Senator KEMP (Assistant Treasurer) (11:29 AM) —I move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard .

Leave granted.

The speech read as follows—

The bill puts in place arrangements that will fulfil the terms of the Commonwealth's offer of general revenue assistance to the States and Territories at the 1998 Premiers' Conference. The bill also provides authority for the Commonwealth to pay to the States and Territories the revenue it will collect in 1998-99 under the safety net arrangements which have been implemented to protect State and Territory revenues following the High Court decision in 1997 which severely curtailed the States' capacity to raise revenues through business franchise fees.

The bill will amend the States Grants (General Purposes) Act 1994. The existing Act covers the provision of financial assistance for 1997-98, with interim arrangements for the continuation of payments for a maximum of six months. The bill extends for a further 12 months the provisions of the Act relating to the payment of financial assistance grants and State and Territory entitlements to payments under the safety net arrangements.

The general revenue assistance to be appropriated by this bill is about $17.1 billion, or around 12 per cent of estimated Commonwealth outlays in 1998-99. Accordingly, these payments constitute a significant element of the Commonwealth Budget and have an important bearing on the spending and borrowing of the public sector as a whole. The States and Territories are able to allocate the funds provided by the Commonwealth under this Act according to their own budgetary priorities.

In addition, revenue replacement payments to the States under the safety net arrangements are estimated to be $6.5 billion in 1998-99. The safety net arrangements are revenue neutral for the Commonwealth.

I turn now to the elements of the bill which give effect to the Commonwealth's funding commitments to the States and Territories.

The States and Territories will be provided with real per capita growth in financial assistance grants in 1998-99 and the real per capita guarantee for financial assistance grants will be extended to 2000-01. Amendments to the Act are consistent with the per capita element of the real per capita guarantee being conditional on States meeting the terms of the Agreement to Implement the National Competition Policy and Related Reforms. This Agreement also provides for up to $217.2 million in competition payments to the States and Territories in 1998-99. The views of the National Competition Council will be taken into consideration by the Commonwealth in deciding whether a State or Territory should receive the payments provided under the National Competition Policy Agreement in 1998-99.

The major part of the assistance provided under this bill is the payment to each State and Territory of a share of the pool of financial assistance grants which is estimated to be about $16.8 billion in 1998-99. The distribution of financial assistance grants will be in accordance with equalisation per capita relativities recommended by the Commonwealth Grants Commission in its 1998 Update Report. The bill updates the per capita relativities accordingly and makes appropriate amendments to the definition in the Act of the amount of unquarantined health funding to be used for calculating the combined pool of financial assistance grants and health care grants.

The Australian Capital Territory will also receive $25.0 million from the Commonwealth in 1998-99 in the form of transitional allowances and special fiscal needs. This payment is outside the scope of this bill and has been included in the Appropriation bills.

The payment of financial assistance grants to the States and Territories will be conditional upon the States and Territories meeting their commitment to make fiscal contribution payments of $313.4 million in 1998-99. This represents a 50 per cent reduction from the total fiscal contribution of the States and Territories in 1997-98. State fiscal contributions will cease after 1998-99. The States and Territories agreed at the 1996 Premiers' Conference to make the fiscal contributions in recognition of the deficit reduction task required to stabilise the national economy. The Commonwealth's fiscal consolidation effort remains a cen tral priority, particularly in light of the recent instability in the Asian region.

Since its election in March 1996 the Government has turned around the fiscal position of the Commonwealth from a budget deficit of $10.3 billion in 1995-96 to an expected surplus of $2.7 billion in 1998-99, with continued surpluses expected over the forward estimates period. The improvement in the Commonwealth's fiscal position has played a major role in shielding the economy against enormous volatility and instability in the Asian region. Continued fiscal improvement is essential if Australia's vulnerability to these and future external shocks is to be minimised.

The Commonwealth will continue to provide States and Territories with maximum flexibility concerning the method of payment of the State fiscal contributions. A State's share can be paid by way of deductions from general revenue assistance, direct payments to the Commonwealth or a reduction in funding provided under a specific purpose grant. Provisions have been included in the bill to allow for States' 1998-99 fiscal contributions to be deducted from general revenue assistance.

Finally I turn to the elements of the bill which relate to the safety net arrangements.

The safety net measures introduced by the Commonwealth protect State and Territory revenues following the High Court decision of 5 August 1997 on State business franchise fees. The Commonwealth is using its tax powers to collect the revenue that the States and Territories previously collected by way of business franchise fees on petroleum products, tobacco and alcoholic beverages. The States and Territories acknowledge that this represents a State tax imposed and collected by the Commonwealth at their unanimous request and on their behalf.

The proposed amendments provide authority for the Commonwealth to pay the States and Territories the revenue it collects under the safety net arrangements in 1998-99. These payments are estimated to be $6.5 billion in 1998-99.

The amendments also include provisions which return to the States and Territories any tax revenues the Commonwealth might receive under the Franchise Fees Windfall Tax (Collection) Act 1997. This will ensure that State and Territory finances are protected from claims for refunds, on grounds of constitutional invalidity, of past payments of business franchise fees.

As I noted earlier, the safety net arrangements are revenue neutral for the Commonwealth. Revenue replacement payments will simply return to the States and Territories amounts raised by the Commonwealth on their behalf, after allowing for Commonwealth administrative costs.

I commend the bill to the Senate.

Ordered that the resumption of the debate be made an order of the day for the first day of the 1998 spring sittings.