Australia’s Commonwealth Grants Commission has for the past 80 years worked to ensure fiscal equalisation between the federation’s states and territories. It could provide an instructive example to other nations grappling with devolution funding
I noted with interest CIPFA’s briefing on funding devolved government in the UK, published in November. In it, CIPFA indicates that it considers that the continuation of the Barnett allocation for resources between the four constituent nations of the UK should be reviewed to take account of relative needs. Australian experience in allocation of resources between the federal government and the eight state and territory governments may be of interest in this context, particularly the role played by the Commonwealth Grants Commission.
In Australia, the main sources of public revenue are national and include income tax, various company taxes, goods and services tax (similar to VAT), customs and excise taxes and superannuation taxes. State and territories’ sources of tax revenue fund only about half of their total expenditure although the proportion varies from state to state. The federal government or Commonwealth (the C’th) gives substantial grants to the states and territories.
Australia is a federation that began in 1901. Before federation, all public sector authority rested with the six states (then colonies under the British crown), which funded their own activities individually. Following federation, some state functions (including defence, fisheries and banking) were defined as services of the Commonwealth (the C’th) and became financed over the country as a whole. The C’th was also given power to give grants to the states
More than a century on from federation, the scope of public expenditure has grown and decisions about new taxes or increases in existing taxes have largely been taken at the Commonwealth level. States have, however, retained responsibility for all services other than those transferred to the C’th including some significant functions with rising costs, notably health and education. So, although substantial tax decisions remain at state level, the growth of state expenditure need has outstripped the growth of the state tax base.
Financial support to states now includes specific grants for major services (notably in health and education) and a share of the proceeds of Goods and Services Tax (GST – the equivalent of VAT). The C’th levies GST and, in exchange for the states’ agreement to cancel sales and some other local taxes, distributes the proceeds wholly to the states and territories under a regularly reviewed methodology
In 2014/15, the C’th is providing payments to the states and territories representing 24% of the C’th’s budget and about half that of the states and territories. Around 85% of this federal funding is broadly based and is intended to allow the states flexibility to support service delivery as they determine.
About 40% of the C’th’s funding relates to special purpose payments, largely health and education, in which the C’th agrees to provide funds to support commitments the states make to achieve stated programmes. The total of these payments is determined by the C’th but the states have a degree of choice as to whether they undertake the programme and hence receive the grant. Agreement to the scope and principles of the grants is sought from time to time under a standing group of the prime minister and the state premiers - the Council of Australian Governments (COAG).
The main part of the balance of the funding is the distribution of revenue from GST, which was introduced in July 2000. The proceeds of GST are collected by the C’th but wholly redistributed to the states in the form of general revenue assistance. The rate of GST was fixed at 10% in 1999 and the consent of all states and the C’th has to be obtained if it were to be varied. The amount collected has risen since 2000/01 at a rate which has exceeded cost rises generally as the economy of Australia has grown although this varies from year to year depending on the level of economic activity.
An independent body, the Commonwealth Grants Commission, which was set up in the 1930s, determines how general revenue assistance is distributed. The commission has a staff of about 30 as well as six commissioners, who consider new data each year and also occasional submissions from the C’th and the states. It costs a little over $6m a year to run. Its aim (agreed by the C’th and the states) is to promote fiscal equalisation between the states. Equalisation is currently defined as ‘state governments should receive funding from the Commonwealth such that, if each made the same efforts 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’.
The commission considers how to implement this principle of equalisation. For example, how should the provision of state infrastructure or the ownership of state businesses be reflected in its work? Having made these decisions, it undertakes research to identify and measure influences on state revenue raising capacity and cost of delivering services. Using these findings, it develops a methodology to calculate a distribution of GST revenue, which reflects differences in needs (as indicated by the services the states overall provide rather than any absolute measure of need) and taxable capacity between the states. Data is updated every year and a major methodology review occurs every five years or so in response to terms of reference provided by the C’th Treasurer. The last completed major review was in 2010.
Funding for each state and territory has varied over time. Some which had greater-than-population funding in the past now have lower and vice versa. The overall effect is quite discriminatory. Only three states have distributions within 10% of the share they would have on a population basis and the most substantial beneficiary has funding (when viewed on a per capita basis) around 10 times that of the state with the lowest funding.
Views about the equity of the decisions reached of course vary and there are strongly held views about the distribution. These controversies keep the commission busy, but the principle of equalisation agreed by the states and territories in the 1930s and updated since continues to be the basis of current decisions.
Australia is just one country in the world where the federal or central government provides significant funding to constituent or regional levels of government. There are many others, including Canada, Germany, India, Malaysia, Russia, Spain, Switzerland, China, Indonesia, Japan, South Africa and South Korea. The principles and methods vary, but the Australian experience is particularly interesting because it is underpinned by an agreed principle of equalisation.
David Riggs has been a CIPFA member for over 50 years. After a career in UK local government and the civil service, he emigrated to Australia over 15 years ago and recently retired from the position of CFO of an Australian-owned government business.
