Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 12: Overall Assessment
and the Need for Reform
The Commonwealth's discretion in allocating GST revenue among the States is
constrained by the Intergovernmental Agreement. It requires that the GST should be
distributed in accordance with HFE principles. At least one State has sought to interpret
this as HFE as presently defined by the CGC. This view was put forward by the current
CGC Chairman at the National Forum. Several State Governments representing the
large majority of the Australian population have, in submissions to the Review,
expressed the view that the reference to HFE in the Intergovernmental Agreement is to
some redistribution from fiscally strong to fiscally weak States, and not to the particular
form of HFE currently favoured by the CGC. They argue that it is consistent with the
Intergovernmental Agreement for HFE to be defined in the less absolutist manner in
which it was applied in the CGC's first six and especially its first four decades.
The Intergovernmental Agreement will never be interpreted by the courts as it is not a
legal document. Nevertheless, it is politically relevant that the records of negotiation
show disagreement on the meaning of HFE among the States in 1999. Unhappiness
over the way this aspect of the Intergovernmental Agreement has been applied in
practice was part of the background to commissioning this independent Review of
Commonwealth–State Funding. There is currently disagreement about the interpretation
of the Commonwealth's guarantee of minimum levels of funding in replacement of taxes
once raised by the States (in particular over the excise on petroleum products). This is
currently of intense interest, but will cease to have importance for Commonwealth
funding once budget balancing assistance has been made redundant by growing GST
revenues.
The Intergovernmental Agreement provides the States with a general assurance on the
level of SPPs – that the Commonwealth has no intention of reducing their amount.
Intentions can change, and even if they do not, the Intergovernmental Agreement does
not indicate if the assurance is in nominal, real or real per capita terms. As noted in
Issues in Commonwealth–State Funding (Garnaut and FitzGerald 2002), much hangs
on the distinction. If SPPs were held constant in nominal terms, and assuming that after
the transition period GST revenue will rise more or less in line with gross domestic
product, total Commonwealth payments to the States would in all circumstances (except
of inflation well above the Reserve Bank of Australia’s target range, or of recession) rise
in real terms, but less rapidly than the population growth rate. If SPPs were held
constant in real terms, total Commonwealth payments would stay fairly steady over time
in real per capita terms. If SPPs were held constant in real per capita terms, total
Commonwealth payments to the States would rise in real per capita terms at about
three-fifths of the national rate of increase in labour productivity.
The GST replaced a number of State taxes, which were less elastic in relation to income
growth, and State revenues (including Commonwealth GST grants but not SPPs) can
now be expected to grow more closely in line with national income. The debate over
whether guarantees over total amounts of SPPs should be firm (no reduction of real
per capita amounts) or weak (no nominal reduction) feeds into a debate about whether
legitimate demands for expenditures in areas of Commonwealth responsibility are likely
to grow more strongly than legitimate demand for expenditures in areas of mainly State
responsibility. Similarly, if there are to be tax cuts, should they be mainly cuts in
Commonwealth or State taxes Any effective assurance on total Commonwealth
payments to the States will require a commitment by the Commonwealth on both SPP
funding and untied grants.
FINAL REPORT [186]