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ECONOMICS LEGISLATION COMMITTEE
21/10/2010
TREASURY PORTFOLIO
Commonwealth Grants Commission

CHAIR —We welcome witnesses from the Commonwealth Grants Commission. Do you have any opening statement that you would like to make?

Mr Spasojevic —We have no opening statement.

Senator WILLIAMS —I am new to this committee, so I have some basic questions; excuse my ignorance, please. When was the Commonwealth Grants Commission formed?

Mr Spasojevic —In 1933.

Senator WILLIAMS —I thought it was after the Second World War, but it was before the Second World War. Of course, in history you would see that the more densely populated states such as Victoria and New South Wales had the wholesale sales tax—it might have been to varying degrees back in those days. In those days, of course, those more densely populated states would pay more wholesale sales tax to the government, and hence the distribution way back to 1933. What I am saying is that you would take from the bigger tax-earning states and distribute money according to whatever your program or formula was.

Mr Spasojevic —Not quite. When the commission was formed, it only took claims from claimant states to get revenue from the Commonwealth budget. So, in a sense, the revenue came from the Commonwealth budget only for claimant states. That situation continued until 1980, and after 1980 there was a more general distribution from a fixed pool of money.

Senator WILLIAMS —Which would include general revenue plus indirect taxes—that general pool of revenue?

Mr Spasojevic —Not in 1980, no. It was just a pool of money coming out of the Commonwealth budget. It was not tied to any particular source of revenue.

Senator WILLIAMS —So what is horizontal fiscal equalisation?

Mr Spasojevic —Horizontal fiscal equalisation is a process whereby the Commonwealth distributes money amongst the states so that they all end up with the same fiscal capacity, so that if they all made the same effort to raise revenue from their own sources, they would be able to provide a comparable level of services to their residents.

Senator WILLIAMS —What is each state’s current return of GST receipts in percentage terms?

Mr Spasojevic —I cannot answer that question because I do not know how much GST is collected in each state.

Senator WILLIAMS —Do you know it as a percentage?

Mr Spasojevic —No.

Senator WILLIAMS —Is there a limit to how low the percentage of an individual state’s GST receipts can fall?

Mr Spasojevic —No.

Senator WILLIAMS —No limit?

Mr Spasojevic —No limit.

Senator WILLIAMS —Has consideration ever been given to having floor or a ceiling on the percentage return to each state of its GST receipts?

Mr Spasojevic —Not that I am aware of.

Senator WILLIAMS —What effect does horizontal fiscal equalisation have on states’ incentive to grow their economies and revenues organically? That is, horizontal fiscal equalisation acts as a tax on success.

Senator Wong —I am waiting for Senator Bushby to defend the interests of Tasmania.

Senator BUSHBY —There is a reason why a senator for New South Wales isn’t here!

Senator Wong —You are, I am noting, conspicuously silent.

Senator WILLIAMS —I am sorry, Mr Secretary—we have some rude interjections, haven’t we!

Mr Spasojevic —All states retain an incentive to grow their own tax bases because they are always better off should they do so, even though part of the gain may be redistributed to other states.

Senator WILLIAMS —How do the CGC’s terms of reference compare with how tax revenues are allocated in other federal countries—for example, Canada or the United States?

Mr Spasojevic —I think the general view amongst the practitioners of the somewhat arcane art that we practise at the CGC would be, ‘We have the most sophisticated and comprehensive process of any federation.’

Senator WILLIAMS —Being a senator for New South Wales, I have heard the complaints, for many years, of how New South Wales collects far more GST than others. I think the figure, going back some time—I forget which premier it was; it might have been Morris Iemma—was that $1.3 billion or $1.5 billion or some figure like that was basically collected in New South Wales and distributed to other states such as Queensland. What are those figures these days? Can you give me, not dollar for dollar, a general idea of the states that give money away to smaller states. Obviously, you would have Victoria, New South Wales being in surplus and having to contribute some money. Would that be correct?

Mr Spasojevic —It is not so much a question of surplus, because we are talking about the distribution of the GST pool.

Senator WILLIAMS —I worded that wrongly. When it comes to the federal government collecting GST in those states and handing it back to the states, obviously there is a lot more GST collected in New South Wales than in South Australia or Tasmania?

Mr Spasojevic —I would believe that is the case, though I have no figures on how much GST is collected.

Senator WILLIAMS —You do not have figures on that? It is more a question for Treasury, obviously.

Mr Spasojevic —To my knowledge, there is no breakdown of the collection of GST by state. Woolworths hands in one GST return for its national operations; it does not split it up by which state it was collected in. Nor can we figure out where the exports come from by state, so it is impossible to do the calculations.

Senator WILLIAMS —If you went on, basically, the GDP of each state with turnover of goods and services, it would be an indication, even though some are exempted of course—various products, fresh food et cetera.

Mr Spasojevic —I believe that is how state treasuries do those estimates, but I am not aware that there is any definitive calculation.

Senator WILLIAMS —So, to put it in simple terms, you are handed a bundle of money from the federal government that you just redistribute to the states?

Mr Spasojevic —What we are asked to do is to give the relative share of the GST bundle which will be collected in a future year and to say how that should be distributed amongst the states. So we actually never get the money.

Senator WILLIAMS —And that is on a percentage basis of the divvying up of that the GST amount?

Mr Spasojevic —Basically, it is a sharing.

Senator WILLIAMS —And, in that share, for example, you may give something like 12 per cent to Western Australian and 14 per cent to Victoria?

Mr Spasojevic —Something like that.

Senator WILLIAMS —For interest’s sake, do you know those percentages? Do you know the percentages of that divvying up for each state?

Mr Spasojevic —I do not have those numbers, because what happens is that, after we make our recommendations in February, they are taken by the Commonwealth and more recent population numbers are then imputed into the numbers we give them, and that determines the final share. That is contained in Budget Paper No. 3, which I do not have with me, unfortunately.

Senator WILLIAMS —In relation to New South Wales and Queensland, would there be more levelling of that ratio over the years as the population in Queensland grows as 500 people a week move from New South Wales to Queensland and hence extra federal seats are established in Queensland and taken from New South Wales? You would see a similar sort of balancing in that dividend percentage, would you?

Mr Spasojevic —That is correct. Over time, what we see is that the proportions going to New South Wales and Queensland have moved in the direction of their population shares.

Senator WILLIAMS —That is about it from me.

Senator BUSHBY —In view of the minister’s suggestion, I thought I had better ask a few questions just to—

Senator Wong —I really will not hold it against you, Senator—I promise.

Senator BUSHBY —I think it is important to defend Tasmania and other states such as South Australia which are, I believe, probably on the same side of the ledger as Tasmania.

Senator WILLIAMS —It is a trap for you, David.

Senator BUSHBY —What are the principles underpinning the process? When you are asked to have a look at how to divvy up the GST cake, so to speak, what sorts of considerations do you look at in determining how that share might end up looking, with the possible consequence that one state may end up with a greater share per capita than another state?

Mr Spasojevic —The process that the commission goes through is to look comprehensively at the structure of state budgets. So, in terms of their expenditure, we would ask by each major expenditure head—for example, schools and education—how much more or less than the average per capita a state would need to spend to be able to provide the average service. We might take into consideration the distribution of schoolchildren and whether one state has higher or lower intrinsic costs that it has to meet. So we go through all the expenditure items. We then look at all the revenue items that states collect and ask how much each state would have collected had it followed the average tax policy. We look at the distribution of other Commonwealth payments. We look at how much investment a state would need to undertake to give it the average capital stock on a year-to-year basis and we do the same thing for their financial assets. Then we do an adding-up, so to speak, so that we put them all on the same position at the end of the distribution of the GST.

Senator BUSHBY —And that is ultimately the end aim of the horizontal fiscal equalisation.

Mr Spasojevic —That is the end aim—correct.

Senator BUSHBY —It is to put them all on the same footing—

Mr Spasojevic —Correct.

Senator BUSHBY —and, in accordance with a fairly long-held position of government, that is the intention of the process.

Mr Spasojevic —That is correct, yes.

Senator BUSHBY —And that is because there is a view that people in all states should be treated equally in that sense or should have access to equivalent services.

Mr Spasojevic —That is an imputation of the policy objectives. It is a common policy of the Commonwealth and the states. It was recorded in the Intergovernmental Agreement on Federal Financial Relations, to which all states and the Commonwealth are signatories.

Senator BUSHBY —When was that signed?

Mr Spasojevic —It was signed in 1999, just before the GST came in, because it was constructed consequent to that. It was re-signed in 2009.

Senator BUSHBY —But it reflected earlier agreements as well, only in respect not of GST but of other transfers—in terms of the ultimate outcome?

Mr Spasojevic —You are testing my memory, but I believe that in the States (Personal Income Tax Sharing) Act 1976 it was embedded in legislation, and it had been agreed at the 1976 premiers conference.

Senator BUSHBY —So that was the first time that horizontal fiscal equalisation was applied in this manner?

Mr Spasojevic —That was the first time it was applied generally to all the states. Before that, we had a claimant state situation where states who thought they had a particular fiscal problem would claim money from the Commonwealth and the commission would raise them to a level comparable to the other states. But it was a raising of the weakest rather than a levelling of all states.

Senator BUSHBY —But, in a sense, reflecting the same underlying philosophy.

Mr Spasojevic —Probably the philosophy was developed in the thirties and then embedded in the legislation after the event.

Senator BUSHBY —Thank you.

CHAIR —I think that is all we have for you. Thank you for coming in this evening.

 [9.54 pm]