6.2	FEDERAL FINANCIAL RELATIONS
The Structure of Australia’s Federal Financial Relations
Australia’s federal relations are characterised by an inequality between the revenue raising capacities and expenditure responsibilities of the Commonwealth and State Governments.  The Commonwealth Government collects the majority of the nation’s taxation revenue, while the States are constitutionally responsible for the delivery of fundamental government services, such as health and education.  This disparity is known as vertical fiscal imbalance and means the States are inherently reliant on fiscal transfers from the Commonwealth Government in order to deliver services.
The ACT relies on Commonwealth financial assistance to meet 46 per cent of its average revenue requirements.  Due to horizontal fiscal imbalance, whereby each State has a different capacity to raise revenues and deliver services, the level of federal funding a State requires varies.  For the Northern Territory this is as much as 80 per cent of its total revenues.
Australia addresses the horizontal fiscal imbalance between the States through the application of Horizontal Fiscal Equalisation (HFE) to the distribution of the Goods and Services Tax (GST) revenue pool to the States and a series of Commonwealth transfers in the form of direct grants.  Under the principles of HFE, each State receives a level of funding whereby the capacity of all States to provide essential services is equalised.
A New Framework for Federal Financial Relations
One of the main priorities of the Commonwealth Government has been to reform the existing framework for federal financial relations to provide the States with greater flexibility to deliver services efficiently, while improving government accountability.  These reforms have been driven by a revitalised Council of Australian Governments (COAG), resulting in the signing of a new Intergovernmental Agreement (IGA) on Federal Financial Relations in December 2008.
The centrepiece of the new IGA is a fundamental change in the nature of Commonwealth-State funding arrangements.  This change delivers broad and tangible benefits to the States, including a rationalisation of Commonwealth grants; a significant funding injection; more appropriate grant funding growth rates; and greater budget flexibility.
Rationalisation of Grants
Under the reforms, the number of Specific Purpose Payment (SPP) grants the Commonwealth provides to the States was reduced from ninety to five.  Existing individual SPPs were rolled into five newly formed National SPPs:
•	National Healthcare SPP;
•	National Schools SPP;
•	National Skills and Workforce Development SPP;
•	National Affordable Housing SPP; and
•	National Disability SPP.
Funding Injection
The rationalisation of existing SPPs was accompanied by a significant rebasing of the level of funding to be delivered through the newly formed National SPPs.  An additional $7.1 billion in Commonwealth funding will be provided to the States over the next five years.  This injection assists in addressing the declining Commonwealth funding contribution towards key State service delivery areas such as health and education.
In addition, the introduction of National Partnership payments will assist the States in funding specific projects and facilitate and/or reward States that deliver on nationally significant reforms.
Funding Growth Rates
The Commonwealth and States jointly developed, and agreed to, more appropriate funding growth rates for the National SPPs.  The new growth rates are more reflective of the demand and cost increases faced by the States and will assist in maintaining the Commonwealth’s relative share of financial responsibilities in respect to the areas covered by the new SPPs.
Budget Flexibility
A primary focus of the reform package was the removal of the prescriptive input controls imposed under the previous Commonwealth-State funding arrangements.  By rationalising the number of SPPs and removing input controls, such as matched funding, States have been given greater flexibility to tailor spending in key sectors according to their own policy priorities and the needs of their populations.
The Intergovernmental Agreement on Federal Financial Relations
The new IGA replaces the 1999 Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (concurrent with the introduction of the GST), and implements the new framework for Commonwealth-State financial relations.
The key attributes of the IGA are that it:
•	is principles based — highlighting the new model of cooperative federalism;
•	covers the totality of the Commonwealth’s financial relations with the States, including in respect of payments of general revenue assistance (including GST revenue payments), payments for specific purposes, and all the associated policy dimensions of the Commonwealth’s involvement in areas of State service delivery;
•	is a ‘living document’ by giving effect to schedules that contain detailed arrangements and which may be amended as necessary by the consensus of interested or affected jurisdictions, in the case of National Agreements, and unanimous agreement of COAG in the case of GST revenue sharing arrangements;
•	creates a new foundation to facilitate far reaching economic and social reforms, to be undertaken as part of COAG’s work program, through the use of incentive payments to the States to support nationally significant reforms; and
•	enhances accountability through simpler, standardised and more transparent public performance reporting for all jurisdictions, underpinned by clearer roles and responsibilities.
In a functional sense, the IGA includes a core agreement and a series of schedules that can be modified by unanimous agreement of the Ministerial Council for Federal Financial Relations.
The core agreement is founded on the mutual commitment by the Commonwealth and States to share the responsibility of funding key service areas as well as improving the efficiency and effectiveness of service delivery.  The schedules to the IGA cover:
Institutional arrangements — detailing the ongoing role of the Ministerial Council, the COAG Reform Council, and the COAG Working Groups.  It also details the administrative arrangements regarding the GST through the GST Administration Sub-Committee.
Taxation reform — which reconfirms States’ commitment to abolish those taxes as agreed under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (the previous IGA).
Public accountability and performance reporting — outlining the proposed use of agreed performance indicators to monitor the outputs and outcomes of service provision with the aim of increasing the accountability of governments.  It is proposed that further work be undertaken in 2009 to develop a set of agreed measures.
Payment arrangements — contains the specifics of the administration of: the proposed semi-monthly payments; the 2009-10 base funding for the five national SPPs and the annual growth factors; distribution issues; the general revenue assistance including the GST; and transitional payment arrangements.

National policy and reform objectives — provides an overview of the objectives of the national agreements and the national partnerships, effectively detailing how they will work and the objectives of the national reforms. 
National Agreements — the reform frameworks and objectives for the sector specific agreements.
National Partnerships — which will be used to drive reform.
Legislation providing appropriation in respect of the fiscal grants, outlined in Schedule D of the IGA, was agreed to by the Commonwealth Government in the form of the Federal Financial Relations Act 2009, on 1 April 2009.
	
Financial Safeguards
The new IGA provides a number of financial safeguards for the States.  These include the continued distribution of GST revenue (less administration costs) to the States on the basis of HFE; and a commitment by the Commonwealth to the States that under the federalism reforms no jurisdiction would be worse off.
Most importantly, the reform separates the provision of Commonwealth funding through the National SPPs from the agreed service delivery outcomes.  This differs from the previous arrangements whereby SPP funding was provided to the States conditionally, based on specific service delivery input controls.  By removing those input controls states are given the flexibility of tailoring the services they deliver to the needs of their population.

Ministerial Council for Federal Financial Relations
With the signing of the new IGA, the Treasurers’ Ministerial Council for Commonwealth-State Financial Relations was renamed the Ministerial Council for Federal Financial Relations.
COAG has assigned the Ministerial Council the responsibility of overseeing the general operation of the IGA.  As the IGA continues to evolve over time, the Ministerial Council will have an active and ongoing role in monitoring and implementing the financial reforms, including:
•	negotiating base funding levels and growth factors for National SPPs and funding arrangements for National Partnerships; 
•	monitoring the maintenance of reforms and ensuring to the fullest extent possible that National Agreements and National Partnerships are aligned with the agreed design principles; 
•	developing and overseeing a new National Performance Reporting System, in consultation with relevant COAG Working Groups and Ministerial Councils, with a focus on governments’ achievement against agreed objectives and outcomes, and the timely provision of publicly available performance information; 
•	monitoring compliance with the Commonwealth’s undertakings with respect to financial support to the States, including reviewing funding adequacy under the IGA; and
•	considering ongoing reform of federal financial relations.
The Ministerial Council will report to COAG on these matters annually.
These roles represent a significant shift in, and consolidation of, responsibility for federal financial relations to Treasurers and a change in the way Commonwealth and State Treasuries interact with each other and with portfolio agencies.  The roles and responsibilities outlined under the new IGA signify a substantial increase in the scope and intensity of the activities undertaken by the Ministerial Council. 
The Ministerial Council also retains a number of roles established under the previous IGA:
•	overseeing the operation of the GST:
•	approving changes to the GST base and rate; and
•	maintaining a performance agreement with the Australian Taxation Office (ATO) in respect of its administration of the GST;
•	considering the Commonwealth Grants Commission’s (CGC) recommended GST revenue sharing relativities; and
•	monitoring compliance with the conditions governing the provision of assistance to first home owners.

Federal funding to the States
As per Schedule D of the IGA, Commonwealth funding to the States will comprise three categories of payments:
•	General revenue assistance;
•	National SPPs; and
•	National Partnership payments.
General Revenue Assistance 
General Revenue Assistance (GRA) covers a broad range of payments, including GST payments, which are provided to the States without conditions, to spend according to their own budget priorities.  GRA to the ACT consists of GST revenues and payments in respect of ACT Municipal Services.
GST revenues
The States are expected to receive GST payments of $42.2 billion in 2008-09.  This represents a decrease of 0.4 per cent over 2007-08 and is the result of lower growth in taxable consumption and dwelling investment, and increasing GST debt.  This is the first sign of negative growth in the GST pool since its introduction in 2000.  GST payments to the States have grown, on average, by 7.2 per cent annually.  The GST revenue collections are currently expected to marginally recover in 2009-10 with growth of 2.9 per cent, leading to total GST payments to the States of $43.4 billion. 
Each State’s share of the GST pool is assessed on the basis that if each State made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each State should be given the capacity to provide services at the same standard.  This does not necessarily result in the equalisation of government services across States, merely the equalisation of the capacity to provide the same standard of service.  Each State can still choose to spend its share of the GST pool according to its own priorities.
Municipal Services Payments
Under the previous framework, the ACT received two SPPs to compensate for the extra costs arising from its role as the national capital:
•	Assistance for Water and Sewerage Services — for the higher maintenance and operational costs arising from the excess length of water and sewerage mains due to the dispersed nature of urban development in the ACT in its open space setting; and
•	National Capital Influences — compensating for a number of factors, such as its ‘rating disability’ because of the large number of national institutions within its borders that it can not tax.
Under the new framework, these payments have been combined to form one payment in respect of ACT Municipal Services and have been classified as general revenue assistance.
General Revenue Assistance to the ACT
2008-09 Estimated Outcome
The Territory will receive $886.1 million in GRA in 2008-09, comprising $851.8 million in GST revenue and $34.3 million in Municipal Services payments.  This represents a decrease of $55.5 million compared to the 2008-09 Budget estimate of $941.6 million.  
The decrease is primarily a result of a $3.1 billion downward revision in the Commonwealth’s 2008-09 GST revenue pool estimate, due to lower than forecast growth in taxable consumption and dwelling investment, and increasing GST debt.
2009-10 Budget Year
The Territory expects to receive $923.6 million in GRA in 2009-10, comprising $888.4 million in GST revenue and $35.2 million in Municipal Services.  This represents an increase of $37.5 million over the 2008-09 estimated outcome.  The increase reflects:
•	an increase of $1.2 billion in the GST revenue pool between 2008-09 and 2009-10
•	noting that the 2009-10 GST revenue pool has been revised down by -$4.3 billion since the time of the 2008-09 ACT Budget; and
•	the CGC’s 2009 Update Report recommendation to increase the ACT’s GST relativity from 1.25457 in 2008-09 to 1.27051 in 2009-10.
The Budget estimate for 2009-10 is a significant decrease ($63.5 million) from the forward estimate as outlined in the 2008-09 Budget due to reasons outlined above.
Forward Years
Estimates across the forward years remain subject to possible significant change following the release of the 2010-11 GST relativities in February 2010, arising from the CGC’s 2010 Review of the State Revenue Sharing Relativities.  There is a potential that this report will recommend major changes to all State relativities.  The Review is still in progress with a number of issues yet to be finalised, therefore, it is not possible to predict the likely outcome with any certainty 
GST revenue grants to the ACT — estimation process
There are a number of difficulties surrounding the forecasting of GST revenue grants to the ACT due to volatility in the underlying parameters.  In particular, the size of the GST revenue pool, which is driven to a large extent by the state of the national economy, and the GST relativities, which are updated annually by the CGC.  
It is common practice for States to adopt Commonwealth GST forecasts for their own budgetary purposes to ensure a high degree of consistency nationally and partly premised on the fact that GST revenue is treated as a Commonwealth tax.  The Commonwealth generally updates its pool estimates only twice per year — at the Federal Budget in May and the Mid Year Economic and Fiscal Outlook (MYEFO) in November/December.  In 2008-09 the worsening economic conditions led the Commonwealth to issue an additional update in the form of February’s Updated Economic and Fiscal Outlook (UEFO).  The ACT’s 2009-10 Budget is based on these latest figures. 
The CGC recalculates the States’ GST relativities on an annual basis based on each State’s latest revenue and expenditure data.  The relativities reflect each State’s economic and social circumstances, relative to each of the other States.  Thus the ability of a State to accurately predict its relative position in a future year is limited.  In addition, the CGC reviews its underlying methodologies every five years, with the next review to conclude in February 2010.
The third variable used to determine States’ relative shares of the GST revenue pool is the Australian Bureau of Statistics’ estimations of the Australian population.  These estimates are generally updated a couple of times per annum, and can be subject to significant revisions following the national census every five years, the last being in 2006.
In short, unlike the Territory’s own revenue sources, the ACT does not forecast the underlying parameters for the GST pool, which are measured on a national basis.  For budgetary purposes, the ACT must instead rely on forecasts published by the Commonwealth Government, which normally are available only twice per year, however, these were also updated in the February 2009 UEFO.
Table 6.2.1 illustrates the adjustments made to GST revenue grant estimates since the 2008-09 ACT Budget.	
Table 6.2.1
Reconciliation of GST Revenue Grants to the ACT
GST Revenue Grants to the ACT	
	
2008-09
$m	
2009-10
$m	
2010-11
$m	
2011-12
$m	

	

	

2008-09 ACT Budget	
May 08	
907.4	
951.9	
997.5	
1,045.3	

Variation (1)	
7.0	
22.6	
30.2	
39.3	

2008-09 Federal Budget	
May 08	
914.4	
974.5	
1,027.7	
1,084.6	

Variation (2)	
-30.2	
-42.8	
-46.2	
-54.1	

2008-09 Commonwealth MYEFO	
Nov 08	
884.2	
931.7	
981.5	
1,030.5	

	

	

Accumulated variation (1 + 2)	
-23.2	
-20.2	
-16.0	
-14.8	

% change	
-2.6	
-2.1	
-1.8	
-1.6	

	

	

2008-09 ACT Mid-Year Review 	
Dec 08	
884.2	
931.7	
981.5	
1,030.5	

Variation (3)	
-32.5	
-53.5	
-51.5	
-51.9	

2008-09 Commonwealth UEFO	
Feb 09	
851.8	
878.2	
930.0	
978.6	

Variation (4)	
0.0	
10.2	
12.1	
13.1	

CGC 2009 Update Report	
Mar 09	
851.8	
888.4	
942.1	
991.7	

	

	

Accumulated variation (3 + 4)	
-32.5	
-43.3	
-39.4	
-38.8	

% change	
-3.7	
-4.6	
-4.0	
-3.8	

	

	

2009-10 ACT Budget 	
May 09	
851.8	
888.4	
942.1	
991.7	

	

	

Accumulated variation from 2008-09 Budget  to 2009-10 Budget	
-55.6	
-63.5	
-55.4	
-53.6	

% change	
-6.1	
-6.7	
-5.6	
-5.1	

Parameter variations:
1.	2008-09 Federal Budget:  Revised GST revenue pool estimates.
2.	2008-09 Commonwealth Mid Year Economic and Fiscal Outlook (MYEFO):  Revised GST revenue pool estimates.  
3.	2008-09 Commonwealth Updated Economic and Fiscal Outlook (UEFO): Revised GST revenue pool estimates.
4.	CGC 2009 Update Report:  Release of 2009-10 GST relativities.
	
These variations are illustrated in the following figure:
Figure 6.2.1: GST Revenue grants to the ACT
ACT estimates over time

National Specific Purpose Payments
Central to the new federal financial framework is a significant financial package that provides an additional $7.1 billion in National SPP funding to the States over five years.  In total, the five newly formed National SPPs will deliver to the States over the next five years:
•	$60.5 billion under the National Healthcare SPP;
•	$18 billion under the National Schools SPP;
•	$6.7 billion under the National Skills and Workforce Development SPP;
•	$6.2 billion under the National Affordable Housing SPP; and
•	$5.3 billion under the National Disability SPP.
The funding received through these National SPPs will provide States with the capacity to fund the policy objectives contained in the National Agreements.  In total, the States are estimated to receive SPPs of $16.8 billion in 2008-09 increasing to $17.9 billion in 2009-10.
The States are required to spend the funding they receive under each National SPP in the service sector relevant to the SPP.  For example, the National Healthcare SPP must be expended in the healthcare sector — but the States have full budget flexibility to allocate funds within that sector as they see fit to achieve any mutually agreed objectives for that sector.  To demonstrate compliance with this condition, State Treasurers are required to prepare an annual report to the Ministerial Council, detailing their respective share of each National SPP and gross expenditure in the area covered by the SPP.
National SPP growth factors
A priority of the States during the reform process was to negotiate SPP growth factors that more accurately reflected the demand and cost increases States faced in delivering key services.  By developing more appropriate and reflective growth factors, the financial efforts required to fund key State services is maintained for both the Commonwealth and the States.  Under the previous arrangements, the Commonwealth’s financial contribution to services such as health and education did not keep pace with the demand for such services, placing a greater burden on State Governments to finance services in these areas.
The new growth factors agreed to by the Commonwealth and the States are contained in Table 6.2.2
Table 6.2.2
National SPP Growth Factors
National SPP	Growth factor	
 		
National Healthcare SPP	product of:
- a health specific cost index;
- growth in population, weighted for hospital utilisation; and
- a technology factor.
	
National Schools SPP	government schools component
product of:
- growth in average government schools recurrent cost;
- growth in full-time equivalent enrolments in government schools non-government schools component; and
- determined in accordance with the Schools Assistance Act 2008.
 	
National Skills and Workforce    Development SPP	sum of:
 - 85 per cent Wage Cost Index 1; and
 - 15 per cent Wage Cost Index 6.
	
National Disabilities Services SPP	rolling five year average of nominal GDP year-on-year growth.	
National Affordable Housing SPP	Wage Cost Index 1	
Distribution of National SPPs
National SPPs will be distributed to States based on their population shares.  There will be a transitional shift from the current funding shares to an equal per capita distribution of SPP funding over the next five years.  The distribution of the SPPs on an equal per capita basis is aimed at ensuring that all Australians, regardless of their location, receive the same share of Commonwealth funding support for State service delivery. 
One exception will be the funding shares for the government schools component of the National Schools SPP.  These will be determined by a State’s proportion of full-time equivalent student enrolments in government schools.  The non-government component will be distributed according to the Schools Assistance Act 2008.
National SPP funding to the ACT
2008-09 Estimated Outcome 
The Territory expects to receive $244.3 million (or 1.45 per cent of the pool, compared to a population share of 1.61 per cent) in National SPPs in 2008-09.
This excludes funding provided to the ACT in respect of the non-government schools component of the National Schools SPP.
2009-10 Budget Year
2009-10 will be the first full funding year under the new funding framework.  The ACT expects to receive $259.4 million (or 1.45 per cent of the pool, compared to a population share of 1.61 per cent).  This represents an additional $15.1 million over 2008-09.
	
New National Partnership Payments
National Partnership payments will be used to support the delivery of specific reforms through facilitation (progress) and/or reward payments.  Reward payments will be subject to jurisdictions achieving performance benchmarks indentified in individual agreements.
Participation in the partnership agreements is voluntary.  Once signed, National Partnership Agreements will be published on the COAG website (www.coag.gov.au).  
At present the ACT is participating in the following new agreements.  Details of all agreements (new and existing) are outlined in Table 6.2.5 at the end of this chapter.

National Partnership Agreement on:	Total Funding Envelope
to the States	ACT Share of Funding	
			
Preventative Health
An agreement to reform Australia’s efforts in preventing the lifestyle risks that cause chronic disease.
	
$643 million over 2009-10 to 2014-15.	
ACT to receive total of $10.7 million, including reward payments.	
Hospital and Health Workforce Reform
An agreement to improve health workforce capability and hospital efficiency and capacity.
	
$1.4 billion over 2008-09 to 2012-13
States to contribute $539.3 million.	
ACT to receive total of $20.5 million.
ACT to contribute $8.7 million. 
	
Closing the Gap on Indigenous Health Outcomes
This agreement aims to assist in closing the gap in health outcomes between Indigenous and non-Indigenous Australians within a decade, though focus on six priority areas including smoking cessation and nutrition.

States are contributing around $804 million over 2009-10 to 2012-13. 	

ACT to contribute $15.8 million.	
Improving Teacher Quality
An agreement to improve teaching and school leadership qualities to maintain a quality teaching workforce.	
$444 million over 2008-09 to 2012-13.

Further $106 million for specific commitments.
	
ACT to receive $8 million including reward payments.

ACT to contribute $0.5 million.	
Literacy and Numeracy
This agreement focuses on the key areas of teaching, leadership and the effective use of student performance information to deliver sustained improvement in literacy and numeracy outcomes for all students.
	
Agreement over 2008-09 to 2011-12, including:
- $150 million in facilitation payments
- $350 million  in reward payments.

States are expected to match Commonwealth facilitation funding.
	
ACT to receive $1.8 million, plus reward payments. 

ACT to contribute $1.8 million.	
Low Socio-Economic Status School Communities
This agreement supports a suite of school and broader reforms designed to transform the way schooling takes place in participating schools and address the complex and interconnected challenges facing students in disadvantaged communities.

$1.1 billion over 2008-09 to 2012-13.

States expected to match Commonwealth facilitation funding.

ACT to receive a total of $2.2 million.

ACT to contribute $2.2 million.
	
Digital Education Revolution 
This initiative is a $1.2 billion Federal election commitment that will provide government and non-government school students with better access to information and communication technology.  
	
$1.2 billion over five years.	
ACT to receive a total of $39.5 million - $21.2 million for government schools and $18.3 million for non-government schools.	
Productivity Places Program
This agreement is part of the Skilling Australia for the Future initiative and aims to reduce skills shortages and increase the productivity if industry and enterprise.
	
Commonwealth to contribute $965.1 million over 2008-09 to 2011-12.

States to contribute $462.7 million.	
ACT to receive total of $22.2 million.

ACT to contribute $10.4 million.
	
TAFE Fee Waivers for Childcare Qualifications
This agreement is part of the Commonwealth’s Early Childhood Workforce Strategy and aims to develop a child care workforce with high level qualifications to provide a strong foundation for the health and educational development of children.

$8.4 million in 2009.	

ACT to receive $0.3 million in 2009.	
Early Childhood Education
An agreement to ensure universal access to quality early childhood education in the year before school.
	
$955 million over 2008-09 to 2012-13.
	
ACT to receive total of $13.2 million. 
	
Social Housing
This agreement facilitates the establishment of a Social Housing Growth Fund that will support reforms to increase the supply of social housing,
	
$400 million over 2008-09 to 2009-10.
	
ACT share estimated at $6.4 million. 	
Homelessness
An agreement to facilitate significant reforms to reduce homelessness.	
Facilitation payments of 
$388.6 million over 2009-10 to 2012-13.
States to contribute $400 million.

$150 million over 2008-09 to 2012-13 under A Place to Call Home initiative.
States to match Commonwealth   contribution.
	
ACT to receive $5.1 million in facilitation payments.

ACT to contribute $5.2 million.

ACT to receive $5 million under A Place to Call Home
ACT to contribute $5 million.	
Indigenous Early Childhood Development
An agreement that aims to improve Indigenous early childhood outcomes through better access to antenatal care, teenage reproductive and sexual health programs, child and maternal health services and integrated family services.
	
Total of $489.62 million from 2008-09 to 2013-14.

States expected to match $75 million.	
ACT to receive a total of $9.6 million.

ACT to match $0.5 million.	
Indigenous Economic Participation 
This agreement will contribute to the COAG target to halve the gap in employment outcomes between Indigenous and non-Indigenous people within a decade.	
Commonwealth will commit a total of $172.7 million over five years.
States will commit a total $56.2 million over five years 
(a combination of existing and additional funding).
	
Nature of ACT participation to be determined.	
Deliver a Seamless National Economy
An agreement to facilitate the implementation and reward the delivery of reforms that assist in the creation of a seamless national economy.
	
Facilitation payments of $100 million in 2008-09.
Rewards payments of $450 million over 2011-12 and 2012-13.	
$1.6 million in 2008-09, plus reward payments.
	
Concessions for Pensioners
The Agreement aims to ensure Governments provide certain concessions for pensioners without discrimination between cardholders; and out of state senior card holders with designated public transport concessions on transport services within their own jurisdiction.
	
Total of $265.2 million over 2008-09 to 2011-12.	
ACT to receive $1.4 million over three years.	

Aside from these new agreements, the Commonwealth has employed the use of National Partnerships to continue existing grants in respect of Commonwealth election commitments and other specific ongoing projects.  Reclassifying these existing grants as National Partnerships satisfies the requirement within the IGA for all Commonwealth grants to the States to take the form of either General Revenue Assistance; a National SPP; or a National Partnership.
Financial Assistance Grants to Local Government
Financial assistance grants to local governments remain outside the new funding framework and continue to be paid to State governments for on-passing to local governments through the State Grant Commissions.  Financial assistance grants to local government are untied and can be spent according to local government priorities.  State distributions of the grant pool are based on historic shares and indexed annually.
As the ACT Government has responsibility for both State and municipal functions, the financial assistance grants are paid direct to the ACT Government to be spent according to its own budget priorities.  The ACT receives approximately two per cent of the financial assistance grants pool.
The ACT will receive $39.3 million in 2008-09, rising to $41.0 million in 2009-10.
Commonwealth Economic Stimulus Packages
Economic Security Strategy
On 14 October 2008, the Commonwealth Government announced a $10.4 billion Economic Security Strategy to strengthen the Australian economy in light of the worsening global financial position.  The package contained five key measures:
•	$4.8 billion in support payments for pensioners and for long term pension reform;
•	$3.9 billion in support payments for low and middle income families;
•	$1.5 billion for the First Home Owners Boost (FHOB);
•	$187 million to create 56,000 new training places in 2008-09; and
•	the early commencement of investment in nation building projects.
State Governments will administer the FHOB through their existing First Home Owner Grant schemes.
Nation Building and Jobs Plan 
On 3 February 2009, the Commonwealth Government announced its second stimulus package —the $42 billion Nation Building and Jobs Plan (NBJP).  The package is focussed on providing immediate stimulus to economic growth through targeted bonuses to low and middle income households and delivering long term nation building investments.  The Commonwealth funded infrastructure and stimulus projects will primarily to be delivered by the States through their agencies or commercial contracts.
Specifically, the NBJP is expected to deliver around $334.5 million of additional Commonwealth funding to the ACT through:
•	Building the Education Revolution — $229.2 million over three years, which will benefit all ACT public and non-government schools;
•	Social Housing — $102.7 million over the next two years to support the construction of new social housing dwellings and the refurbishment of existing dwellings that are currently not suitable for occupation, therefore adding to the housing stock;
•	Black Spots, Regional Roads and Community Infrastructure — $2 million to improve road safety in the ACT and for maintenance costs towards the Federal and Barton highways, and $2 million for upgrades to Glebe and Eddison parks; and
•	Energy Efficient Homes — these grants will be paid direct to householders for the installation of ceiling insulation in uninsulated homes and for solar hot water rebates.
The package will be provided to the States under a National Partnership agreement, with the condition that the additional Commonwealth funding must provide a net increase in State government spending.  
More information and progress reports of ACT projects being implemented under the NBJP can be found on the Commonwealth Government’s website at www.australia.gov.au/economicstimulus or the ACT Government’s dedicated website at www.stimulus.act.gov.au.
Total Federal funding to the ACT
Revenue transfers from the Commonwealth Government provide a vital source of revenue for the Territory, and will comprise 46 per cent of the ACT’s General Government Sector revenues in 2009-10.  The introduction of the new framework delivered a funding injection to the ACT over the forward years, but has been partly offset by the decrease in GST revenues due to the slowing of the national economy.
Table 6.2.3 summarises the expected level of Commonwealth Government funding to the ACT across the Budget and Forward Estimates.
Table 6.2.3
Commonwealth Government Funding to the ACT
Payment	2008-09	2009-10	Var	Var	2010-11	2011-12	2012-13	
	Est. Out.	Budget			Estimate	Estimate	Estimate	
	$m	$m	$m	%	$m	$m	$m	
								
General Revenue Assistance:								
GST Revenue Grants	851.9	888.4	36.5	4.3	942.1	991.7	1,043.9	
Municipal SPPs	34.3	35.2	0.9	2.6	35.9	36.6	37.3	
Total General Revenue Assistance	886.2	923.6	37.4	4.2	978.0	1,028.3	1,081.2	
								
National Specific Purpose Payments:								
Health	138.6	148.6	10.0	7.2	166.7	186.4	207.8	
Education and Early Childhood - Government	44.8	49.0	4.2	9.4	52.1	54.9	57.8	
Education and Early Childhood - Non-Government	122.0	131.0	9.0	7.4	141.5	153.7	157.4	
Skills and Workforce Development	22.5	22.6	0.2	0.7	22.8	22.9	23.1	
Disability Services	12.5	13.1	0.6	5.1	15.6	18.6	19.3	
Affordable Housing	25.6	26.1	0.5	2.1	25.3	24.4	23.4	
Total National Specific Purpose Payments	366.3	390.4	24.1	6.6	423.9	460.9	488.8	
								
Financial Assistance Grants to Local Government	39.3	41.0	1.7	4.3	42.7	44.5	46.3	
								
National Partnership Payments:								
COAG Reform National Partnerships	51.1	20.2	-30.9	-60.5	18.2	24.1	19.1	
Other National Partnerships	41.9	34.6	-7.3	-17.4	33.5	33.6	35.1	
C'wealth Economic Stimulus Packages	24.6	220.0	195.4	794.7	122.5	5.0	0.0	
Total National Partnership Payments	117.6	274.8	157.2	133.6	174.2	62.7	54.2	
								
Other	26.2	0	-26.4	#	0	0	0	
Total Commonwealth Government Funding	1,435.1	1,629.8	194.8	13.6	1,618.7	1,596.4	1,670.6	
Details of each individual funding grant are outlined in table 6.2.5 at the end of this chapter.
Other Administrative Functions underpinning the IGA
GST Administration Subcommittee
The ATO collects the GST revenue on behalf of the Ministerial Council for Federal Financial Relations and, under the IGA, is accountable by way of a performance agreement.  The ATO’s administration of the GST is overseen by the GST Administration Sub-Committee (GSTAS), whose role is to:
•	monitor the performance of the ATO in the administration of the GST;
•	assess policy proposals for the modification of the GST rate and base;
•	make recommendations to the Ministerial Council on the need for legislation that might significantly affect the GST base; and
•	request the ATO to produce draft Public Rulings in specified areas.
In 2008-09, GSTAS revised the ATO performance agreement to reflect the new IGA.  The IGA specifies that accountability and performance arrangements will be subject to a performance agreement between the ATO and the Ministerial Council.  Previously, the agreement was between the ATO and the States.
GSTAS also agreed upon a protocol between the Commonwealth and the States governing consultation and agreement over legislative proposals to change the GST base.  Under the IGA, the Commonwealth requires the agreement of the States prior to enacting legislation that alters the GST rate or base.  The protocol clarifies what constitutes a change to the base, thus requiring formal agreement, as well as setting out the proposed processes for consultation and timeframes for obtaining agreement.  The protocol also provides that where possible, the Commonwealth will consult the States on its proposed measures at the initial design stage, prior to an announcement.
Throughout the year, GSTAS considered a number of proposals that affected the GST base and made recommendations to the Ministerial Council.  The proposals covered issues such as amendments to the restrictions of refunds; changes and additions to the determination exempting taxes, fees and charges from GST; and amendments arising from the tax treatment of political parties.
Commonwealth Grants Commission
Commonwealth Grants Commission Report on State Revenue Sharing Relativities
The CGC annually advises the Commonwealth Government on the appropriate per capita relativities for distributing the GST pool among the States.  The distribution is made in accordance with the principles of horizontal fiscal equalisation and is designed to provide all States with the same fiscal capacity to provide services to their populations.
Report on State Revenue Sharing Relativities — 2009 Update
Changes since the 2008 update
The new IGA introduced significant changes in the financial arrangements between the Commonwealth and the States.  Although the majority of these changes will be phased in during future years, an immediate impact is that the CGC has been asked to allocate only GST revenue.  In past years, State relativities have been used to allocate a funding pool, comprised of GST revenues as well as the Health Care Grants.  Under the new IGA however, from 1 July 2009 the Health Care Grants will be absorbed into the National Healthcare SPP and will be distributed equal per capita, according to the IGA.  By removing the Health Care Grant from the funding pool, the size of the pool is significantly reduced, which has the effect of magnifying the gap between measured State relativities and 1.0 (that being an equal per capita share).
As a result rebased 2008 relativities, calculated on the same basis as the 2009 relativities, have been provided below to facilitate comparison. 
Outcome of the 2009 Update
The 2009 Update Report was publicly released on 15 March 2009.  The Report’s recommendations in respect of State relativities were agreed to by the Ministerial Council for Federal Financial Relations on 25 March 2009.  These relativities will be used to distribute the 2009-10 GST pool.
A comparison of the 2008 Update and 2009 Update relativities shows that New South Wales, Victoria, South Australia and the ACT received increased relativities.  The other States received reduced relativities.
6.2.4
Comparison of GST Relativities
	2008 Update
(rebased)	2009 Update	
New South Wales	0.88779	0.93186	
Victoria	0.91393	0.91875	
Queensland	0.96118	0.91556	
Western Australia	0.85782	0.78485	
South Australia	1.23151	1.24724	
Tasmania	1.66332	1.62040	
Australian Capital Territory	1.25457	1.27051	
Northern Territory	5.25633	5.25073	

A relativity above one indicates that a State requires more than the Australian average per capita share of GST revenue to deliver services at Australian average levels.  For the ACT, a relativity of 1.27135 indicates that it is entitled to 27.1 per cent above an equal per capita share of GST.  In 2009-10 half of all States (that is, the smaller jurisdictions) will require more than an Australian average per capita amount, or relativity above one.
The changes to the relativities between the 2008 and 2009 Updates have been primarily influenced by movements in the relative revenue raising capacities of the States.  Queensland and Western Australia continued to experience strong growth in their mining sectors and as such, the capacity for these States to raise revenue from their own sources increased, which led to a redistribution of GST away from them to other States. 
The increase in the ACT’s relativity reflects a decline in the Territory’s relative fiscal capacity (and hence an increased need for federal assistance) because its relative revenue raising capacity fell, primarily due to the lack of a mining sector, and it received a smaller share of SPPs.
ACT’s above equal per capita share — CGC’s assessment of the ACT’s fiscal capacity
Fiscal capacity is a measure of the difference between what a State could raise from its tax base at Australian average tax rates, plus its relative receipt of SPP funding, and what a State would need to spend to provide average levels of services to its residents.  State relativities are intended to demonstrate the difference from the Australian average based solely on differences in economic and social circumstances and not policy.  Such circumstances include the size and scope of State economies, natural resource endowments, physical geography and population characteristics.
Specific factors influencing the ACT’s fiscal capacity include:
•	below average capacity to raise revenue: 
•	Payroll tax — due to the dominance of the public service within the ACT labour market, and the inability to tax the Commonwealth Government; per capita private sector wages being below the national average; and a small employment base in mining, agriculture, manufacturing and wholesale trade.
•	Mining — the absence of a mining industry in the ACT means it lacks a major revenue source available to other resource rich jurisdictions.
•	Land tax — reduced revenue raising capacity stems from the lower than average value of commercial and industrial land in the Territory and the below average proportion of private renters, which limits the collection of land tax from non-principal residential land owners.
•	near average requirement for expenses: 
•	Several features are likely to bring about higher service costs, such as the Territory’s relatively small population, leading to diseconomies of a small scale, and its status as a regional centre within southeast New South Wales, which inevitably leads to the provision of services to non-ACT residents.  These are almost entirely offset by relatively lower service needs due to higher socio-demographic composition.
•	slightly lower per capita share of SPPs:
•	Of those SPPs included in the CGC’s assessments, the ACT received slightly less than an average per capita amount over the five year assessment period.  
•	From 2010-11, the new IGA requires an equal per capita distribution of the National SPPs to be phased in, which will reduce the ACT’s per capita relativity because a greater share of funding will be received through SPPs.
2010 Review of Methodologies
Since 1988, the methods used to calculate relativities have been reviewed every five to six years.  The CGC is currently undertaking a review, which is due to be finalised in 2010.
The purpose of the 2010 Review is to develop a simpler methodology for the CGC to use in measuring the relative fiscal capacities of the States.  The Review has been an iterative process with the CGC and States working jointly to develop each assessment.
During 2008-09, work on the Review intensified with the CGC releasing a series of papers outlining their current proposals with respect to measuring the expense and revenue capacities of the States.  The CGC invited States to provide comments on these proposals.  The ACT provided a series of submissions in response to these papers.  These submissions, along with those of other States are available publicly on the CGC’s website at www.cgc.gov.au.
Additionally, the CGC Commissioners held a series of discussions in each State in order to gain a first hand understanding of service delivery issues and challenges confronting individual jurisdictions.  The ACT State Visit was conducted during 10-12 May 2008 during which key personnel from all ACT Departments delivered presentations to the Commissioners and participated in intensive discussions with a focus on the unique economic and social characteristics of the Territory. 
The final outcome of the 2010 Review will be contained in the CGC’s Final Report 2010 Review, which is scheduled for release in February 2010.
Other Intergovernmental Forums
Australian Loan Council 
The Australian Loan Council was established under the Financial Agreement Act 1927 to manage the call on national savings by the Australian public sector as a whole.  Each year, the Commonwealth and States nominate their proposed borrowings for the coming financial year for all general government departments and public trading entities in their jurisdiction.  The estimated Loan Council Allocations (LCA) measure each jurisdiction’s call on financial markets.
The Loan Council met on 25 March 2009 to determine the appropriateness of each jurisdiction’s LCA for 2009-10.  All jurisdictions expect to have net borrowings in 2009-10 totalling $58.9 billion.  The ACT’s LCA for 2009-10 is $98 million, with a tolerance limit of +/- $80 million.  A positive LCA represents a net borrowing position.  The two per cent (of non-financial public sector cash receipts from operating activities) tolerance limit is designed to accommodate changes to the LCA resulting from changes in policy.
The Loan Council was also given greater responsibility following agreement by the Council that the Federal Government would provide a time-limited, voluntary guarantee over State Government borrowing to ensure the States proceed with nation-building infrastructure investment.
The guarantee will be available for both existing and new issuances of securities across a range of maturities, although will not extend to issuances denominated in foreign currencies.  The Commonwealth will charge a fee for the use of the guarantee, which will vary depending on States’ credit ratings.  The fee is intended to provide a balance between facilitating access to the market while also providing a disincentive to use the guarantee once market conditions have normalised.
The Loan Council will provide an additional level of transparency and rigour to the process, as State borrowing requirements will continue to be considered by the Council through the LCA process, meaning States will need to account for their infrastructure spending.
Council for the Australian Federation
The Council of the Australian Federation (CAF) was established by State Premiers and Chief Ministers in October 2006 to support and enhance collaborative federalism by providing an intergovernmental forum for State and Territory leaders to work together.
CAF convened for the fifth time on 12 September 2008.  The Council discussed key issues relating to federalism; climate change; water reform; national standards for electric vehicles; harmonisation of ANZAC day; and recognising the contribution of the not-for-profit sector.
The key outcomes of the meeting included agreement to: undertake further work on the possible impacts of the Commonwealth’s Carbon Pollution Reduction Scheme on the community; recommend to COAG the introduction of a framework for the national reporting or urban water consumption; and commit to a national course of action to address infrastructure and regulatory requirements to support the introduction of electric vehicles in Australia.

Table 6.2.5
Details of Commonwealth Government Grants 
2008-09		2008-09	2009-10	2010-11	2011-12	2012-13	
Budget	FUNDING CATEGORIES	Est.Outcome	Estimate	Estimate	Estimate	Estimate	
$'000		$'000	$'000	$'000	$'000	$'000	
							
 	General Revenue Assistance	 	 	 	 	 	
907,400	GST Revenue	851,800	888,400	942,100	991,700	1,043,900	
0	ACT Municipal Services	0	35,154	35,856	36,574	37,305	
24,411	rolled up:  National Capital Influences - Local Government	24,446	0	0	0	0	
9,817	rolled up:  Assistance for Water and Sewerage	9,817	0	0	0	0	
941,628	Total General Revenue Assistance	886,063	923,554	977,956	1,028,274	1,081,205	
							
	Health Services						
0	National Healthcare SPP 	0	148,610	166,680	186,440	207,780	
131,600	rolled up:  Health Care Grants	134,047	0	0	0	0	
60	rolled up:  Youth Health Services	60	0	0	0	0	
3,601	rolled up:  National Public Health Outcomes Agreement	4,528	0	0	0	0	
135,261	Total National Healthcare SPP	138,635	148,610	166,680	186,440	207,780	
							
0	Health Services NPP	308	308	387	386	382	
0	Elective Surgery Waiting List Reduction Program NPP	1,667	0	0	0	0	
0	Hospital and Health Workforce Reform NPP	18,165	0	0	980	1,320	
0	Preventative Health NPP	0	40	137	1,248	2,277	
0	Indigenous Early Childhood Development NPP	0	250	300	330	340	
0	Total Health Services NPPs	20,140	598	824	2,944	4,319	
							
13,937	Highly specialised Drugs (formerly High Cost Drugs)	12,937	0	0	0	0	
4,094	Essential Vaccines (formerly Aust Immunisation Agreement)	5,670	0	0	0	0	
0	ATSI Residential Alcohol and Other Drug Facility	1,000	0	0	0	0	
18,031	Total Health Services - Other	19,607	0	0	0	0	
153,292	Total Health Services	178,382	149,208	167,504	189,384	212,099	
							
	Housing						
0	National Affordable Housing SPP	12,810	26,120	25,280	24,360	23,390	
6,864	rolled up:  Supported Accommodation Program	3,144	0	0	0	0	
19,320	rolled up:  CSHA Block Assistance for Housing	9,616	0	0	0	0	
26,184	Total National Affordable Housing SPP	25,570	26,120	25,280	24,360	23,390	
							
0	First Home Owners Boost NPP	11,451	5,922	1,092	0	0	
0	Homelessness NPP 	1,000	1,926	2,336	2,401	2,401	
0	Social Housing NPP	3,219	3,220	0	0	0	
0	Nation Building and Jobs Plan NPP 	4,167	65,515	28,049	5,018	0	
0	Total Housing NPPs	19,837	76,583	31,477	7,419	2,401	
							
0	Housing Affordability	250	0	0	0		
0	Total Housing - Other	250	0	0	0	0	
26,184	Total Housing	45,657	102,703	56,757	31,779	25,791	
							
	Community Services						
0	National Disability Services SPP	6,301	13,060	15,600	18,520	19,310	
8,851	rolled up:  Disability Services	5,969	0	0	0	0	
446	rolled up:  Young People With Disabilities 	190	0	0	0	0	
9,297	Total National Disability Services SPP	12,460	13,060	15,600	18,520	19,310	
							
12,919	Home and Community Care NPP	13,420	14,434	15,632	16,740	18,113	
0	Home and Community Care for Veterans NPP	0	253	261	262	263	
749	Aged Care Assessment NPP	780	774	809	845	882	
	Indigenous Early Childhood Development NPP	483	2,060	1,874	1,524	1,072	
0	Concessions for Pensioners NPP	887	169	179	190	0	
1,393	Concessions for Pensioners NPP - Extension of Fringe Benefits (formerly Concession Funding)	776	1,608	1,662	1,700	1,700	
15,061	Total Community Services NPPs	16,346	19,298	20,417	21,261	22,030	
							
158	Sport Participation Development	158	0	0	0	0	
158	Total Community Services - Other	158	0	0	0	0	
24,516	Total Community Services	28,964	32,358	36,017	39,781	41,340	
							
	Education & Early Childhood						
0	National Schools SPP - Government Schools Component	21,487	49,020	52,080	54,930	57,810	
32,662	rolled up:  Government Schools - General	13,408	0	0	0	0	
5,321	rolled up:  Government Schools - Capital Grant	5,759	0	0	0	0	
693	rolled up:  Indigenous Education Strategic Initiatives Program - Government	1,057	0	0	0	0	
5,551	rolled up:  Targeted Programmes - Government schools and Joint	3,059	0	0	0	0	
0	National Schools SPP - Non-Government Schools Component	0	130,995	141,476	153,722	157,426	
121,818	rolled up:  Non-Government Schools	113,381	0	0	0		
3,717	rolled up:  Non-Government Schools - Capital Grant	5,044	0	0	0	0	
3,542	rolled up:  Targeted Programmes - Non-government schools	3,542	0	0	0	0	
173,304	Total National Schools SPP	166,737	180,015	193,556	208,652	215,236	
							
3345	National Secondary Schools Computer Fund	1,390	0	0	0	0	
0	Local Schools Working Together, Gold Creek/Holy Spirit	300	0	0	0	0	
0	Civics and Citizenship Education	43	0	0	0	0	
0	Middle Years Mental Computation Program	143	0	0	0	0	
3345	Total Education & Early Childhood - Other	1,876	0	0	0	0	
							
0	Digital Education Revolution NPP - Government Schools 	12,350	2,830	2,030	2,000	1,970	
0	Digital Education Revolution NPP - Non-Government Schools	10,210	2,500	1,840	1,880	1,900	
0	Smarter Schools - Low Socio-Economic Status School Communities NPP	20	300	410	750	730	
0	Improving Teacher Quality NPP	110	230	610	720	0	
0	Literacy and Numeracy NPP	850	970	0	0	0	
0	Early Childhood Education NPP	440	920	1,160	3,560	7,080	
0	Productivity Places Program NPP	1,621	4,671	7,331	8,529	0	
0	Nation Building and Jobs Plan NPP - Government Schools	10,458	79,510	55,202	0	0	
0	Nation Building and Jobs Plan NPP - Non-Government Schools	8,410	50,460	25,230	0	0	
0	Total Education & Early Childhood NPPs	44,469	142,391	93,813	17,439	11,680	
176,649	Total Education & Early Childhood	213,082	322,406	287,369	226,091	226,916	
							
	Vocational Education & Training						
0	National Skills and Workforce Development SPP	9,892	22,560	22,750	22,920	23,080	
20,154	rolled up:  Skilling Australia’s Workforce	10,471	0	0	0	0	
704	rolled up:  VET - Contracts 	727	0	0	0	0	
2,720	rolled up:  VET Funding Act – TAFE Capital 	1,360	0	0	0	0	
23,578	Total National Skills and Workforce Development SPP	22,450	22,560	22,750	22,920	23,080	
							
0	TAFE Fee Waivers for Childcare Qualifications NPP	158	159	0	0	0	
0	Total Vocational Education & Training NPPs	158	159	0	0	0	
23,578	Total Vocational Education & Training	22,608	22,719	22,750	22,920	23,080	
							
	Infrastructure						
0	Auslink NPP	0	1,436	1,436	1,436	1,436	
470	rolled up:  National Highway System 	470	0	0	0	0	
602	rolled up:  National Safety Black Spots Program	602	0	0	0	0	
0	Roads to Recovery NPP	0	3,200	6,300	6,166	6,167	
303	Interstate Road Transport NPP	303	286	297	314	331	
0	Kings Highway Upgrade NPP	7,000	0	0	0	0	
0	Building Australia Program NPP	0	23,500	14,000	0	0	
0	Nation Building and Jobs Plan NPP	1,549	966	0	0	0	
1375	Total Infrastructure NPPs	9,924	29,388	22,033	7,916	7,934	
1375	Total Infrastructure	9,924	29,388	22,033	7,916	7,934	
							
	Environmental Services						
1500	Caring for Our Country NPP	1,078	1,359	1,359	1,359	1,359	
1500	Total Environmental Services NPPs	1,078	1,359	1,359	1,359	1,359	
							
2,700	Australian Government Water Fund 	4,334	0	0	0	0	
2,700	Total Environmental Services - Other	4,334	0	0	0	0	
4,200	Total Environmental Services	5,412	1,359	1,359	1,359	1,359	
							
	Other Services						
3,980	Legal Aid NPP	3,980	4,186	4,290	4,395	4,501	
104	rolled up:  Family Dispute Resolution	102	0	0	0	0	
0	Standard Business Reporting Program NPP 	0	370	0	0	0	
0	Albert Hall Restoration NPP	0	500	0	0	0	
0	Deliver a Seamless National Economy NPP	1,610	0	0	0	0	
4,084	Total Other Services NPPs	5,692	5,056	4,290	4,395	4,501	
							
38,388	Financial Assistance Grants - Local Government	39,308	40,990	42,702	44,475	46,343	
38,388	Total Other Services - Other	39,308	40,990	42,702	44,475	46,343	
42,472	Total Other Services	45,000	46,046	46,992	48,870	50,844	
1,393,894	Total Commonwealth Government Funding	1,435,092	1,629,741	1,618,737	1,596,374	1,670,568