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Economics Legislation Committee
Commonwealth Grants Commission

Commonwealth Grants Commission


CHAIR: I now call to the committee the Commonwealth Grants Commission. Good afternoon. Thank you for appearing before the committee today. Do you have an opening statement for us?

Mr Willcock : No, we do not.

CHAIR: Thank you. We might kick off the questions with Senator Ketter.'

Senator KETTER: Was the Grants Commission involved in any way with the Productivity Commission's review into the GST?

Mr Willcock : Not directly. The Productivity Commission process is the Productivity Commission's process. At staff level there are some interactions between us as the Productivity Commission seeks some information on the work of the commission, but otherwise not directly.

Senator KETTER: So that is just to inform if they have any questions.

Mr Willcock : That is right.

Senator KETTER: On the issue of the national partnership on remote housing: this is a pressing social and economic issue. With respect to closing the gap, are payments made under the national partnership on remote housing excluded from the Commonwealth Grants Commission's assessment?

Mr Nichols : I believe that all payments associated with closing the gap are excluded from affecting GST shares; however, there is a national partnership payment on remote Indigenous housing that does have some effect.

Senator KETTER: Does the budget contain any new GST-excluded funding for remote housing to help close the gap on Indigenous disadvantage?

Mr Nichols : Not that I am aware.

Senator KETTER: Could you take that on notice?

Mr Nichols : We could take that on notice.

Senator KETTER: I have a series of questions in relation to remoteness allowances. I understand you have a formula to allocate funding to states based on the costs associated with providing essential services like health and education. Is that correct?

Mr Nichols : That is correct.

Senator KETTER: Is it correct to say this formula was adopted in 2015?

Mr Nichols : The commission every five years or so has a methodology review where it reviews its methods. The most recent methodology review was in 2015, so the current assessments undertaken by the commission reflect the 2015 methodology.

Senator KETTER: Is this current methodology based on the distance from the state's capital city?

Mr Nichols : That was known as SARIA, and the current methodology is based on ARIA, or ABS remoteness. The distances reflect distance from and size of a town rather than where that town is located. For example, it is not always the capital city.

Senator KETTER: Can you tell us a bit more about how that factors into the calculation of the remoteness allowance?

Mr Nichols : The commission assesses differing costs and use of services by geography. The commission's view in the 2015 methodology was the standard ABS remoteness area classification was a consistent method which met data reliability constraints that reflected differing costs and use of services. Its view was that, for example, Broken Hill was more affected by being able to receive services from Adelaide than it was from Sydney.

Senator KETTER: That is the key difference between the state capital approach and—what does ARIA stand for again?

Mr Nichols : It is the state-based area remoteness index.

Senator KETTER: Is that the key difference between the two methodologies?

Mr Nichols : That is right. The ARIA, or the ABS remoteness area classification, is based on distance at the top level from cities above 250,000, whereas the SARIA, the previous regime, was based on the state capital regardless of the size of the state capital.

Senator KETTER: Is Tasmania treated as a state for the purposes of the CGC's formula?

Mr Nichols : Yes.

Senator BUSHBY: It is a state.

Senator KETTER: A very good state, in fact—a fine state. One of the best.

Can you tell me how this change of methodology might have impacted on a state such as Tasmania?

Mr Nichols : Under the ABS remoteness area classification, as Tasmania has no towns or cities of 250,000, its distances relate to Melbourne, which is the closest city. On balance, compared to the SARIA approach, Tasmania is considered to be more remote. It has no major city regions.

Senator KETTER: What data do you have about the cost of providing, say, primary school education services in southern Tasmania?

Mr Nichols : The schools education assessment is based on the ACARA data, and we use that data to look at costs of different types of students. We look at it at a national level rather than state-specific.

Senator KETTER: What about the cost of providing equivalent services in Wyndham or Halls Creek in Western Australia?

Mr Nichols : Similarly, the ACARA data covers all schools, and we group schools by their area of remoteness classification.

Senator KETTER: Has anyone from the CGC ever visited a school or medical facility in southern Tasmania?

Mr Nichols : State visits are a routine part of the commission's methodology reviews with the exception of the 2015 review, which was a shortened review. I would have to take on notice whether anyone has actually visited a Tasmanian school, but it would be likely in a previous review.

Senator KETTER: What about northern Western Australia?

Mr Nichols : Similarly, commission staff and commissioners as part of the 2010 review had a visit to Western Australia. I cannot recall the exact itinerary for that visit.

Mr Willcock : Importantly, when it comes to these state visits as part of the commission's regular reviews of its methods, effectively, the relevant state treasuries are the ones who organise the state visits. They are the ones who, I suppose, are keen to ensure that the commission has got a very full understanding of the particular needs that that state might face and therefore to ensure that the commission recognises those needs and is able to incorporate those needs into the methodology. As I said, we are very much in the hands of the state treasuries as our counterpart in organising those visits. However, I think it is fair to say that the commission generally is well aware of the fact that remote areas create additional spending need for states which they cannot control. In other words, they are needs which the commission needs to recognise when it assesses each state's need for GST revenue.

Senator KETTER: What effect did the 2015 change in the formula have on the allocation of GST to Western Australia?

Mr Nichols : There was some published material at the time of the 2015 review. Some areas of Western Australia previously considered to be very remote are now considered to be remote, so on balance there may have been a slight decline, but I would have to check that.

Senator KETTER: Could you take that on notice?

Mr Willcock : Just to clarify, are you looking for the counterfactual: the outcome for WA under the 2015 methodology and what would have been the outcome for WA if the commission had not changed its methodology in 2015 away from SARIA to ARIA?

Senator KETTER: Yes, and could you also give that change in respect of the other states?

Mr Willcock : We will take that on notice.

Senator KETTER: Can you explain why you adopted the new formula in 2015?

Mr Willcock : Do you mean in relation to remoteness?

Senator KETTER: Yes.

Mr Nichols : It was a combination of reasons. The SARIA regime was specifically tailored to the commission's work. That meant it did not align particularly well with other administrative datasets. So the commission thought that the standard remoteness classification was the ABS remoteness area classification, and that classification did effectively reflect a good measure of differences in use and cost of services by different areas using that classification. It thought that different areas were better reflective using that classification than the SARIA classification. And the added bonus was that it integrated much more easily with other administrative datasets, which meant that we had more reliable data upon which to base our assessments.

Senator POLLEY: The Grants Commission, as I understand it, have been allocating the GST amongst the states and territories since about year 2000—is that correct?

Mr Willcock : Yes.

Senator POLLEY: There has been some political interest in the way that is allocated and the proportion that has been allocated to various states. Can you just step me through the process for that allocation?

Mr Willcock : Certainly. As you note, it was since the year 2000. The critical point about the year 2000 is that of course was the time at which the GST was introduced. Since that time it is the GST pool which has constituted the bucket of money through which the Commonwealth seeks to achieve horizontal fiscal equalisation. The commission's job is to make recommendations to the Treasurer on how to share out all of the GST revenue among the states—and when we say 'states', we include the Northern Territory and the ACT—in a way that meets the principle of horizontal fiscal equalisation. That principle, in short, is designed to ensure that each states has the same capacity to provide an equivalent standard of state services to its residents. That principle of HFE has been applied by the commission for a number of years, including before 2000. It is a longstanding principle that has been in its time reflected in legislation back in the 70s, when the Fraser government proposed to introduce an income-tax sharing arrangement. It has been the subject of a number of intergovernmental agreements involving all governments in this country. As I said, it is the basis on which the commission is instructed annually by the Treasurer to calculate a way of distributing the GST revenue amongst all states.

What the commission does in implementing HFE is look first at what it is that states do. That is, if you like, a simple exercise of observing what it is that states do, what sorts of services states provide and what sorts of taxes states levy to provide those services. It includes what other forms of income states might have. For example, this includes so-called payments for specific purposes that come from the Commonwealth to support hospitals and schools and other funding. This includes GST revenue that they get and other sources of income that they get. So, we look across all states to then work out benchmarks on the all-Australian average for collecting state taxes and for providing state-like services like schools, hospitals, police and courts that sort of thing. Then, we look at each state, and indeed we are heavily reliant on data provided to us by the treasuries of each of the states, to see how much they could raise they applied that benchmark, that Australian average. And we look at how much they would need to spend if they provided that Australian average service standard, given the circumstances that are beyond each state's control. There are certain things that affect a state's capacity to raise money, or the service-delivery tasks that a state faces that are beyond their control. Some of those are demographic factors, like the fact that some states have an older population than the average. Some states have a larger land area over which to provide services to a relatively small population while other states have a population that is in a smaller land area and therefore have some sort of economies in service delivery. Then, we look at the difference between what that benchmark of the average is versus our assessment of what the unavoidable costs in delivering services are or how much money a state could raise. And it is that divergence which affects the distribution of GST.

Senator POLLEY: Am I correct in—

Mr Willcock : So, to make all of that sound a little bit simpler: where a state can raise more revenue of its own than the average of all states or can provide services to its population at a lower cost than the all-Australian average, it will need less of GST per capita than the average. And where a state can raise less revenue than the average or provide services to its community at greater cost than the average, it will need more GST revenue per capita than the average.

Senator POLLEY: My understanding was that all the states agreed to this before it was implemented in 2000. Would it be fair to say that over the last 16 and a half years there has been some movement in terms of the allocation to various states, depending on their circumstances at the time?

Mr Willcock : Yes. There has indeed been some movement.

Senator POLLEY: As you know, Tasmania is the jewel in the crown of the country!

Senator KETTER: Hear, hear! I could not agree more.

Senator POLLEY: But we are an island, obviously, that has some challenges around an ageing population and the ability to sustain any further increases in state taxes. Would it be fair to say that any change to the distribution of the GST could well disadvantage Tasmanians?

Mr Willcock : I suppose point number 1 is: the HFE system in a sense is a zero-sum game, because there is a fixed pot, namely the GST revenue, that is raised in any given year, that needs to be distributed among eight states and territories. So, necessarily, for one state to receive more, other states must receive less. There is that concept.

However, of course, from year to year an individual state's share of GST can and does change. It is not as if from year to year there are cases where a particular state will have exactly the same share of GST revenue year in, year out. That is because states' circumstances are constantly changing. Because GST is worked out on a relative basis it is not simply a matter of looking at one state like Tasmania in isolation, seeing what has happened to its economy in the last year and how that has affected that state's capacity to raise revenue and how that has affected that state's ability to deliver services and then, having looked at that state in isolation, deciding whether it should get more GST or less. It is a matter of looking at what has happened over that period of time—the assessment period the commission uses—and what has happened in the other seven states. It is that relative concept. That is why there is a slight caveat to the question you have asked.

Senator POLLEY: My understanding is that the Treasurer has asked for a review of the way the GST is allocated. He has commissioned the Productivity Commission to undertake that. What were the reasons for that? If this has been agreed to and it has been in place for almost 17 years, what is the urgency or the need now to have that process reviewed when it seems, on the surface of it all, to be quite fair to all the states.

Mr Willcock : I cannot really speculate on the reasons for the Treasurer providing the PC with those terms of reference. I think it is fairly well known that there are stresses in the system and that at least one jurisdiction—namely, WA—is quite unhappy with the share of GST revenue that the commission recommends it receive.

Senator POLLEY: But, as you said before, there is only one pot of money, so for one state to get additional funding it means it is going to be at the detriment of other states and Australians. In light of that, were you asked to do any sort of briefing or paper in terms of providing some additional information to the Treasurer before this review was sought from the Productivity Commission?

Mr Willcock : The commission is tasked by the Treasurer under terms of reference. We typically receive terms of reference from the Treasurer annually which task us to go through the calculations to make a recommendation each year for the distribution from the following 1 July of the GST amongst the eight states and territories. Occasionally, as my colleague said, we have terms of reference from the Treasury for a general review of our whole methodology. That typically happens every five years. We are not tasked outside that process.

Senator POLLEY: The review from the Treasurer has been asked to report by the end of January next year. I just want to know whether the Prime Minister or the Prime Minister's department has sought any advice prior to his statement when he said that any changes to the GST distribution would be a few years away. Have you provided any advice to the Prime Minister's department or his office?

Mr Willcock : I can only repeat what I said to the last question. The work that we do is as a consequence of being tasked by terms of reference. Unlike being a department of state, we are, if you like, an arm's-length statutory authority set up under our statute. Our statute sets out a process whereby we are tasked through terms of reference.

Senator POLLEY: The assistant minister might want to answer this: is there any way that the federal government can guarantee that Tasmania and South Australia will not be any worse off from any changes that this review may bring down?

Senator McGrath: I will have to take that on notice.

Senator POLLEY: Is that because we have Western Australians in the room?

Senator McGrath: I will just have to take it on notice.

CHAIR: Senator Polley, you have done 15 minutes of questioning, which is the way that this committee has been working—15 minutes for each questioner. I know that I still have two Western Australians who are dying to ask questions, and we are supposed to finish in three minutes. The minister has kindly agreed to stay until 4.30 pm, even though I know he has some more commitments, and I am hoping that the witnesses can too. Do you mind if I move onto Western Australia?

Senator POLLEY: No, that is fine.

CHAIR: Sorry, not to Western Australia. To senators on—

Senator IAN MACDONALD: Queenslanders might have questions too!

CHAIR: I do not doubt that Queensland—

Senator GALLAGHER: Everyone will be seeking a guarantee that no-one is worse off, except WA, who want to be a lot better off!

Senator BUSHBY: I would like one from Bill Shorten, given what he has been saying.

Senator POLLEY: Tasmanians already know they cannot trust this government.

Senator BUSHBY: What Bill Shorten said in Western Australia is a worry.

Senator SMITH: We have not even got the report yet.

Senator GEORGIOU: Western Australia's share of GST has dropped from 95c on the dollar in 2007 to 34c on the dollar at present. Do you think the current formula is a fair way of distributing GST?

Mr Willcock : The word 'fair' certainly involves a value judgement. Probably a fuller answer to that is that the commission is tasked expressly, in terms of reference issued to it by the Treasurer, with coming up with recommendations for the sharing out of the GST revenue on the basis of horizontal fiscal equalisation. The commission is satisfied each year that its recommendations to the Treasurer of how the GST could be shared out would indeed be consistent with achieving horizontal fiscal equalisation. To that extent, it believes that that is a fair set of recommendations.

Senator GEORGIOU: In the nation's interest, what is the best way for the GST to be distributed among all the states and territories so no other state or territory feels like it is being left out?

Mr Willcock : That would be inviting me to express an opinion on a policy matter, and I do not think I am in a position to do that. I would simply note that the distribution of the GST to achieve horizontal fiscal equalisation, as I think I said earlier, has been a longstanding mandate for the Commonwealth Grants Commission for many, many decades—since 1999, when an intergovernmental agreement was struck before the introduction of the GST. All states, territories and the Commonwealth agreed that the GST revenue would be shared in accordance with the HFE principle. That IGA, and the endorsement of the notion of sharing out GST in accordance with HFE, has been re-endorsed by all states, territories and the Commonwealth on a couple of occasions since then. As I said, that is the policy setting that is conveyed to us. So we do not make the policy. We implement the policy, and that is the task that the commission seeks to deliver on.

Senator GEORGIOU: Fair enough. If the Treasurer wanted to change the GST calculation method tomorrow, what is stopping him from doing this? Is there any legislation connected to the calculation method used?

Mr Willcock : I think that that is a question that would best be directed to Treasury itself as—

Senator GEORGIOU: But is there any legislation—

Mr Willcock : they are the people who actually advise the Treasurer on that. Rather than legislation, as I said earlier, there is an intergovernmental agreement. There was one in 1999, there was one in 2007-08 and another one in 2011. Each of them provide a commitment by the Commonwealth and by all states and territories that the GST is to be distributed in accordance with HFE. I do not know whether there is a legislative or other constraint, but there is certainly that political agreement.

Senator BUSHBY: On that, how long has it been since the Treasurer did other than except the recommendation of the Commonwealth Grants Commission?

Mr Willcock : I have to confess that I have been with the CGC only since February last year. I am not personally aware of an instance when the government has done that.

Mr Nichols : I think is only once, in 1981, and maybe sometimes in the early 1980s. That was the first time there was all state equalisation.

Mr Willcock : The Commonwealth Grants Commission has been in existence since 1933. Between 1933 and 1980 the way that equalisation worked was for the Commonwealth to provide special assistance to certain so-called claimant states. It did not involve equalisation for all states and territories; it just involved some special grant funding to particular states at particular points in time.

Senator BUSHBY: Including Western Australia.

Mr Willcock : Yes. Since 1980 we moved to so-called all-state equalisation. At some time since the 1980s we included the Northern Territory and the ACT. The most recent big change to the way that equalisation is delivered in this country is as a result of the introduction of the GST, when that became the funding pool.

Senator BUSHBY: Which also provided a high degree of transparency as to where the money came from and where it went, which is part of the problem we have now.

Senator GEORGIOU: Western Australian mining royalties impact on its GST allocation. Is it true that considerable revenue from gambling, such as poker machines, is not taken into consideration for GST allocation in New South Wales and Victoria?

Mr Willcock : There are two elements to your question. A factor that has heavily influenced the GST share for WA has been its revenue strength. Since 2008 and 2008-09 WA has been the fiscally stronger state in our process. Up until 2008 at various times in our history it has been New South Wales or Victoria. In 2008-09 WA became the fiscally stronger state. Notwithstanding the fact that the commission assesses WA as having very significant spending requirements that are beyond its control, reflecting the fact that it is a very large state with a small population spread over large areas and with a large Indigenous population—there are a number of factors there that more than explain why the cost of delivering government services in WA is quite large and higher than the average. That has been more than offset by the fact that WA has considerable capacity to raise revenue on its own account. That is the mining royalty issue that has helped explain why WA is a fiscally stronger state and therefore, in the commission's assessment, has less need for GST than other states.

The second part of your question related to gambling. It is not the case that the commission ignores gambling. The commission, when it looks at the revenue available to states, seeks to be as comprehensive as possible and to look at all revenue sources available to the states. That includes gambling. Gambling is somewhat different from many other revenue bases that states have available, like payroll tax, land tax, conveyance duty et cetera. The thing about gambling is that the different states have quite different policies which affect gambling activity. In the case of WA, WA prohibits gaming machines outside its casino. That necessarily has an impact on the amount of gambling revenue that Western Australia is able to collect.

Senator GEORGIOU: Is that considered?

Mr Willcock : Other states will have different policy settings or different laws regulating the access that their communities have to gambling. That will then do different things to their capacity to raise gambling revenue. The commission feels that it is unable to reliably estimate the revenue that each state could raise if it applied average Australian policies in this area. That is because it cannot work out what an average Australian policy in this area is, because gambling is so policy contaminated—it is so affected by government policy decision making.

That being the case, the commission certainly finds out how much gambling revenue each state and territory raises. It then assesses that for the purposes of its assessment of revenue raising on an equal per capita basis. Equal per capita, in the commission's assessment world, does not shift GST. So the gambling revenue is recognised. The differences in gambling revenue collected by each state, from the commission's point of view, are very heavily reflect each individual government's policy choices about how to make gambling available.

It is difficult for the commission to see any alternative approach. One alternative, if you like to take the extreme polar opposite, would be for the commission to substitute its own view of how much gambling revenue a state could earn if it applied some other set of gambling policies. We are pretty sure that every state—and I underline every state, including WA—would vigorously oppose a move by the commission to do that, because that would be substituting the commission's view about what a state should do when it comes to raising revenue on gambling for what the parliaments of all those states have actually decided should be the regime applied to gambling.

Senator GEORGIOU: Is a fact that for the 2016-17 financial year, Western Australia would expect to receive from the GST pool $759 per head, while the Australian Capital Territory would expect to receive from the GST pool $2,896 per head? That is a massive discrepancy.

Senator GALLAGHER: The Commonwealth does not pay payroll tax.

Senator GEORGIOU: Good question. Do you agree with this question?

Mr Nichols : Those numbers sound about right.

Senator GEORGIOU: Is there an intent to distribute this GST more evenly, considering these figures that I have just announced?

CHAIR: I think that question has been asked and answered already by this panel. I think it is important that we move the conversation on. We seem to be repeating the same questions. Please feel free to answer, Mr Willcock.

Mr Willcock : If I can reframe the question in a way that I think I can try to be helpful about—I do not know how wise it is to be helpful, but let me give it one go. There are a number of people who look at the recommended relativity for WA and say—I think this goes back to one of your first questions—that somehow it is unfair because it looks so small, and ask what explains that. As I mentioned earlier, under the commission's assessments WA is assessed as being the fiscally strongest state. I briefly mentioned one of the really big factors that explains that, and that is the significant income boost that WA has received as a result of the mining royalty boom of the last almost 10 years.

We put out in our annual update reports a couple of measures for the size of the equalisation task. One of those measures shows that, since 2008-09, when WA became the fiscally strongest state, to the current year, the size of the equalisation task has increased from 14 per cent of the GST pool to 70 per cent. That is saying that, back in 2008-09, when WA first became the strongest state, only 14 per cent of the pool was required to equalise. Now it is 70 per cent. That is partly a measure of just how fiscally strong WA is relative to all other states and it is saying that fully 70 per cent of the GST pool is required to equalise the other seven states up to the fiscal capacity that WA has as a result of the mining royalty that it receives and the other sources of income available to it to provide the state services that states provide. A lot of the pool needs to go to the other seven states, as I said, to get the other seven states to the same fiscal capacity to provide state services as WA enjoys. The remaining 30 per cent of the pool is then distributed on an equal per-capita basis across all eight states. It is because such a large part of the pool needs to go to the seven other states to get them to WA's capacity in the first place and then WA simply gets, if you like, its equal per-capita share of the remaining 30 per cent that WA then has such a small relativity.

In previous years, before 2008, typically the fiscally strongest state was a large population state like New South Wales or Victoria. Where a large population state is the fiscally strongest, you do not need to use so much of the GST pool to raise the smaller population states up to the level of, say, New South Wales. The specific circumstances are that WA is a small population state that happens to be fiscally strong and, to ensure an equalisation whereby all other states are equalised to the level of WA, requires a large part of the pool. It is mathematically driven.

CHAIR: I am hugely conscious of time and I know that the minister has to leave. Senator Smith has been waiting very, very patiently to ask his questions, so I am going to—

Senator GALLAGHER: Is it about WA?

Senator SMITH: It is about the national interest, Senator Gallagher. I will make this as expeditious as possible. Mr Willcock, is it the intention of the Commonwealth Grants Commission to make a submission to the Productivity Commission review process?

Mr Willcock : At this stage, I do not think that the commission itself has had an opportunity to consider that. To be a bit clearer about what I am saying, we think of the commission in two different ways. There is the commission—namely, the chair and the two statutorily appointed members who are the commission. We are, if you like, staff of the commission; we are the secretariat to the commission. So, when it comes to the question, 'What will the commission do?' that largely reflects a decision of those three statutory members, and those three statutory members have not yet had an occasion to turn their minds to that question.

Senator SMITH: So they have not yet contemplated whether or not to make a submission to the Productivity Commission review on HFE?

Mr Willcock : I have it here in front of me. As you will know, the Productivity Commission review was announced by the government shortly before the budget and it has been even more recently that the Productivity Commission put out a—

Senator SMITH: Guidance note?

Mr Willcock : Guidance note—to the community generally about the inquiry they are conducting and the sorts of issues they would like to have—

Senator SMITH: So there is a chance that the Commonwealth Grants Commission will not defend the HFE by not making a submission to the Productivity Commission review?

Mr Willcock : There is a chance that the commission will take the view that the Productivity Commission is another independent statutory body charged by government to look at HFE. I need to highlight again that the commission—the Commonwealth Grants Commission, not the Productivity Commission—is itself currently engaged in a review of its methods; we typically call these five-year reviews. Late last year, the Treasurer gave us terms of reference to undertake a comprehensive review of all of our methods which go to how we seek to implement HFE, and to report to the Treasurer on 28 February 2020. So the Commonwealth Grants Commission and the commissioners that we work for have their own mandate from the Treasurer to undertake a comprehensive review of our methodology, in full consultation with each of the states and territories. That is the main task that the commission is focused on.

Senator SMITH: That is important. Do you see the final report of the Productivity Commission review—which will be available on 30 January next year—informing the review that the Commonwealth Grants Commission has been asked to undertake and which will report in 2020?

Mr Willcock : Yes. As part of this 2020 review that the Commonwealth Grants Commission is conducting, we as staff of the commission issued a discussion paper on 12 May, or around then. In doing that, that discussion paper—and indeed our website—makes it clear that the commission is aware of the fact that the Productivity Commission is conducting a review of the economic effects of HFE and so, I suppose, wanted to provide some sort of public signal that the Commonwealth Grants Commission is undertaking its review with full awareness of the fact that the Productivity Commission is doing the review of HFE. They are concurrent processes. They have slightly different focuses, although there may be some overlap in particular areas. The Commonwealth Grants Commission has said that it believes that the CGC review will complement and assist the PCs work. In looking at the work program for our review, our commission has specifically factored in an opportunity for the states and the territories to come back to the commission to reflect on any outcomes of the PC process, post- the January 2018 reporting date for the PC.

Senator SMITH: In your earlier evidence, you correctly noted that demographics and area and remoteness all affect the calculation. Does economic circumstance come into the commission's consideration? And if so, how?

Mr Willcock : What the commission seeks to equalise—in implementing horizontal fiscal equalisation—is the fiscal capacity of states to provide services. So the commission is equalising the capacity of states to provide services without saying how states should provide services or where they should direct the money. As you no doubt know, Senator, the GST is so-called untied revenue: the states can do with that revenue what they will. The economic circumstances can affect state data, so general economic circumstances will affect, for example, property markets, which will then affect the capacity of a particular state to raise money through land-transfer taxes and things like that. But HFE is not about equalising state economies or state budget positions or anything else out there that relates to the wider economy. It is to do with equalising the fiscal capacities of states to provide the services.

Senator SMITH: It sounds to me like this issue around the particular economic circumstances is realised by how the economic circumstances influence the data that comes to the Commonwealth Grants Commission.

Mr Willcock : Indeed. And, Treasurer—I am sorry; Senator—perhaps I am being prophetic!

Senator SMITH: I do not think there will be many people endorsing your consideration of me, Mr Willcock!

Mr Willcock : I was going to make the point also—which I am sure you would be aware of, Senator—that when the commission is making its revenue assessments and expense assessments, it is, of course, relying on lagged data. We do those assessments off the basis of a so-called assessment period of three years. A complaint that some would make about the commission's methodology is that we are not equalising in the so-called application year—that is, in the year in which the relevant GST is actually being provided to a state; we are actually equalising the fiscal capacities of states over a three-year period that is in the past. In the very small world of people who are interested in horizontal fiscal equalisation in Australia—

Senator SMITH: That world has got much bigger now.

Mr Willcock : But it is still a pretty small world.

Senator SMITH: The informed world is still very small!

Mr Willcock : This issue is called the contemporaneity issue—what, if anything, could or should the commission do to ensure that its assessment of relative state fiscal capacity is as up-to-date as possible, to ensure that the amount of GST that is then provided to a state better reflects the actual fiscal capacity that they have at the time that they receive that GST? The discussion paper that I referred to squarely put that issue out there and, indeed, I think provided some alternative ways. None of this is clear-cut. It is not as if there is an obvious way of doing it—

Senator SMITH: Do you agree that it is a black box? Or part-black box?

Mr Willcock : Let me put it this way, I am not sure what people would mean when they say it is a black box. I certainly want to put the point that the commission recognises that there are different arguments and there are trade-offs in a whole lot of method choices that the commission has to make decisions on—and that perhaps stakeholders would wish the commission to make some different judgements, or to come to a different set of trade-offs. So, in this case of so-called contemporaneity, the commission has used this approach—the three years of data rather than just one year's data—to smooth any sorts of lumps and bumps and volatility and outlier bits of data. And it uses three-year data because that is more authoritative, it is ABS-verified, GFS data, rather than, say, forecasts from individual states which may or may not turn out to be less than robust, and it also reflects previous reviews, which have been fully consultative and have had full buy-in from all states.

Senator SMITH: Mr Willcock, on notice, can you provide me with a list of those payments that have been quarantined from the GST distribution arrangements for the last four years? And what was the value of the payments that have been quarantined? In addition to that, can you also advise whether, technically, it is available to the Commonwealth Treasurer to change the relativity recommendation that is made by the Commonwealth Grants Commission to the federal Treasurer?

Mr Willcock : We can certainly provide you with the list of quarantined payments, because payments quarantined as a result of directions to us are in terms of reference from the Treasurer, so we simply need to look at our terms of reference: we can get that. The role of the commission is to make a recommendation to the Treasurer on how to share out the GST pool a way that achieves horizontal fiscal equalisation. The commission's job finishes with the making of that recommendation. What then happens to the commission's recommendation is, frankly, up to the Treasurer. And what, if any, constraints there would be for the Treasurer in the circumstances that you postulate—

Senator SMITH: Yes, but there is no legislative restraint, is there?

Mr Willcock : Not that I am aware of.

Senator SMITH: Finally, in your earlier evidence you talked about stresses in the system. 'Stresses' was a word that you used. At a high level, what are those stresses?

Mr Willcock : I think I used that word in connection with the fact that—

Senator SMITH: It was in response to Senator Polley's question, yes.

Mr Willcock : It was in response to Senator Polley's question where I was making the point that it is, I think, generally recognised that WA does not like the GST share that the commission has most recently been recommending.

Senator SMITH: I thought there might have been some economic stresses in the system, but I understand that point. That is it. Thank you very much.

CHAIR: Senator McGrath, did you have a statement to make?

Senator McGrath: No, I think it is okay, looking at the interests of time.

CHAIR: If there are no further questions for the Commonwealth Grants Commission, gentlemen, you are free to go. Thank you very much from attending. The committee has conferred quietly behind the scenes and decided to push on through the break so that we can complete the ABS. However, Minister McGrath has to leave us, I understand.

Senator McGrath: I will wait until I am tagged out.

CHAIR: That is terrific. Thank you very much for that. I now call the Australian Bureau of Statistics to the table.