Commonwealth Funding Levels
Commonwealth grants to the States (collectively) as a proportion of Commonwealth Government taxes fell substantially over the past two decades, forcing the States to turn to their narrower, less economically and socially desirable tax bases (e.g. by liberalising gambling activity in some cases) to fund increasing expenditure pressures.
The replacement of some of the States’ less desirable taxes (e.g. financial transaction taxes) by the GST saw a one‑off increase in grants to the States as a share of Australian Government taxes.
However, while the GST has grown strongly, this has not resulted in any ongoing increase in the States’ grants as a share of national taxes. This partly reflects the strong growth in company tax collections relative to the GST revenues.
Grants to the States as a Share of Commonwealth Government Tax Collections
Source: Commonwealth's Final Budget Outcome and Commonwealth Budget papers.
Highlighting the vulnerability that comes with the States’ high reliance on Australian Government grants, for an extended part of this period the Australian Government indexed general purpose grants to the States (then known as financial assistance grants) by only an inflation factor. At various stages it even reduced grants in real terms, or withheld grants specifically to help balance its own budget.
There are also several more recent examples of the Australian Government reneging on promised funding. At the national level, it unilaterally changed part of the formula for calculating the top-up grants required to ensure that the States were not financially worse off in the early period of the GST funding arrangements. It has also unilaterally decided to discontinue National Competition Policy (NCP) payments after 2005-06.