Garnaut Fitzgerald Review of Commonwealth-State Funding

CHAPTER 4: Allocation of General Purpose Grants
CHAPTER 4: Allocation of
General Purpose Grants
• The Commonwealth Grants Commission applies horizontal fiscal equalisation by
developing per capita grant relativities to distribute GST revenue among the States.
• These relativities are based on the Commonwealth Grants Commission’s
complicated methodology, which uses over sixty models that aim to equalise States’
expenditure needs and revenue capacities.
• The measures are intended to be policy neutral and reflect what States do in
practice.
• Problems with the Commonwealth Grants Commission’s methodology include
extreme complexity, the use of unsubstantiated judgements and the assumption of
standard policy.
• The Commonwealth Grants Commission’s per capita grant relativities result in New
South Wales, Victoria and Western Australia being ‘donor’ States, receiving less
than an equal per capita share of the GST pool. The remaining States are ‘recipient’
States and receive more than an equal per capita share.
4.1 Types of Commonwealth grants
Goods and Services Tax (GST) revenue comprises around 90 per cent of general
purpose grants. When current transitional arrangements are completed, the GST will
fund all general purpose grants other than National Competition Policy payments and
Special Revenue Assistance for the Australian Capital Territory.
Other general purpose grants that are not funded from the Commonwealth’s own
revenues (see Chapter 3) are:
• budget balancing assistance, which is paid to meet the net revenue shortfalls for
each State arising from GST-related tax reforms. Budget balancing assistance
should diminish to zero as the GST revenue grows, although this is expected to take
several years
• competition payments, which are paid to the States in return for implementing
competition policy reforms, and allocated on an equal per capita basis among the
States. These ongoing payments were not affected by the 2000 tax reform
FINAL REPORT [47]