Appendix II

Treasurer's Press Release No. 17, 9 April 1999 and Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations

EMBARGO: 9 April 1999

PREMIERS' CONFERENCE/LOAN COUNCIL OUTCOME FOR 1999-2000

In reaching agreement today on general revenue assistance to the States and Territories in 1999-2000, the Premiers' Conference recognised that the continuation of sound fiscal policies by all levels of government remains fundamental to maintaining economic and employment growth in an uncertain international environment.

The substantial programme of fiscal consolidation implemented by the Federal Government during its first term has played a central role in boosting international investor confidence in Australia and creating the conditions for strong and sustainable economic growth, notwithstanding the sharp downturn in the Asian region.

Despite the need for ongoing fiscal restraint, the agreement reached today sees a substantial increase in Commonwealth payments to the States and Territories in 1999-2000.

· General revenue assistance to the States and Territories is expected to increase by $843 million (4.9 per cent) in 1999-2000. Allowing for the fact that States and Territories will no longer be making State fiscal contributions, which totalled $313.4 million in 1998-99, general revenue assistance will rise by 6.9 per cent in 1999-2000, or 4.4 per cent in real terms.

· Total payments to the States - which include general revenue assistance and specific purpose payments - are estimated to rise by $988 million or 3.0 per cent.

General Revenue Assistance

The Commonwealth will maintain Financial Assistance Grants (FAGs) to the States and Territories in real per capita terms in 1999-2000, resulting in an estimated increase in total FAGs of some $628 million, or 3.7 per cent.

The distribution of FAGs between the States and Territories will be based on the corrected Commonwealth Grants Commission's (CGC) 1999  recommended per capita relativities, using a five year assessment period and including an allowance for depreciation costs of the States.

A State or Territory's receipt of the per capita element of FAGs growth will remain conditional on meeting the obligations of the Agreement to Implement the National Competition Policy and Related Reforms.

The Commonwealth will also provide Competition Payments to the States and Territories as specified in the Agreement to Implement the National Competition Policy and Related Reforms.

These payments will be worth up to $443.3 million in 1999-2000, more than double their estimated 1998-99 level of $216.2 million. A State's receipt of its per capita share of Competition Payments will be determined once the National Competition Council has released its assessment of progress under the Agreement.

The ACT will receive Special Revenue Assistance from the Commonwealth totalling $13.2 million in 1999-2000, comprising transitional allowances of $9.3 million and $3.9 million for special fiscal needs. These amounts are in accordance with the CGC's recommendations and will be funded directly by the Commonwealth.

Details of the estimated general revenue assistance to the States and Territories in 1998-99 and 1999-2000 are set out in Tables 1 and 2.

The actual 1999-2000 payments for FAGs and Competition Payments will reflect the outcome for the CPI and the determination of population by the Australian Statistician during the year.

Total Payments

Table 3 shows estimated total payments, comprising general revenue assistance and specific purpose payments, to the States and Territories in 1999-2000. The estimates of specific purpose payments are cash based estimates as at the time of the Commonwealth's Mid-Year Economic and Fiscal Outlook and are prepared on a no policy change basis. In accordance with normal budgetary procedures, specific purpose payments will be subject to consideration in the Commonwealth's 1999-2000 Budget processes. Detailed estimates of the proposed level and distribution of specific purpose payments will be included in the 1999-2000 Budget papers.

1999-2000 will be the final year in which FAGs payments are made to the States and Territories. From 2000-01, States and Territories will receive the full proceeds of the GST. This historic reform to Commonwealth-State financial relations will provide States and Territories with a more robust tax base which can be expected to grow over time, while at the same time permitting the elimination of a range of existing inefficient taxes which are impeding economic activity.

Over time, these new arrangements will substantially improve the overall financial position of all States and Territories, while in the transitional period, the Commonwealth has undertaken to ensure that the budgetary position of each State and Territory is no worse off than it would have been had the reforms not been made.

Loan Council Allocations for 1999-2000

Loan Council endorsed the Loan Council Allocations (LCAs) nominated by the Commonwealth and each State and Territory for 1999-2000. These are shown in Table 4.

Loan Council noted that the Australian economy has remained resilient in the face of the international slowdown and, in particular, the downturn in many of our Asian trading partners. Loan Council considered that the process of fiscal consolidation has been important in helping to shield the domestic economy from the instability experienced in our region and noted the need for continued perseverance with sound fiscal policies.

Against this background, Loan Council considered that the aggregate of LCA nominations is consistent with current macroeconomic policy objectives.

TABLE 1: GENERAL REVENUE ASSISTANCE TO THE STATES AND
TERRITORIES, 1998-99 & 1999-2000

(a) The estimates of financial assistance grants (FAGs) are determined by distributing the pool of FAGs and unquarantined health care grants on the basis of the per capita relativities recommended by the Commonwealth Grants Commission (CGC), and then deducting the estimate of unquarantined health care grants. The FAGs estimates do not include offsets for State fiscal contributions in 1998-99.

FAGs for 1999-2000 have been derived by indexing estimated FAGs for 1998-99 by 3.74 per cent (an increase of $627.7 million). The final outcome for 1999-2000 will depend on the actual increase in the CPI to March 2000 and the determination of the Statistician as to population as at 31 December 1998 and 31 December 1999, as well as the final level of FAGs for 1998-99.

(b) For 1998-99 and 1999-2000, these payments only consist of transitional allowances and special fiscal needs paid to the ACT in accordance with CGC recommendations.

(c) The Agreement to Implement the National Competition Policy and Related Reforms specifies that $200 million in 1994-95 prices is to be distributed between the States on an equal per capita basis in 1998-99 and $400 million in 1994-95 prices in 1999-2000. The receipt of the payment is conditional on a State meeting the obligations of the Agreement.

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

TABLE 2: DISTRIBUTION OF FINANCIAL ASSISTANCE GRANTS (FAGS) TO THE STATES AND TERRITORIES, 1999-2000

(a) Total weighted population differs from the total population in column 1 as the per capita relativities are calculated by the CGC using population numbers for a lagged assessment period and are then rounded. It is the total population shown in column 1 that is used in determining an index factor for the FAGs pool. Note also that the population numbers are projections.

(b) As specified under the AHCAs.

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

TABLE 3: ESTIMATED TOTAL PAYMENTS TO THE STATES AND TERRITORIES, 1998-99 & 1999-2000 (a)

(a) Specific purpose payment data are presented on a cash basis in this table and abstract from grants to the States under the Guns Buyback Scheme ($78.8 million in 1998-99).

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

TABLE 4: LOAN COUNCIL ALLOCATIONS – 1999-2000 NOMINATIONS ($m) (a)

Figures have been rounded. Discrepancies between totals and sums of components reflect rounding.

(a) LCA nominations for 1999-2000 reflect current best estimates of 1999-2000 public sector deficits/surpluses. Nominations have been provided on the basis of policies announced up to and included in jurisdictions' mid year reports. With the exception of Victoria (see footnote 2) nominations are based on preliminary estimates of general government finances provided by jurisdictions for purposes of their mid year reports, and projected bottom lines for each jurisdiction's PTE sector. Updated LCA estimates will be provided through publication by each jurisdiction of its budget time LCA as part of its budget documentation. The 2 per cent (of total non-financial public sector revenue) tolerance limits around each jurisdiction's 1999-2000 LCA are designed, inter alia, to accommodate changes to the LCA resulting from changes in policy.

1. Memorandum items are used to adjust the public sector deficit/surplus to include in LCAs certain transactions - such as operating leases - that have many of the characteristics of public sector borrowings but do not constitute formal borrowings. They are also used, where appropriate, to deduct from the public sector deficit/surplus certain transactions that Loan Council has agreed should not be included in LCAs - for example, the funding of more than employers' emerging costs under public sector superannuation schemes, or borrowings by entities such as statutory marketing authorities. Where relevant, memorandum items include an amount for gross new borrowings of government home finance schemes. Overfunding and underfunding of emerging superannuation liabilities is also included as a memorandum item, as are interest earnings on employer superannuation balances.
2. Government contingent exposures under infrastructure projects with private sector involvement are identified in the attachment to this report, rather than included as a component of LCAs. These exposures, which are measured as the government's contractual liabilities in the event of termination of the project, are unlikely to be realised and are thus materially different from actual borrowings undertaken to finance the public sector deficit. Government outlays under these projects, such as equity contributions and ongoing commercial payments to the private sector, continue to be included in the annual total public sector deficit, and hence the LCA.
3. New South Wales' 1999-2000 allocations and latest 1998-99 estimates incorporate the impact of its superannuation conversion offer.
4. Victoria updated its 1999-2000 LCA nomination, and its latest estimate of 1998-99 LCA, on 7 April 1999. These changes were mainly due to significant privatisation receipts, which occurred after their Mid Year Report.

3. Changes in the measurement of overfunding of superannuation have led to a substantial upward revision in South Australia's memorandum items and in the LCA surplus estimated for 1998-99.

4. The revision in the Commonwealth's 1998-99 estimate since Budget time mainly reflects a change in the timing of the sale of the Government's remaining equity in Telstra.