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Federal-State Financial Relations: the Deakin Prophecy

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Federal-State Financial Relations: the Deakin Prophecy Department of the INFORMATION AND RESEARCH SERVICES Parliamentary Library Research Paper No. 17 1999–2001 Federal–State Financial Relations: The Deakin Prophecy ISSN 1328-7478 Copyright Commonwealth of Australia 2001 Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means including information storage and retrieval systems, without the prior written consent of the Department of the Parliamentary Library, other than by Senators and Members of the Australian Parliament in the course of their official duties. This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document. IRS staff are available to discuss the paper's contents with Senators and Members and their staff but not with members of the public. Published by the Department of the Parliamentary Library, 2001 I NFORMATION AND R ESEARCH S ERVICES Federal–State Financial Relations: The Deakin Prophecy The Vision in Hindsight: Parliament and the Constitution: Paper No. 2 Vision in Hindsight Vision in Hindsight is a Department of Stage two will involve the selection of the Parliamentary Library (DPL) project eight to ten of the papers for inclusion in for the Centenary of Federation. the final volume, to be launched in conjunction with a seminar, in November The Vision in Hindsight: Parliament and 2001. the Constitution will be a collection of essays each of which tells the story of A Steering Committee comprising how Parliament has fashioned and Professor Geoffrey Lindell (Chair), the reworked the intentions of those who Hon. Peter Durack, the Hon. John Bannon crafted the Constitution. The unifying and Dr John Uhr assists DPL with the theme is the importance of identifying management of the project. Parliament's central role in the development of the Constitution. In the first stage, essays are being commissioned and will be published, as IRS Research Papers, of which this paper is the second. Centenary of Federation 1901– 2001 Denis James Research Paper Date 4 April 2000 No. 17 1999–2000 About the Author Denis James has a Bachelor of Arts degree with First Class Honours in Economics from the University of Newcastle and a Master of Economics degree from the Australian National University. For six years, he taught economics within the Faculty of Economics and Commerce at the Australian National University. In 1980, he joined the then Parliamentary Research Service as a Research Specialist to the Federal Parliament in the fields of public finance, taxation and Federal– State relations. Having obtained several computing qualifications, he has been working as an information technology consultant in Sydney since March 1999. Inquiries Information and Research Services publications are available on the ParlInfo database. On the Internet the Department of the Parliamentary Library can be found at: http://www.aph.gov.au/library/ IRS Publications Office Telephone: (02) 6277 2778 Contents Glossary of Terms Major Issues ...........................................................................................................................i Introduction ...........................................................................................................................1 Commonwealth Financial Domination of the States.............................................................4 The First Four Decades .................................................................................................4 Uniform Taxation..........................................................................................................8 Federal–State Finances From 1946 to 1975................................................................13 The Era of New Federalisms.......................................................................................16 Specific Purpose Payments .................................................................................................22 Horizontal Fiscal Equalisation ............................................................................................27 Government Borrowing.......................................................................................................30 Conclusion...........................................................................................................................34 Endnotes..............................................................................................................................36 Appendix 1: Constitutional Provisions ...............................................................................41 Glossary of Terms Advances: Repayable, interest-bearing loans, often provided on concessional terms. Australian Loan Council: A body consisting of the Commonwealth (represented by the Treasurer) and the Premiers of the States (and, in recent years, the Chief Ministers of the two Territories). Loan Council usually convenes in conjunction with the annual Premiers' Conference. The role of the Loan Council has varied over the decades but essentially it is a vehicle for reaching agreement on the size and allocation of the annual borrowing programs of the Commonwealth and the States. Block grants: Grants provided by the Commonwealth to the States for very broadly defined purposes. While the States must use the grants for the purposes as broadly specified, they may exercise a considerable amount of autonomy as to how the funds are actually used. Central borrowing authorities: Agencies established by the States to undertake borrowing on behalf of State semi- governmental and local authorities. In recent years, the State governments have also tended to borrow from their central borrowing authorities. The NSW Treasury Corporation is an example of a central borrowing authority. Claimant states: Those States which, at various times in the past, have been eligible to apply to the Commonwealth Grants Commission for an assessment of their need for a special grant. Fiscal capacity: The financial capacity of a State to meet its responsibilities. This will reflect the adequacy of the various tax bases available to that State, as well as the existence of any disabilities or advantages faced by that State in the provision of services. General government sector: All of the agencies of government not classified as public trading or financial enterprises. It includes all government departments and offices and other bodies engaged in providing services free of charge or at prices significantly below their cost of production. General purpose capital assistance: Prior to 1987–88, general purpose capital assistance comprised capital grants provided by the Commonwealth to the States along with borrowings by the Commonwealth on behalf of the States. Such assistance could be used by the recipient for capital or recurrent purposes. After 1987–88, general purpose capital assistance consisted only of grants. The provision of such grants ceased in 1993–94. General revenue assistance: Grants provided by the Commonwealth to the States and local government, to be used for whatever purposes the recipients might choose. The main form of general revenue assistance currently provided to the States is financial assistance grants. Another form of general revenue assistance to the States is special revenue assistance. General revenue grant relativities: To achieve fiscal equalisation, the Commonwealth Grants Commission compares the fiscal capacity of each State in turn with a 'standard' which comprises the State concerned plus all of the other States. The revenue needs and expenditure disabilities faced by each State are assessed and the amount of financial assistance required to offset these needs and disabilities is calculated. After subtracting the amount of eligible financial assistance received by each State, the equalisation assistance requirement of each State is determined. These requirements are then expressed as a set of per capita weights, with the per capita weight for Victoria set at unity and all other weights expressed relative to this. The resulting set of per capita weights are referred to as the general revenue grant relativities. Global borrowing limits: Limits applied each year by Loan Council to the new money borrowings by the authorities of the Commonwealth and the States. The limits applied to both conventional and 'non-conventional' borrowings, these latter including sale and leaseback arrangements, trade credits, deferred payment arrangements and so forth. Grants: Non-repayable, non interest bearing assistance. Horizontal fiscal equalisation: The provision of financial assistance to the States which, as assessed by the Commonwealth Grants Commission, is designed to provide each State with the capacity to provide services at a standard comparable with those of the other States but without requiring that State to impose a greater burden of taxation. Identified road funding: Since
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