Garnaut Fitzgerald Review of Commonwealth-State Funding

TABLE OF CONTENTS
Table of Contents
EXECUTIVE SUMMARY....................................................................................................................................1
CHAPTER 1: Overview and Summary of Recommendations .......................................................................5
1.1 Context ..............................................................................................................................................5
1.2 Background to the Review.................................................................................................................6
1.3 Terms of Reference ...........................................................................................................................7
1.4 Issues in Commonwealth–State funding............................................................................................8
1.5 Overall assessment of current arrangements ..................................................................................12
1.6 The new model ................................................................................................................................16
CHAPTER 2: How the System Grew: A History of Commonwealth Grants to the States.........................21
2.1 Introduction......................................................................................................................................21
2.2 Federation, distribution of surplus revenue, and specific purpose payments...................................22
2.3 Creation of the Commonwealth Grants Commission .......................................................................24
2.4 Increased vertical fiscal imbalance through Commonwealth monopolisation of income tax ............26
2.5 Whitlam’s centralism and Fraser’s New Federalism ........................................................................29
2.6 Hawke and the Premiers .................................................................................................................31
2.7 Howard’s New Tax System..............................................................................................................32
2.8 Defining horizontal fiscal equalisation..............................................................................................32
2.9 The Intergovernmental Agreement ..................................................................................................37
2.10 The future ........................................................................................................................................38
CHAPTER 3: The Current System .................................................................................................................39
3.1 A summary of Commonwealth grants to the States.........................................................................39
3.2 Impact of the Intergovernmental Agreement....................................................................................40
3.3 General purpose grants ...................................................................................................................42
3.4 Specific purpose payments..............................................................................................................44
CHAPTER 4: Allocation of General Purpose Grants ...................................................................................47
4.1 Types of Commonwealth grants ......................................................................................................47
4.2 Overview of horizontal fiscal equalisation ........................................................................................48
4.3 Implementing horizontal fiscal equalisation......................................................................................51
4.4 Issues around horizontal fiscal equalisation.....................................................................................54
CHAPTER 5: Specific Purpose Payments and Overall Payments to the States .......................................59
5.1 The role of specific purpose payments ............................................................................................59
5.2 Scope and make-up of specific purpose payments .........................................................................61
5.3 Distribution and trends.....................................................................................................................63
5.4 Features...........................................................................................................................................65
5.5 Issues ..............................................................................................................................................70
CHAPTER 6: Comparative Fiscal Positions .................................................................................................77
6.1 Overall fiscal position.......................................................................................................................77
6.2 State expenditure levels ..................................................................................................................81
6.3 Taxation effort..................................................................................................................................83
6.4 Special features of the Australian Capital Territory..........................................................................87
6.5 The States’ overall fiscal situations..................................................................................................88
CHAPTER 7: Other Federations ....................................................................................................................89
7.1 Introduction......................................................................................................................................89
7.2 Vertical fiscal imbalance and the control of revenues ......................................................................90
7.3 Inequality at State level....................................................................................................................94
7.4 Comparing fiscal disparities and equalisation..................................................................................98
CHAPTER 8: Federal Policy Effects on Interstate Distribution of Incomes and Economic Activity .....109
8.1 Introduction....................................................................................................................................109
8.2 Commonwealth income transfers and production effects ..............................................................111
8.3 Impact of Federal policies on States’ production ...........................................................................117
8.4 Trends ...........................................................................................................................................118
8.5 Comparisons with State incomes and growth ................................................................................119
8.6 Conclusions ...................................................................................................................................122
FINAL REPORT [i]