributed on an equal
per capita (EPC) basis and interpersonal equity was targeted with Specific
Purpose Payments.[9]
No systemic changes occurred as a consequence of this review
-
a comprehensive GST Distribution Review between 2011 and 2012.
This review was commissioned by Prime Minister Gillard, who is referenced as
saying ‘...she believed the [GST] funding formula was not working and promised to
make it fairer, simpler and more transparent,’ and that ‘...the current
arrangements were too complex and unpredictable, leaving State and Territory
budgets vulnerable to "shocks" when the GST carve-up changed from one
year to the next’.[10] The review took submissions, undertook
hearings, commissioned expert research, delivered two interim reports and a
final report. Among a range of findings on federal financial relations, ‘a GST
distribution model of EPC, plus Commonwealth-funded
top-ups for fiscally weaker States, was contemplated’.[11]
No systemic changes occurred as a consequence of this review
-
a reference in the 2014 National Commission of Audit report. The Towards
Responsible Government: Phase One review recommended new arrangements to
address HFE, while also recommending an approach to reducing the level of vertical
fiscal imbalance.[12] The Commission of Audit
recommended sharing all GST revenue on an equal per capita basis, with the
Commonwealth providing an additional grant to current recipient states and territories
to ensure that no state or territory is worse off compared with the existing
equalisation process. In the model of the Commission of Audit, the CGC would
determine the distribution of additional equalisation grants.[13]
No systemic changes occurred as a consequence of this review and
-
the Reform of the Federation White Paper. In
February 2015 the Commonwealth Government published an issues paper as part of
the Federation White Paper process. The paper noted ‘recently, HFE has
been brought into sharper focus as an increase in mining royalties in Western
Australia has seen its share of GST funding fall to very low levels.’[14]
This issues paper reported extensively on the findings and evidence generated
through the 2012 review, and posed questions around the fairness of full
equalisation, tolerable differences from full equalisation, the best approach
for re-distributing resources within the federation, the treatment of grants in
the HFE process, and whether the system created reform disincentives.[15]
A final white paper on federalism was initially deferred for the term of the
45th Parliament,[16] and additional advice was provided that
neither a green paper nor white paper would be proceeding.[17]
Over the period since 2000, the CGC also undertook three
five-year methodological reviews, commenced a 2020 five-year review and
delivered at least 19 annual update reviews.[18]
On 5 May 2017, the then Treasurer issued Terms of
Reference to the Productivity Commission (PC) to undertake an inquiry into
Australia’s system of HFE. The Treasurer required the PC to take into account
the 2012 review. The review scope was wide ranging on a general theme:
The inquiry should consider the influence
the current system has on productivity, efficiency and economic growth,
including the movement of capital and labour across state borders; the
incentives for the States to undertake fiscal (expense and revenue) reforms
that improve the operation of their own jurisdictions, and on the States’
abilities to prepare and deliver annual budgets.[19]
The PC received submissions, undertook hearings, and
produced a draft report and a final report. The final report— Inquiry Report
into Horizontal Fiscal Equalisation (PC Review)—was completed in May
2018.[20]
The report comprehensively details the current system of HFE, and makes several
findings and recommendations to improve the system in line with the terms of
reference.[21]
In July 2018, the then Treasurer tabled the PC Review.
Concurrently, the Treasurer tabled a Government Interim Response (Interim
Response) which set out the Government’s position on the PC findings and
recommendations.[22]
Unusually for HFE reviews, the Interim Response committed the Government to
implement changes to the nature of the system of HFE. The changes flagged in
the Interim Response are the genesis of changes implemented in this Bill. The
changes were discussed by the Council on Federal Financial Relations on 3 October
2018,[23]
and the Bill was introduced on 18 October 2018.
Committee
consideration
Senate Economics Legislation Committee
The Bill was referred to the Senate Economics Legislation
Committee (the Economics Committee) for inquiry on 18 October 2018. The
Economics Committee reported
on 8 November 2018.[24]
Details of the inquiry are at the inquiry
homepage.
The Economics Committee received 13 Submissions, primarily
from the states.[25]
They held one day of hearings, on 26 October 2018, with evidence being given by
most of the submitters and the Commonwealth Treasury.[26]
The report canvassed the views of submitters, which are recorded
in the ‘Position of major interest groups’ section later in this digest.
Specific matters referred to by the Economics Committee included:
-
concerns about forecasts: submitters contend that forecasts used
in future GST relativity scenarios are unreliable given the ten year duration[27]
- ‘no worse off’ guarantee: submitters contend that the guarantee,
as structured, is a cumulative guarantee which may not provide year-on-year
certainty for state’s budgets.[28]
The states would prefer an in-perpetuity guarantee, noting that the guarantee
in the Bill effectively ceases in 2026–27
-
discretion offered to the Commonwealth Treasurer: submitters
contended that the Bill provides too much discretion in what the Treasurer may
consider in choosing which relativity outcome occurs (proposed subsection
5(3) of the FFR Act, at item 3 of Schedule 1 to the Bill)[29]
and
-
review of the updated HFE system: submitters contended that the
review of the outcomes of the Bill, to be conducted by the PC in 2026, may not
have sufficient coverage or scope.[30]
Generally, the Economics Committee did not address these
issues directly, and noted:
The committee acknowledges the concerns raised by the states
and territories regarding the implementation of the updated HFE system but
considers that the 'no worse off' guarantee provides a safety net during the
transition period. Further, the legislated inclusion of a completed
Productivity Commission inquiry by December 2026 gives all stakeholders an
opportunity to reflect on the updated HFE system and argue for ongoing
improvements following the transition period.[31]
The Committee recommended that the Bill be passed.[32]
Additional comments were made by Australian Labor Party
(ALP) Senators, largely recasting the history of the debate from media sources,
concluding with an observation:
Federal Labor has led the way in the GST debate. It is clear
that Federal Labor's calls for a GST floor, for this floor to be legislated and
that the 'no state worse off' guarantee be legislated have had a very material
impact on the Government's actions and this legislation.[33]
The ALP Senators recommended ‘[t]hat the letter from the
Federal Treasurer to the State and Territory Treasurers stating that 'any
additional financial assistance referred to in the Bill will not be offset or
partially offset by a decrease in other grant funding to the states' be tabled
during the Parliamentary debate’.[34]
Senate Standing Committee for the
Scrutiny of Bills
At the time of writing, the Senate Scrutiny of Bills Committee
had not commented on the Bill.
Policy
position of parties/independents
The position of political parties has shifted during
different reviews and depending on the time within the review cycle. There is
vast public commentary on the issues surrounding GST; this section aims to
provide a reasonable snapshot of the most crucial views.
Liberal-National Coalition parties
Within months of becoming Minster for Finance, responding
to issues raised by the then WA Premier about the impact of revenue sharing
relativities on the WA GST share, Senator Mathias Cormann remarked: ‘...on behalf
of all WA ministers...we have been very clear that we will not be making any
changes to the GST in this term of Government and we will stick to that
commitment’ and ‘beyond that we have also said that we would have a review into
our tax system as well as into our Federation through two white paper processes
and we encourage the WA State Government to submit its views through those
reviews for consideration’.[35]
In the context of further agitation from the WA Government
based on its HFE outcomes, in 2015 Senator Dean Smith made representations that
the HFE system could be improved by fixing the relativities at the 2014–15
levels, and then:
... establish a floor below which a relativity for any state or
territory would be prevented from falling. The precise level at which this
floor should be set is secondary to agreeing the merits of the proposal. We
should not delay improvement in the pursuit of perfection.[36]
A policy shift occurred in August 2016. The then Prime
Minister outlined an approach to GST reform to be followed by a re-elected
Coalition Government:
Over the next few years, the [GST sharing] formula will see
Western Australia’s share more than double—considerably more than double from
where it is at the moment to a much higher level.
We believe that we should take that opportunity— as the
Western Australian share of the GST increases under the current system— to
change the arrangements so that we set a percentage floor below which no
state's receipts of GST can fall below.
Setting a floor below which a state’s share of the GST cannot
fall, immediately after it has been exceeded in this cycle, means that no other
state will be disadvantaged based on their projected GST shares.[37]
While this did not promise an immediate legislated floor
or a no worse off guarantee, the floor concept has persisted in debates about
GST reform since this time. The Prime Minister flagged a difficult political
sell to ‘fix the GST’, and this was evident two days after the approach was
announced, when Tasmanian Liberal Senators stated they were ‘...opposed to any
changes to the GST distribution formula that would disadvantage Tasmania’.[38]
In the second reading stage of the Bill, Rick Wilson noted:
... we, the Western Australian members, met with the Prime
Minister and the Treasurer in the then Prime Minister’s office, and we spoke about
a way forward and the process to get come political agreement. That set off the
Productivity Inquiry process.[39]
Australian Labor Party
Over an approximately similar time frame to the views of
the Coalition, the position of the ALP has changed as well.
In 2015 it was reported that the Leader of the Opposition,
Mr Shorten said ‘politicians “should not meddle” with the processes of the
[Commonwealth Grants] commission’, and ‘a federal Labor government would not
intervene to alter the distribution model of the goods and services tax’.[40]
Responding to the Prime Minister’s August 2016 statement,
Mr Shorten was reported to have said ‘...he couldn’t take Turnbull’s idea
seriously unless more detail was provided’ and ‘“Tell you what we’ll do about
the GST–one, we’ll never increase it, unlike Mr Turnbull, and two–if he’s got a
serious proposal to change the allocation, let’s see his detail”.. Mr Shorten
also reportedly stated ‘I’m just not going to entertain Mr Turnbull’s thought
bubbles, which are purely going by state politics in WA. Australia is getting
fed up with Mr Turnbull’s all-talk, no-action approach to government’.[41]
In August 2017 Mr Shorten announced a new ALP policy a Fair
Share for WA Fund. This policy committed an ALP Government to:
... invest $1.6 billion in a Fair Share for WA Fund –
bringing Commonwealth funding for Western Australia up to the equivalent of a
70 cent floor...
The Fair Share for WA Fund will be enshrined in
legislation and include a statutory obligation to invest all proceeds into
Western Australian projects – creating jobs and boosting economic growth across
the state...
This policy does not change the current GST formula.[42]
This promise did not outline an in-system relativity
floor, rather an additional payment equivalent to a 70 cent GST floor.
Following the tabling of the PC Review and the Government’s
Interim Response, the ALP announced a ‘unity ticket’ with the Coalition Government,
noting:
What Labor will do is that we will support what the
Government has said, but what we will also do is we will legislate it within
our first hundred days. That's a floor of 70 cents, from 19/20 and we will lift
that floor to 75 cents, 2024/25. We will also make sure that this funding is
untied. Obviously, we will consult with the Western Australian Government and
we'll have a view about things but this is going to be genuinely, a call for
Western Australia.[43]
Second reading speeches from ALP members reflect this
position.[44]
Minor parties and independents
There has been minimal commentary from the Australian
Greens and independent members and senators. The consistent commentary has been
in relation to protecting each jurisdiction’s individual GST share.[45]
Position of
major interest groups
The states are the primary interest group affected by the
Bill. The positions held by the different states has shifted during the several
reviews and depending on the time within the review cycle.
Focussing only on the period covered by the Government’s Interim
Response and the Bill, reflecting on the summary of states’ evidence provided
in the Senate Standing Committee on Economics report, the key points are that
WA ‘enthusiastically’ supports the changes proposed, while Tasmania, the NT, Victoria
Queensland, ACT, NSW and SA support the existing system or an alternative
system.[46]
Despite the disagreement about the approach, it appears
that the ‘no worse off’ guarantee will provide some comfort for the states to
work with the Commonwealth on implementing the changes. The governments of VIC,
TAS, the ACT and NT made a case to the Senate Standing Committee on Economics
that the guarantee should be extended ‘in perpetuity’, rather than expiring in
2026 as proposed in the Bill.[47]
At this stage, neither the Bill as tabled, nor broader changes
to the IGA FFR, have been agreed through the Council on Federal
Financial Relations.
Financial
implications
Over the period from 2018–19 to 2021–22 the Explanatory Memorandum
outlines a total expenditure of $2,373 million on the
Government’s Interim Response. This is summarised in
Table 1.
Table 1: financial impact forward
estimates
2018–19 |
2019–20 |
2020–21 |
2021–22 |
— |
-$883m |
-$585m |
-$905m |
Explanatory Memorandum,
Treasury Laws Amendment (Making Sure Every State and Territory Gets Their Fair
Share of GST) Bill 2018, p. 4.
The Bill will have an enduring effect on federal financial
relations beyond the period in Table 1. The Explanatory Memorandum notes that ‘the
Australian Government announced it would contribute additional funding to
support the States and Territories to transition to the new benchmark—in total,
nearly $9 billion over ten years’, which includes a combination of short term
transition payments and the longer term boost to the GST pool.[48]
No additional funding is identified for the CGC to
implement changes proposed by the Bill or other accepted recommendations which
may impact upon the CGC’s operations.
Special appropriations
The Bill does not introduce a new special appropriation.
However, payments to the states, both existing and proposed
through the Bill, are a special appropriation created under section 22 of the FFR
Act.
Statement of Compatibility with Human Rights
As required under Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the
Bill’s compatibility with the human rights and freedoms recognised or declared
in the international instruments listed in section 3 of that Act. The
Government considers that the Bill is compatible.[49]
Parliamentary Joint Committee on
Human Rights
At the time of writing, the Parliamentary Joint Committee
on Human Rights had not reported on the Bill.
Key
provisions and issues
Clauses 1-3
Clauses 1 to 3 are machinery provisions. These
provide the short title, commencement provisions and the effect of schedules to
the Bill.
Clause 4
Clause 4 requires the Productivity Minister[50]
to refer the operation of the Bill to the Productivity Commission for inquiry,
including:
(a) whether
the amendments made by the Bill are operating efficiently, effectively and as
intended; and
(b) the
fiscal implications for each State, the Australian Capital Territory and the
Northern Territory, of the amendments made by the Bill.
Subclause 4(2) requires the Productivity Minister to set
31 December 2026 as the reporting date for the inquiry.
Submissions to the Senate Economics Legislation Commission
argue that the reference is problematic. Specifically:
-
the Victorian Government is concerned that ‘intent’, ‘efficiency’
and ‘effectiveness’ are not defined. It was joined by the NSW Government in its
concern about how many recommendations would be acted upon[51]
-
the NT Government argues the Productivity Minister should wave
the 25 sitting day timeframe for tabling inquiry reports established under
section 12 of the Productivity
Commission Act 1998, in favour of immediately providing copies to the
states. Queensland argued similarly, except that it says the report should be
immediately forwarded to the Council on Federal Financial Relations (CFFR)[52]
- Tasmania
argues against the PC undertaking the review, in favour of the CGC[53]
-
the NT, Victoria, Queensland, and ACT governments argue that the
terms of reference for the inquiry should be developed in cooperation with the
states.[54]
Schedule 1
Schedule 1 of the Bill contains the substantive amendments
to the CGC Act and the FFR Act.
These amendments:
- create
an updated HFE system
- provide
for transitional arrangements between the current and the updated HFE systems
- introduce
a GST revenue sharing relativity floor
- create
a GST revenue pool top-up and
- define
the value of additional financial assistance for payments during the transition
period.
These are considered in terms of the overall proposed
changes. A consistent problem with identifying issues with this Bill is that
the amendments introduced are inconsistent with the review report from the PC,
meaning evidence from that review cannot be relied upon to assess the impact of
the Bill.
Model of HFE
Amendments to the CGC Act define a change in HFE
standard from full equalisation to reasonable equalisation, consistent with the
Government’s position outlined in its Interim Response to the PC Review.
Item 1 proposes inserting a new section
16AB ‘Inquiries relating to GST revenue grants’ in the CGC Act. This
section will:
-
apply to references made to the CGC by the Treasurer, to
determine revenue sharing relativities from 2020–21 onwards (proposed subsection
16AB(1))
-
introduce a new standard for reasonable fiscal equalisation that
‘the States, the Australian Capital Territory and the Northern Territory each
have the fiscal capacity to provide services (including associated infrastructure)
at a standard that is at least as high as the standard for whichever of New
South Wales and Victoria has the higher standard’ (proposed subsection 16AB(2))
and
-
require the Treasurer to frame the terms of reference to the CGC so
as to require the CGC to make necessary adjustments to its methods to make an
appropriate and even transition to the revenue sharing relativities generated
under the reasonable equalisation approach over a five year period, increasing
the ‘proportion of the relativities derived from the new arrangement’ in
one-sixth increments commencing in 2021–22 under proposed subsection 16AB(3)).
The model of equalising states to a standard equivalent to
New South Wales or Victoria adopted in the Bill was not considered by the PC in
its review.
The closest model in the PC Report was ‘equalising to the second
strongest state’.[55]
The PC did not recommend this approach, instead preferring ‘equalising to an
average of all states’, noting the second strongest state approach ‘...provides
limited potential efficiency benefits, as it only substantially reduces
disincentives for the fiscally strongest state’, and has the potential for
‘...equalisation to be driven by fiscal outliers should the strongest and second
strongest states attain a significantly stronger fiscal capacity than all
remaining states.’[56]
The Government Interim Response rejects the PC
recommendation, noting ‘benchmarking all States to the economies of the two
largest States would remove the effects of extreme circumstance, like the
mining boom, from Australia’s GST distribution system’,[57]
while not introducing counterfactual evidence to the PC evidence.
Defining NSW and Victoria in the legislation does not
allow for the potential of another state becoming relatively stronger over
time. For example, over the 19 years between 2000–01 and 2018–19 WA has been
the strongest state (recording the lowest relativity) in 11 years and Queensland
has been the second strongest in two years.[58]
Under the NSW and Victoria definition, a stronger Queensland would receive
windfalls like WA if it attained second strongest or strongest state
relativities again in the future.
Fiscal capacity is not a defined term in the CGC Act,
the FFR Act or the IGA FFR.
A relativity floor
Section 8 of the FFR Act outlines the determination
of GST revenue sharing relativities. Item 4 proposes to insert subsections
8(2A) and 8(2B) in the FFR Act to create a GST revenue
sharing relativity floor.
Subsection 8(2A) sets a floor of 0.7 for the
2022–23 and 2023–24 payment years. Subsection 8(2B) sets a floor of 0.75
for the payment years from 2024–25 or later. The Explanatory Memorandum notes:
... a GST relativity floor would provide an additional safety
net to guard against the unlikely event of an economic shock that is extreme
enough to introduce significant volatility into the horizontal fiscal
equalisation system, even under a new equalisation standard.[59]
This language replicates precisely the statement made in
the Interim Response.[60]
A key issue for the floor is that no evidence-based review
of the HFE system has concluded that introducing a relativity floor in the GST
system is an optimal approach.
The PC analysed a GST floor during its review. It noted a
number of issues with a floor, including:
- ‘...a
relativity floor would represent less than full equalisation...’
- ‘a
further downside of such a proposal...is the increased complexity and
unpredictability it could introduce’
- funding
the floor by increasing the GST pool ‘...would likely have negative implications
for transparency and accountability’
- ‘...the
introduction of a relativity floor is unlikely to fix the policy disincentives
and complexity concerns identified...’
- ‘...a
floor would be blunt and arbitrary and would benefit one State for the
foreseeable future’ and
- ‘...adding
a floor today creates a variant to the system that can be further varied—with
inevitable pressure for funding beyond the GST pool’.[61]
Finding 8.3 states:
The introduction of a relativity floor would blunt the
equalisation task and introduce greater incentives for policy effort for the
beneficiary State(s) — Western Australia for the foreseeable future. But a
floor represents a band-aid solution, as it is not well targeted to broader
efficiency and fairness problems.[62]
Apart from WA, most states did not favour the introduction
of a GST floor.[63]
Similarly, the panel for the 2012 GST Distribution Review
noted in its interim report:
While the Panel sees merit in exploring approaches that lead
to increased predictability and stability in the distribution of GST revenue,
it considers that there is no compelling case for adopting a floor at present.
Moreover, a relativity floor of 0.75 would cause a major disparity in the
fiscal positions of the States in the very near future.[64]
Further, they observed that ‘there has been no evidentiary
basis or logically probative argument put forward to support that particular
number [0.75]’.[65]
In 2011, the Australian Treasury did not support the
concept of a relativity floor. In a submission to the 2012 Review Treasury noted
that the ‘application of a relativity floor would reduce simplicity because no
categories would be removed, but additional calculations would need to be
applied in order to implement the relativity floor’[66]
and:
... some options, such as imposing a relativity floor, are
expected to reduce overall predictability. Although States breaching the floor
would benefit from increased predictability, this would be outweighed by
reduced predictability for States unaffected by the floor. States unaffected by
the floor will have to account for the general assessment as well as the
additional redistribution brought about by the floor.[67]
The implementation of a floor has been tested in the House
of Representatives. In 2011, Tony Crook moved, inter alia:
That this House:
calls on the Government to amend the [FFR Act] to
stipulate a minimum GST revenue-sharing relativity of 75 per cent, which would
allow continuing respect for the principles of HFE, but with proper recognition
for population, and without Western Australia being unfairly penalised for its
disproportionate contribution to our national economic prosperity.[68]
After some debate, and attempts to amend the motion, the
approach was not approved on a division vote, receiving just two ‘ayes’ on 24
November 2011.[69]
These observations were made under an assumption of a
zero-sum GST pool, where any change in payments to one state axiomatically changes
payments to other states. Despite adding no counterfactual evidence of the
impact of the proposed floor in the Interim Response or the Explanatory
Memorandum, the Bill allows for pool growth which removes the zero-sum distributional
impact of a fixed GST pool.
The GST pool and ‘no worse off’
guarantee
Item 3 proposes replacing section 5 of the FFR
Act, relating to the GST revenue grants. The effect of this change will be
to incorporate a GST pool top-up into the grant determination formula:
Adjusted State
population x (GST revenue + Pool top-up)
Adjusted total population
Item 5 proposes adding a new section 8A
into the FFR Act, to define the pool top-up. The pool top-up is staged
across payment years, including a base top-up and an indexation amount. The
staging of the base top up is $0 in 2020–21; $600 million in 2021–22, 2022–23
and 2023–24, and $850 million in 2024–25 and 2025–26.
Proposed subsections 8A(2) and 8A(3)
define a first indexation amount to apply in each of the years 2022–23 to 2025–26
inclusive. Proposed subsections 8A(4) and 8A(5) define a
second indexation amount to apply in the year 2025–26. Substantively, subsection
8A(3) increases the $600 million base top up by a growth factor equivalent
to growth in GST revenue since 2021–22. Similarly, subsection 8A(5)
increases the additional $250 million base top up by a growth factor equivalent
to growth in GST revenue since 2024–25.
The effect of the proposed paragraphs
8A(2)(a)-(c) and 8A(4)(a)-(c) is to guarantee that an indexation
amount cannot be less than $0.
The pool top-up occurs beyond the current forecast
horizon. The Explanatory Memorandum advises that the arrangements will
‘...increase the size of the untied GST distribution pool by a total of $7.2
billion from 2021–22 to 2028–29’.[70]
This is inconsistent with the ideal transitional path identified by the PC. In
the Review the PC noted:
... the transition path should be fiscally sustainable for both
the States and the Commonwealth Government. The most sustainable approach (given
the current fiscal position of the Commonwealth Government) is for the
transition to be funded through the GST pool, rather than from sources outside
the pool, such as other Commonwealth payments.[71]
To achieve a ‘no worse off’ guarantee, proposed subsection
5(3) of the FFR Act entitles states to whichever is higher from the
outcome of a determination that would have been made under the current HFE
system (‘...if the Treasury Laws Amendment (Making Sure Every State and
Territory Gets Their Fair Share of GST) Act 2018 had not been passed’) and
the updated system including the pool top-up. The Explanatory Memorandum notes
this is a cumulative entitlements guarantee.[72]
The states have challenged the value of the guarantee, noting the potential for
a year-on-year reduction in grants if there is no net loss in a cumulative
sense.[73]
The cumulative nature of the guarantee complicates the interpretation of this
subsection, and Treasury has confirmed:
... the transition period actually does operate on a
year-on-year basis, but it's a cumulative year-on-year basis. I'm not sure that
was clear in all of the evidence that was given. If, in a scenario, a state did
trigger a no-worse-off provision, they would get additional money in that year.[74]
A key issue for the guarantee is the source of additional
GST pool revenue. Collectively, the states through the Board of Treasurers,
have sought to ‘...ensure the source of top-up funding to meet the GST guarantee
will not diminish other sources of grant revenue’.[75]
The Explanatory Memorandum notes the pool top-up ‘...will be sourced from
Commonwealth revenues not related to the GST’.[76]
When asked ‘how do you respond to state and territory concerns that the
Commonwealth funding arrangements for GST changes will be funded by cuts to
other state and territory funding arrangements?’, the Treasury provided
evidence that ‘the government has taken a policy decision that that won't be
the case, and that's been communicated formally, in writing, to the states and
territories’.[77]
Treasury also noted that the $2,373 million identified under the fiscal impact
section will ‘...be offset through the [2018-19] MYEFO [Mid-Year Economic and
Fiscal Outlook] process’.[78]
Item 7 confirms that the proposed amendments to the
FFR Act apply in relation to the 2021–22 payment year and later payment
years. Any activity in the federal financial relations system from
2018–19 to 2019–20 will be achieved through different instruments.
The option of increasing the GST pool with other
Commonwealth revenue was not considered by the PC in its Review, or in the
earlier 2012 review. It is unclear what evidence exists that states
collectively require an aggregate increase in united grants sourced from
outside the GST pool. Further, the consequential impacts on the Commonwealth
Budget from increased expenditure are not canvassed in the Explanatory
Memorandum or Interim Response.
The introduction of a floor and a ‘no worse off’
commitment necessitate an increase of the GST pool. That is, the zero sum
nature of the current HFE system is removed, requiring pool growth. A key issue
for the additional pool is how it will be treated in the relativity
recommendation by the CGC.
What is assessed by the CGC is dependent on the Terms of
Reference received from the Treasurer, specifically, aspects that should be
included or excluded from relativity modelling. Included items in the model
will affect the GST relativity, whereas excluded items will not.
The relevant document that outlines the way in which
payments are included or excluded is the IGA FFR. Specifically Schedule
D advises that, for the purpose of the CGC
determining GST revenue sharing relativities:
... general revenue assistance, excluding GST payments, will be
treated by ‘inclusion’, recognising that these payments are available to
provide untied general budget support to a State or Territory, however, the
Commonwealth Grants Commission may treat, on a case by case basis, any
component of general revenue assistance as ‘out of scope’ if it considers such
treatment is more appropriate (IGA FFR Schedule
D—paragraph D66(c)).
The Bill does not define the
pool top-up as GST Revenue, suggesting it would currently be treated by
‘inclusion’, meaning it will be factored into the calculation of the GST
relativity which may mitigate some of the gain by generating a lower relativity
than would otherwise be the case.
Matters not addressed in the Bill
The Bill does not deal with all of the PC Review recommendations,
many of which were methodological in nature. The eight recommendations which
were ‘accepted—subject to consultation with the states’ by the Commonwealth
which are not dealt with are summarised in Appendix A. The PC also made several
findings, which are not summarised, noting that the Commonwealth broadly
accepted all the PC’s findings.
Two issues stand out as material to considering the impact
of the Bill.
A regular critique of the current system is the overall
complexity of the methodology and the transparency of how the methodology is
implemented. The Bill:
-
requires the operation of parallel HFE systems by the CGC—the
current system and the updated system—in order to determine the no worse off
guarantee
-
introduces additional terms—the floor—into the relativity
modelling
-
adds other funding pools to the formula which are at the sole
discretion of the Commonwealth and
-
constrains the decision making on equalisation standard to two
states.
Also, there is no guidance on how the current methodology
may be simplified. It is unclear how these issues contribute to a reduction in
complexity or an increase in transparency.
Second, the PC has recommended a review of the fundamental
nature of federal financial relations. At an administrative level this may simply
adjust the IGA FFR, at a substantive level this may adjust the need for
and volume of payments from the Commonwealth to the states. The discussion
about potential reforms is material to understanding the long-term impact of
the changes introduced by the Bill.
Other provisions
In addition to the substantive changes to the HFE system
achieved by amending the CGC Act and FFR Act, the Bill provides
for a review of the operation of the new system.
Specifically, clause 4 requires the Productivity Minister
to refer ‘the matter of the operations of the Act’ to the Productivity
Commission for inquiry by 31 December 2026. The minimum terms of
reference for the inquiry are:
(a) whether
the amendments made by this Act are operating efficiently, effectively and as
intended; and
(b) the
fiscal implications for each State, the Australian Capital Territory and the
Northern Territory, of the amendments made by this Act.
None of the CGC Act, the FFR Act or the Productivity
Commission Act 1998 defines ‘efficiently ‘or ‘effectively’.
Concluding comments
The Bill will implement changes committed to by the Government
in its Interim Response to the PC Review, including an updated
reasonable standard for HFE, the introduction of a GST relativity floor, a top-up
to the GST pool and a ‘no worse off’ guarantee for the states. The changes will
not occur for several years. The changes implemented, as a package, were not
canvassed by the PC Review, and there is little evidence of the impact
of the changes other than the Interim Response itself. Seven states do not
agree with the proposed reform of HFE but have noted the ‘no worse off’
guarantee is welcomed. There are a range of recommendations and findings in the
PC Review which are not dealt with which may nevertheless alter the federal
financial relations system over a long time frame and are material to consider
in the context of the Bill.
Appendix A: matters not addressed in the Bill
Recommendation |
Response |
Recommendation 6.2: The CGC — through its
Chairperson and Commission members — should provide a strong neutral voice,
to facilitate a better-informed public discourse on the HFE system |
Accept, subject to consultation with the States.
The Government supports the CGC adopting a greater public
educational role. As the subject matter experts, the CGC could help improve
understanding of the system which is currently very low, and mitigate the
potential for misunderstandings to develop
|
Recommendation 6.3: The CGC should strengthen its
formal interactions with the State and Commonwealth Governments. In
particular, when requested by a State Government, it should provide
provisional ‘draft rulings’ on the HFE implications of a policy change |
Accept, subject to consultation with the States.
The Government notes that the CGC already has strong
relationships with the States, including through written papers, informal
staff engagements, and formal State visits. Nonetheless, the Government
supports the CGC further strengthening these interactions, including by
providing States with draft rulings.
Draft rulings could provide the States with greater
transparency and certainty on the GST impacts of reform and may further
encourage States to pursue beneficial reforms.
|
Recommendation 6.4: The Commonwealth Government, in
consultation with the States, should develop clear guidelines detailing the
basis on which Commonwealth payments are to be quarantined from HFE by the
Commonwealth Treasurer (so that they do not unnecessarily erode the efficacy
of the CGC’s relativities and compromise the objective of HFE).
The guidelines should strike a balance between enhancing
accountability and transparency, while not unduly affecting the Treasurer’s
ability to quarantine payments in exceptional circumstances that are in the
national interest.
|
Accept, subject to consultation with the States.
The Government supports the development of guidelines that
provide an equal playing field for all States. However, the Government notes
that there are also sometimes exceptional circumstances where the
Commonwealth must act in the national interest
|
Recommendation 6.5: The Commonwealth Government
should strengthen the CGC’s decision-making framework. In particular:
- the
Commonwealth Treasury should provide input, including public submissions, to
the CGC’s five-yearly methodology review process, drawing upon its
community-wide perspective
- the
Commonwealth Treasurer should nominate specific areas of focus for the CGC in
the terms of reference for the five-yearly methodology reviews, following (as
is currently the case) consultation with the States
|
Accept, subject to consultation with the States.
The Government supports the Commonwealth Treasury providing the CGC with more
input, where this would contribute additional value to the CGC.
The Government also agrees to consider whether there are
specific areas that the CGC should focus on during methodology reviews, when
developing these terms of reference.
|
Recommendation 6.6: The CGC should immediately and
systematically make the data provided by the States publicly available on its
website, along with the CGC’s calculations on these data
|
Accept, subject to consultation with the States.
Consistent with our ‘open data’ policy, the Government
supports the public dissemination of more data. However, such data must be
released responsibly, and address concerns such as privacy, commercial
sensitivities and/or the possibility for the data to be misinterpreted
|
Recommendation 7.1: The Commonwealth Treasurer
should direct the CGC (in accordance with the refocused HFE objective) to:
- examine
simpler and more aggregated revenue and expenditure assessments that use more
policy-neutral indicators, consistent with achieving a reasonable standard of
services
- adopt
significant increases in materiality thresholds, which would assist in
determining and applying more policy-neutral category level indicators.
This initial direction should be embedded in revised terms
of reference for the CGC’s 2020 methodology review
|
Accept, subject to consultation with the States.
The Government agrees there is merit in exploring the use
of more policy-neutral indicators. These indicators would simplify the HFE
system and could reduce disincentives for States to pursue beneficial policy
reforms.
The Government also agrees there is merit in raising the
materiality thresholds within assessments, which would simplify the system
and ensure that only the most important factors are considered in assessing
State’s relative fiscal capacities.
The Government notes that the CGC is currently undertaking
a major methodology review, which could provide an ideal opportunity to
thoroughly explore these issues
|
Recommendation 9.1: Improvements to the HFE system
can only go so far.
The Commonwealth and State Governments, through the
Council on Federal Financial Relations and recently formed Board of
Treasurers, should work towards meaningful reform to federal financial
relations.
In the first instance, the process should:
- assess
how Commonwealth payments to the States — both general revenue assistance and
payments for specific purpose — interact with each other, given the
significant reforms to payments for specific purposes that have occurred in
recent years
- develop
a better-delineated division of responsibilities between the States and the
Commonwealth and establish clear lines and forms of accountability. Policies
to address Indigenous disadvantage should be a priority.
Following this, options to address the vertical fiscal
imbalance should be considered and advanced.
|
Accept in-principle, subject to consultation with
the States.
Commonwealth-State relations are fundamental to the smooth
operation of our country. To ensure this relationship continues to remain
effective, we should constantly review and refine it
|
Recommendation 3.2 [extract from the 2012
Review, dealt with in the PC Review] on rounding relativities: To ensure
the system does not appear to be falsely precise, the Panel recommends that
relativities produced from the CGC’s process be rounded to two decimal places
in the annual Updates and Reviews
|
Accept, subject to consultation with the States.
In addition to the PC’s Recommendations, the Government
agrees that implementing this additional recommendation from the 2012 GST
Distribution Review would further address false precision in the system
|
Source: Australian Government, Productivity
Commission inquiry into horizontal fiscal equalisation: Government interim
response, op. cit., pp. 24–27.