Commonwealth Grants Commission
GST revenues are distributed among the States according to recommendations from the Commonwealth Grants Commission using the principle of horizontal fiscal equalisation (HFE).
The aim of HFE is to enable each State to provide the same standard of services, providing it makes the same effort to raise revenues from its own sources.
HFE takes account of the different costs faced by State governments in providing services and States’ differing capacities to raise their own revenues. To the extent that these differences can be identified and are due to unavoidable factors (such as high cost remote communities) rather than differences in State policies (or efficiency of service delivery), grants are allocated to offset the discrepancies.
The Grants Commission updates its calculation of State grant shares annually, using the latest available data (e.g. on State revenue bases and the composition of State populations). In addition to annual updates, the Commission undertakes a major review of the methodology used to implement fiscal equalisation every five or six years. The last review was completed in 2004 and its outcome was a significant improvement in the State's funding share of $231 million (see the graph below), reflecting amongst other things, better recognition of recent rapid growth in our population, social infrastructure demands, and a more accurate measure of our revenue raising advantage in the mining area.
The current Grants Commission Review is due to report by February 2010. The terms of reference have a focus on simplification (consistent with the principle of HFE). In March 2007, the Grants Commission presented a progress report to the Ministerial Council (available at www.cgc.gov.au), as required by its terms of reference.
The 2010 Review is requiring considerable involvement by State Treasuries (with the assistance of other State agencies) in the preparation of submissions and data, participation in working groups and attending conferences. During 2008, the Grants Commission will visit each State to hold discussions with Treasury officials and State service delivery staff (including in country areas). The Western Australian visit is in the week commencing June 23, 2008.
The 2007 Update
On 27 February 2007, the Grants Commission reported on its annual update recommendations, to apply in 2007‑08. The Commission recommended a decrease in Western Australia’s funding share of around $272 million ($132 per person), which becomes $291 million in 2007-08 terms. As shown in the table below, Queensland and Tasmania also experienced a reduction in their grant shares, while other States’ shares were increased. The March 2007 Treasurers’ Conference accepted the Grants Commission’s recommendations.
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Impact of Grants Commission Recommendations (2006‑07 terms)
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2007 Update
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1994-2006
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$m
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$ per capita
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$m
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$ per capita
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New South Wales
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+277
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+40
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-132
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-19
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Victoria
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+64
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+13
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+408
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+79
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Queensland
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-166
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-41
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-377
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-92
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Western Australia
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-272
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-132
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-757
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-365
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South Australia
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+69
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+45
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+237
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+152
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Tasmania
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-5
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-10
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+211
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+430
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ACT
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+13
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+40
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+196
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+592
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Northern Territory
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+20
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+94
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+214
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+1,029
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The main reasons for Western Australia’s loss are the increase in the State’s revenue raising capacity, principally for stamp duty on conveyances and increases in our capacity to raise payroll tax and mining revenue and the decreased importance of financial transaction taxes. Further, losses are due to a relative reduction in the States’ rate of government school enrolments and hospital admissions, and in the support required for our mining industry.
Western Australia’s annual GST grant is now $757 million less (in 2006‑07 terms) than it would have been if the 1993‑94 share still applied. This reflects mainly strong growth in the State’s royalty revenues (particularly from the North West Shelf project and from iron ore royalties), which has resulted in a redistribution of funds to States with weaker revenue growth.
The graph below shows the cumulative gains/losses experienced by the States since 1993-94 (in 2006-07 terms). The increase in Western Australia’s grant share in 2004‑05 was the result of improvements to the Grants Commission’s methods resulting from its major review of methods reported in 2004, but only partly offsets the State’s losses over time.
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Cumulative Per Capita Impact of the Grants Commission Process since 1993-94 Review
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Source: Department of Treasury and Finance estimates using Commonwealth Grants Commission data.
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