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Select Committee on the Reform of the Australian Federation
05/05/2011
Reform of the Australian Federation

DOHERTY, Mr Dermot, Assistant Secretary, Commonwealth Grants Commission

SPASOJEVIC, Mr Janko, Secretary, Commonwealth Grants Commission

[12:12]

CHAIR: Welcome. Thank you for attending today. We do not have a submission from you, but I should acknowledge on the public record that when the committee's inquiry began we did seek a private briefing from the Commonwealth Grants Commission which you were generous to grant us. We were very grateful for that. It was very helpful to our inquiries. We felt that some of the issues needed to be on the public record, which is why we have invited you to attend the committee today. We are grateful that you have agreed to accept that invitation. We will allow the opportunity to make an opening statement if you care to make it, and then we will move to questions.

Mr Spasojevic : We have no opening statement.

CHAIR: Mr Spasoj—

Mr Spasojevic : As we discussed last time, Secretary will do!

CHAIR: I am happy to wrestle with your name, Mr Spa—Secretary! I think it will be helpful to us if you begin by quickly outlining your particular mandate as the Commonwealth Grants Commission and then providing us with some insight into the way in which you undertake the task for which you are most celebrated, which is the work that relates to the GST revenue and the way it is distributed.

Mr Spasojevic : The Commonwealth Grants Commission's main task is to advise the government on how the GST revenue should be distributed amongst the states to leave each state in an equal fiscal position. That is the predominant task of the Grants Commission. From time to time it is asked to do other things, but that is its main role and function. It does that on an annual basis and every five or six years it also reviews the methodology that it uses to reach those decisions. I can talk a little bit more about exactly how we go about doing that, which I think is the second part of your question. To do that, the commission undertakes a comprehensive analysis of the revenues that states raise and the expenditures which they undertake and it asks for each of those revenues or expenditures. We compare that to the average which we have observed—how much more or less than that average would a state need to spend or be able to raise if it followed the average policy of all the states.

Taking payroll tax as an example, the commission looks at the distribution of wages and salaries by state. That is the base upon which payrolls are levied. In a simplified form it would say: if a state had within its boundaries 25 per cent of the wages and salaries, it would be able to raise 25 per cent of the payroll tax in any given year. It goes through this procedure item by item and that allows it to form a view on how much GST revenue a state would need to get to enable it to deliver the standard level of services if it makes the standard or average revenue-raising effort.

CHAIR: When you say 'item by item', do you mean each item of revenue and each item of expenditure?

Mr Spasojevic : Each major item of revenue and each major item of expenditure.

CHAIR: I see. Do you test whether or not it is major by reference to a percentage of overall expenditure or revenue? How do you decide what is major?

Mr Spasojevic : The commission, when it undertook its last methodology review, which reported in 2010, started with the aggregate of all expenditure and asked: how should we break this up? It agreed that it would break something down or split something out if it had a significantly different distribution of the base, so to speak, between the states. So we start with the total and take things out which are very different between the states, leaving a residual item which we think is very much the same between the states.

CHAIR: I am sorry—I have taken you away from your narrative, but it is perhaps useful to explore these opportunities when they arise. Are you able to tell the committee how many items were in that category of there being a significant difference between the states? Can you identify those areas?

Mr Spasojevic : The areas are all identified separately in every report that the commission has undertaken. Each item has its own assessment and it is written up as an individual item, and numbers are produced every year for how we would assist that state for those items. Dermot might know better than I how many revenue items, categories and expenditure there are.

Mr Doherty : There are seven revenue items, of which one is a balancing item, and there are 14 expenditure areas, of which one is a balancing item.

Senator MOORE: Mr Doherty, could you define 'balancing item'?

Mr Doherty : As Jan explained, we started with one revenue category and we said that payroll was different, so we took payroll out and we took another five out, and what was left were all the other revenues we have not separately identified.

CHAIR: Please continue, if we have not completely distracted you.

Mr Spasojevic : That is fine. I think it is better to ask a question as we go along. We undertake these assessments for each of these items of revenue and expenditure. We also make an assessment of states' need to undertake investment and we make an assessment of how much a state needs to save or add to its wealth. At the end of the day we can calculate out how the GST would need to have been distributed in the past to achieve equality. We use those past shares of the GST as the basis on which the future GST should be distributed. We only look at the last three years of history and that enables us to average history and determine an appropriate distribution in the next year. So in February of this year we made a recommendation in relation to the year beginning 1 July. We are six months ahead of the fiscal year in which we are going to apply.

CHAIR: When we had our briefing and you have said this morning that you undertook a review in 2010, I think, which was your most recent five-year review. Is that correct?

Mr Spasojevic : That is correct.

CHAIR: Perhaps you can tell us how significantly or otherwise there was a change in the distribution of revenues as a consequence of that review.

Mr Spasojevic : Before I get to the actual distribution numbers, because you are going to catch me there because I do not have the impact of the 2010 review on the distribution, there were quite significant changes in the methodological approach of the commission at that time which led to significant changes in the way the GST was distributed.

CHAIR: You will say something about that, but I would like to know why it was that you changed the methodology.

Mr Spasojevic : At the end of the preceding review in 2004 heads of treasury engaged in an exercise to simplify the commission's methodology. There was some concern about complexity. There was concern from the commission itself that some data might not be reliable and being asked to carry too much of the load. So heads of treasury engaged in an exercise for some 12 months. At the end of that they identified that simplification of the commission's approach was an important element of any future work of the commission and that was embedded in the commission's terms of reference. The commission then decided that, bearing in mind this desire of the Commonwealth and the states that we should achieve horizontal fiscal equalisation but in a simpler way, it would start with a completely clean sheet of paper in developing its methodology—that is, it would not pick up the preceding methodology and review it and see whether it needed to be changed at the margins; it would actually ask questions from the very beginning. That led it to make some different decisions than it had in the past. One of those decisions was that it wanted to have different states' investment needs have a faster impact on the GST distribution than it had in preceding methodologies. The other decision it took was that it wanted its recommendations to be more contemporaneous, that is to more closely reflect the conditions in the year in which the GST distribution actually occurred. That led it to decide that it wanted to move from taking five years of data in its average to three years of data in its average. Those two things by themselves had quite a significant impact on the methodology and on the final distribution of the GST in that year. So the change from the 2009 update to 2010 was quite significant because of the different treatment of investment and the move from five years to three-year averaging.

CHAIR: Can you clarify for me the extent to which the review that you undertook in 2010 was directed by Treasury? I am interested in the extent to which there was a measure of autonomy that you had in determining the methodology. Was it, for example, the fact that Treasury said, 'Look, it is too complicated. We want you to simplify it and we want you to simplify it around 10 principles, five principles.' The question I am asking here is that one of the criticisms which is constantly made and has been made in the course of this inquiry is that this process lacks a great deal of transparency and we would all benefit by there being a greater degree of access to an understanding of the methodology. Can you address that question about the extent to which the work you have undertaken in relation to this review is a reflection of a direction from Treasury or the extent to which it reflects your own judgement about the best way in which you can distribute this money?

Senator MOORE: Can I add to that as well, Chair? It is 'treasuries' as well, isn't it, because this involves the treasuries of the states? Certainly it is my understanding that this body actually engages in a COAG like process with all of the state treasuries as well as the Treasury from the Commonwealth government. I want to test that and see whether that is an accurate statement as well.

Mr Spasojevic : Let me take the two questions one after the other because they are slightly different. I will get to both of them. The only involvement of the Commonwealth Treasury is via the written terms of reference. They may make submissions, as can any other treasury of the states, but my recollection is that in the 2010 review they made no submission. The only direction we had from the Commonwealth Treasury was the formal terms of reference, which tell the commission to develop the methodology to be used after 2010. It did set out some guidance, but that is formal guidance and there is nothing else apart from that. We were told to make it simpler and we were told to have materiality standards, but we were not told what the materiality standards were or how we were to make it simpler. That very much follows the thinking of the commission itself.

I will now go to the other question. The terms of reference for the commission are discussed with other state treasuries but in the end it is a decision of the Commonwealth Treasurer what he sends to us. How that works you best ask the Commonwealth Treasury because I am assuming they talk to people and modify the terms of reference as they go along. Through the work of the commission we deal quite intensively with the other state treasuries. They make submissions to the commission. We sit down and talk to their officials and the commission responds to the submissions made by state treasuries. That is a very open and public process. We put all state submissions on the internet and all commission documentation is available on the internet.

Senator MOORE: It is working in terms of the way that COAG operates, which is the formal way that the federation operates and how it links in with your group. Certainly it is about getting my head around the fact that direction comes from the Commonwealth Treasurer but in fact the consumer group in a large extent is the state treasuries.

Mr Spasojevic : The stakeholders are very much the state and Commonwealth treasuries together.

Senator MOORE: The information on which you base your calculations comes from states and territories. Is it a separate report they make?

Mr Spasojevic : The primary source of information is from the Australian Bureau of Statistics. It relies on data that the states have provided first to the ABS, which it collates in the form of government financial statistics.

Senator MOORE: Which are special reports that the states give to stats for this purpose?

Mr Spasojevic : Which states give to the ABS?

Senator MOORE: Yes.

Mr Spasojevic : Not because of what we do. It is part of the ABS statistical process to report on the financial statistics of the Commonwealth, state and local governments. They collect data from all of those bodies and publish it. It is our primary source of data. We do collect some data specifically from the states in areas that the ABS does not collect and they report to us on the basis of the data requests we make of them.

Senator MOORE: Are they standard requests? I am trying to see what the basis of the model is. We have the stats information and the requests of the states to provide further information. Are they standard request from the states?

Mr Spasojevic : They are standard in that every year we update the numbers, so every year we go to them and ask them for the numbers that relate to the most recent financial year and any changes to preceding financial years. So there is a standing process which occurs on an annual basis.

Senator MOORE: And they are free to make other submissions as required in terms of the process, which people have done over the years about their perceived inequities. They put a formal submission in to you.

Mr Spasojevic : Absolutely.

Senator MOORE: The Prime Minister has announced a review.

Mr Spasojevic : Correct.

Senator MOORE: Will that review be done by you?

Mr Spasojevic : No.

Senator MOORE: I want to get it all on the record.

Mr Spasojevic : A completely independent review has been commissioned by the government.

Senator MOORE: Of the whole process?

Mr Spasojevic : Yes.

Senator MOORE: That is for completion this year?

Mr Spasojevic : I think there is a draft report next February and a final report the following August.

Senator MOORE: And that review is looking at the whole way the system operates?

Mr Spasojevic : Yes, I think that is probably the right form of words.

Senator MOORE: Thank you.

Senator RYAN: I was not present at the private briefing last year, I was away, so my apologies if part of this was covered. With respect to what you described before as the average policy—for example, on payroll tax, the amount that could be collected—can you list what the other revenue measures are? You said it was payroll tax and five others that you looked at. I am more familiar with it before simplification, I have to admit, so sorry if I get it wrong.

Mr Doherty : Payroll tax, land tax, stamp duty and conveyances, insurance taxation, motor taxes, mining revenue, and then 'other revenue'.

Senator RYAN: As an example, the state of Western Australia does not have pokies outside its casino, as I understand it, as opposed to places like Victoria or New South Wales where there are a lot more. Is Western Australia effectively penalised in terms of GST disbursements for not raising as much money from gambling machine revenue? It does collect below the average of what it could collect if it had the same number of machines per capita as the other states.

Mr Spasojevic : Gambling is a good and a bad example of the question I think you are trying to ask. If I could think about land tax for a moment, the Northern Territory does not collect land tax, but we calculate how much they could raise if they had the average land tax rate of all the states and that assessed calculation is what is used to determine their GST. So the fact that they choose not to generate any land tax does not lead them to have more GST revenue.

Senator RYAN: Exactly. So how does gambling work? It is contentious, for the reason I used.

Mr Spasojevic : The reason I did not want answer in terms of gambling is we make no differential assessment of gambling.

Senator RYAN: It is not considered the way you just described land tax?

Mr Spasojevic : It is not considered as it forms part of 'other revenue' and we consider that the states can raise an equal amount per capita of those taxes and charges.

Senator RYAN: Sure.

Senator BACK: Can I just clarify this, because revenue for some of the states is 13, 14 or up to 15 per cent from gambling. I am still not clear from your response to Senator Ryan's question if Western Australia is advantaged or not advantaged by—

Mr Spasojevic : It is unaffected in terms of its GST distribution.

Senator RYAN: In simple terms, it is not paid more GST because it is unable to raise the gambling revenue—

Mr Spasojevic : Correct.

Senator RYAN: and it is not paid less because it refuses to.

Mr Spasojevic : Correct. Gambling revenue currently has no impact on the differential distribution of the GST.

Senator BACK: Are there other examples? Gambling is one.

Mr Doherty : There would be one-off revenues that states may raise which we would put in this 'other revenue' group.

Senator MOORE: Would that be like a privatisation? As a one-off revenue that would be a significant income. Various states over the years have privatised certain things.

Mr Spasojevic : Privatisations are not treated as revenue. I believe that is a balance sheet transaction.

Senator MOORE: So it is not counted as revenue for the year in which they get the money?

Mr Spasojevic : I think that is right.

CHAIR: Colleagues, I think we should let Senator Ryan proceed with his questions.

Senator RYAN: You used land tax as an example. Unlike payroll tax where, say, you have 25 per cent of the payrolls, land tax is a harder thing to measure easily because you have to make assumptions about the value of land, I suppose. States do this to varying degrees of competence, I suppose, with irregular or regular assessments. Obviously, with the land in Sydney around the harbour, I would suggest the government of New South Wales has much more capacity to raise land tax than the government of the Northern Territory would, even though it chooses not to, or the government of South Australia would, even if I considered it on a per capita basis. So, when you look at the capacity of a state to raise revenue, New South Wales has more capacity per capita to raise revenue on land tax than does South Australia because of the value of land. Does that mean that, in the way you make your assessment about the disbursements of GST revenue, New South Wales should be raising more per capita from land tax than a state with lesser capacity like South Australia in order for the GST disbursements to be unaffected?

Mr Spasojevic : I will try to go through that question to make sure I understand what it—

Senator RYAN: Please.

Mr Spasojevic : Let me make two statements which I think you said were assumptions. Let me assume that New South Wales has a higher value of land per capita and South Australia has a lower level—

Senator RYAN: Than New South Wales.

Mr Spasojevic : than New South Wales. What we would say is that, at an average land tax rate, New South Wales will—

Senator RYAN: That is an average across the Commonwealth?

Mr Spasojevic : An average across the Commonwealth. At an average land tax rate, New South Wales will be able to raise more land tax per capita than South Australia.

Senator RYAN: Yes.

Mr Spasojevic : Other things being equal, it would therefore get less GST per capita.

Senator RYAN: So if New South Wales chose to reduce its per capita land tax rate to that of South Australia then the truth is that it would end up worse off in net financial terms because it would not get extra GST revenue to compensate.

Mr Spasojevic : I will put aside any effect on the average, because New South Wales is 30 per cent of the average, so there would be an effect, but the thinking becomes difficult then—or more difficult. If the average were not changed, the decision of New South Wales to raise less than the average is a cost it bears itself.

Senator RYAN: Exactly. This is where I wanted to get to the point. It is possible, under the arrangements that are currently in place and have been in place for a long time, for the relativities as they are calculated—the capacity to raise revenue—actually to mean that the burden on individuals, because we look at it per capita, can be higher in some places than in others to pay tax. So in order to maintain an unaffected GST distribution—if we exclude the impact on the national average as you outlined, Mr Secretary—South Australia, if land values are less per capita, will be paying less land tax than New South Wales citizens.

Mr Spasojevic : Yes.

Senator RYAN: I think that is a very important point.

Mr Spasojevic : I think what you have asked is: if every state levied average tax rates, would people in areas of low land tax pay low land tax?

Senator RYAN: The point I am making, though, is that this is so widely not understood—I am not saying misunderstood. It is not the easiest part; I studied it and I still have trouble getting my head around it. It is still based upon people in different parts of Australia on an issue like land tax, which is different to an income based tax like payroll tax. Citizens can own a quarter-acre block in Sydney, subject to land tax, or a quarter-acre block with their home in Adelaide, subject to land tax. This system assumes and depends upon the citizen in New South Wales paying a higher amount of tax on their quarter-acre block.

Mr Spasojevic : It assumes they pay the same rate of tax.

Senator RYAN: Exactly, but because we have some—

Mr Spasojevic : So they bear the same burden.

Senator RYAN: We have immovable economic commodities like land tax—unlike payroll tax, which can move with labour. There is a different burden that falls. Many years ago, the Kennett government when it was first elected introduced a levy of $100 per rateable property; it was called the state deficit levy. It was in place for three years, I think, from 1993 until 1996. I was a bit younger at the time; I was still at uni. I recall from when I was studying this that when the Kennett government removed that levy it was then penalised—this was pre GST, but there were FAG relativity disbursements. The then Kennett government effectively suffered a penalty in its disbursements under the financial assistance grants because it had raised a tax and was now effectively choosing not to. It had a taxing capacity that it was not actually using. I know that goes back a long way, but I was wondering if either of you had memory of that or whether the model that I am explaining would still happen today. If a state introduced a tax for a number of years and then chose to withdraw it, would that in effect impact upon the calculations that you are talking about and penalise it, for lack of a better way of putting it?

Mr Spasojevic : I think you are going to test our memories to go back to Kennett.

Senator RYAN: I tested my own, so I am not—

Mr Spasojevic : You are going to test mine, because I only joined the commission in the 2000s, so I certainly cannot answer that question.

Mr Doherty : I will take it under advisement, but I believe we put that tax, because it was a tax by one state only, in the balancing item, and therefore it did not affect the disbursements of any state.

Senator RYAN: Not even Victoria?

Mr Doherty : Not even Victoria.

Senator RYAN: But the principle could apply, could it not—the principle of a state having a source of revenue, having raised a tax from that source of revenue and then discontinued it, then finding itself in much the same situation? It may have been a Kennett tax in Victoria, but it could be any state doing the same thing with the same consequences.

Mr Spasojevic : By and large, if one state introduces a tax it does not constitute average tax policy so it has no impact on what the commission does. It has to be something which affects either the majority of the tax base across the country or the majority of the people in the country. If New South Wales were to introduce a tax that no other state had, we would just say it is following some very different policy and it should not affect the GST distribution.

CHAIR: So it would not affect the distribution while the tax is being raised? If it were discontinued, it would not affect the distribution either?

Mr Spasojevic : That is correct.

Senator RYAN: That is very helpful. When you are calculating what I understand used to be called 'disabilities' with respect to spending—I might be going back to un-PC or old language with this but I can remember a story about calculating the relative spending requirements to support public transport in the various states and territories. Again, this was 10 or 12 years ago, so dismiss it if it is either apocryphal or out of date. One of the things I heard at that point was that the ACT received a spending bonus because they had a spending disability. There was so much free car parking around so many workplaces within Canberra as opposed to Sydney and Melbourne, where more people were simply funnelled onto public transport, that, in essence, it was going to be more expensive for the ACT to maintain a mass transit public transport system. Is that the sort of story that is apocryphal or is that the sort of story that could fit into the guidelines in which you operate?

Mr Spasojevic : It is not apocryphal but it does not exist anymore.

Senator RYAN: It used to?

Mr Spasojevic : It used to.

Senator RYAN: That is also very helpful.

Mr Spasojevic : It was simplified.

Senator RYAN: When you look at something like health—and you talked about the average service delivery of health—what do you use as your measurements? Life expectancy takes years. Do you use input measures like the number of beds per hundred of population? Do you use the number of GPs per head of population? How do you decide that the people of Queensland need $1.20 to provide the same health service for which the people of Victoria might need 88½c?

Mr Spasojevic : We use the Australian Institute of Health and Welfare database. They give us data based on the spending on different types of people by their demographic and social characteristics. If you are an 80- to 85-year-old Indigenous person, we know what the average spend on such a person is across the country, for example. We say that if that is what is spent on average on those types of people then to deliver the average service that is how much the average state would need to spend. We do not look at the measures like GPs.

Senator RYAN: That makes perfect sense.

Mr Spasojevic : We look at how much the states—

Senator RYAN: Doesn't this then have an anticompetitive aspect? If you are always pulling everyone back to the mean, the average spend, then Victoria, for example, could prove that if it got its cost per head down it would effectively then suffer a funding penalty absent of the impact upon the national average?

Mr Spasojevic : No. You are completely wrong there. If I assess that you need to spend the average of $100 and you can do it for $80, that $20 is your money to spend as you see fit.

Senator RYAN: But then, if I am, say, a state like New South Wales and I start spending $120 instead of $100, I am going to have a significant impact on the national average, dragging costs up, aren't I?

Mr Spasojevic : Correct.

Senator RYAN: That is something that you do not take into account?

Mr Spasojevic : We do not take that into account. We assume that the average spend is the average spend and incorporates the average level of service delivery efficiency.

Senator MOORE: You make no assessment of whether that is the right level or the appropriate level? You do not make any qualitative assessment; it is purely quantitative?

Mr Spasojevic : The commission make no judgment about what states should spend their money on or how they should raise their revenue; we just look at what they do, and it is purely quantitative in that sense.

Senator RYAN: The Northern Territory is a classic case. It has a significant Indigenous population. The health costs for Indigenous people are significantly higher. It therefore gets significantly more per head than does the state of Victoria or Tasmania. Those grants are then given as untied, aren't they?

Mr Spasojevic : Correct.

Senator RYAN: Even though the Commonwealth Grants Commission says the Territory gets $3.20 rather than a $1.20 to spend on health because of the balance of its population demographically and that money is given to the Northern Territory, just to clarify, that money is not tied to the purpose for which the disability is calculated?

Mr Spasojevic : Correct. Once the GST is determined, it is a lump-sum transfer to the Territory to spend as it sees fit.

Senator BACK: Could you give us a breakdown of the per capita GST return to the states and territories in percentage terms?

Mr Spasojevic : For the coming financial year?

Senator BACK: Yes, or the current and the coming if you have got them.

Mr Spasojevic : I have got numbers but they may not be right because the amount of GST keeps changing all the time. Do you want them in billions?

Senator BACK: Per capita per cent.

Mr Spasojevic : I can give you the shares of the GST.

CHAIR: Senator Back, would it be helpful if we had a table on this, or do you need some of this information now for the purpose of your questions?

Senator BACK: I do not need it right now to continue my questions, no.

Mr Spasojevic : It is publicly available in the published reports. Table 2 on the executive summary of the 2011 update gives you the state shares. The state shares per capita are what we call the relativities, and that is in table 1.

Senator BACK: Thank you. I can source that. You mentioned very kindly the revenues. I think you said there were 14 expenditures including one balancing. Do the summary of the expenditures appear in the reports also?

Mr Spasojevic : Yes.

Senator BACK: The Northern Territory Speaker and her opposite number appeared before this committee in Brisbane and they were pleading the case for statehood. I recall asking them, 'In the event that the Territory achieves statehood, to what extent would this actually improve their financial position vis-a-vis the GST share per capita that it gets?' They said, 'It wouldn't at all.' I said, 'Don't you have an objective to get closer to being self-sufficient?' They said, 'No, why would we?' So I ask you the question.

Mr Spasojevic : We treat the territories as if they are states.

Senator BACK: Sure; I understand that. My question is in relation to all eight. You have explained to us the averaging, you have explained to us the need for horizontal fiscal equalisation, but can I ask you: where is the incentive for states and territories to actually maximise revenue or contain expenditure for the overall good of the nation? Why? If one state—Tasmania, for example—in the current structure chooses, for whatever reason, to not proceed with or to maximise their revenue opportunities in one particular area, where is the incentive for them to do so? They are getting a good share. They might say they are not, but others would say they are. I suppose it comes back to the question Senator Ryan asked. It is not so much in relation to competitiveness. But it is not clear to me where in the guidelines the states and territories should be aiming to act as responsibly and effectively as possible to maximise revenue and contain expenditures.

Mr Spasojevic : I think those constraints fall outside the gamut of what the commission is asked to do, in that if we think of the states collectively we are asked to distribute a given amount of money amongst them. We are not asked, for example, to determine what a good state policy or a good state fiscal position is and distribute the GST to somehow make that happen. We just give them all the same fiscal outcome. You may think that the states should have a tighter or lower average outcome. It is beyond the commission to comment on whether that is appropriate or not.

Senator BACK: You did make the observation that one of the changes being contemplated—I think you mentioned two—was a five- down to three-year reduction. The first that you mentioned was the taking into account of the different investment needs of the different states. Can you explain to me the basis upon which those decisions and calculations were made? I would have taken that to mean that a particular state might have a greater or lesser investment need. In turn, in the event of a greater investment need, that might actually return more to the Commonwealth as a result of that investment being made. Am I wrong in that assumption?

Mr Spasojevic : I think you are wrong in drawing the conclusion that we do not look at the financial return to any particular body. We have a very different way of looking at investment. The way the calculations are done is that the average state needs the average amount of infrastructure—if you can imagine that concept—per person. That average amount of infrastructure is determined by the decisions of all the states collectively and basically what we do is we say that states which have fast growing populations will need to spend more than the average to give them that average level of infrastructure. It is their faster population growth which drives our decisions on how much investment they need to take.

Senator BACK: If it is not then within the commission's purview to consider the question I was asking about the effectiveness of operations of states and territories, whose is it? You know the state I come from and you probably know the comment that our premier made recently about Tasmania being a national park. Who then should take that level of accountability and responsibility in making the final determination?

Mr Spasojevic : I think that is a very good question but I do not know what the answer is myself.

Senator BACK: Sure. I know time is against us so therefore I will ask one final question. You did hear the chief executive of the Local Government Association giving his evidence to us earlier. Can you explain if at all, how the commission takes into account this need of local government in terms of your GST calculations or indeed are they just simply drawn up as part of your overall averaging process?

Mr Spasojevic : The functions of local government fall outside our ambit. We only look at the functions of state general government. We do not think about local government itself. The only way that there is an impact is any state government spending that they direct towards their own local governments. I think it has almost no impact at this point in time.

Mr Doherty : I think that is correct.

Mr Doherty : We make no differential assessment of what a state needs to do to support it.

Senator BACK: They cannot appeal to you for this widening gap between the services they are expected to deliver and the funding that follows?

Mr Spasojevic : No, I am sorry. It is not something that currently is treated by the methodology because we consider it falls outside our ambit.

CHAIR: Were you asked to undertake the task, is it theoretically possible to do the same kind of calculation that you do for states amongst the local government areas across the country?

Mr Spasojevic : I think in the past the commission actually was asked to do that.

Mr Doherty : In 1974 and I think 1975 we were given that task. It now falls to the local government grants commissions and there is seven of those in each of the states except the ACT. They do that task for the money the Commonwealth passes to the local governments.

CHAIR: When you undertook that task did you undertake it on more or less the same kind of basis of principle that you undertake the task in relation to states?

Mr Doherty : We did. It preceded my time at the commission as well but it was on the same approach.

CHAIR: Mr Doherty, is it your understanding that that continues to be the approach that the commission undertakes now?

Mr Doherty : When we did it we would have used a national average but I believe that when the state local grants commissions do it they use a state average.

CHAIR: They do it independently for their states?

Mr Spasojevic : Correct.

CHAIR: It is not necessarily coherent or nationalised, as it were, across the country. Is that correct? Are they applying common methodologies in each state?

Mr Spasojevic : The Commonwealth money for local government gets distributed amongst the states into eight pots, according to how many people there are in each state. Each of those pots is then divvyed up to try to equalise the standards of local governments within that state. There is no assurance that the standards are therefore evened out nationally.

CHAIR: So there could be significant differences between the revenues received from local governments in one state as distinct from others, even though they might be applying the same kind of methodology?

Mr Spasojevic : Correct. For example, even after the money is distributed, local government in the Northern Territory—where only half a percent of the total goes—probably has a lower fiscal capacity than local government in, say, Victoria where 25 per cent of the money goes.

CHAIR: Was that the outcome when you undertook the task, Mr Doherty? Or was there a more representative return to government—a more equitable return, given their status across the country?

Mr Doherty : It was 10 years before I was at the commission so I do not know what the outcomes were.

CHAIR: In relation to the review that is being undertaken, following on from the question from Senator Moore, it is not a review that you are undertaking but are you expecting to make a submission to the review? Presumably you have some role in the review and I just want to understand how that works.

Mr Spasojevic : Staff from the commission will be seconded onto the secretariat of that review, which is being provided by the Commonwealth Treasury. The review itself is being undertaken by Nick Greiner, John Brumby and Bruce Carter. They are the three reviewers supported by a secretariat from the Commonwealth Treasury, which will have state and commission staff seconded onto it. The commission has said that it, first of all, welcomes this review and thinks that this is an important issue that needs to be addressed. The review basically reviews the commission's own terms of reference, which it has always thought exceeded its own abilities but it has called in the past for such a review to occur in the country. The commission will be as helpful as it possibly can in providing information and briefing to that review but it is not clear that it will make a submission because it would be making a submission on its own terms of reference, which it thinks is probably not appropriate. So it will be as helpful as possible without necessarily making a submission.

CHAIR: I can see the awkward situation you are put in. Do I take it, though, from your remarks that you have been uneasy with the terms of reference that you have received consistently?

Mr Spasojevic : No. In the most recent 2004 review, there was a great deal of concern by some states about whether fiscal equalisation itself was the right thing that should be occurring, but the commission has never been asked that question. It has been asked, 'Can you tell us how to implement HFE?' The commission at that time said: 'The question of whether there should be HFE is a question for government. It would be appropriate for the government to have a review of the question and then tell the commission what it wants it to achieve.'

CHAIR: I think I am right in saying that this is the most sophisticated means by which any federation seeks to achieve horizontal fiscal equalisation amongst its elemental parts. Is that correct?

Mr Spasojevic : I think that is a fair statement. From what people in other federations tell us, we have the most sophisticated and involved system.

CHAIR: And complex, it would seem, as a consequence?

Senator MOORE: Less complex than before, I believe.

Mr Spasojevic : Complexity is a very interesting question. It would be much simpler if the states were simpler. If the states were all homogenous our job would be made a lot easier. Our job is made difficult because the states are so different and they engage in such a wide range of activities and tax-raising functions. I believe our complexity mirrors the complexity of the real world.

CHAIR: Thank you for your time. It has been most interesting and we are very grateful to you for returning to the committee and providing your evidence in the public domain.

Proceedings suspended from 12:59 to 13:49