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Thursday, 27 November 1941

Senator KEANE (Victoria) (Minister for Trade and Customs) . - 1 move- -

That the bill be now read a second time.

The purpose of the bill is to implement the recommendations contained in the eighth report of the Commonwealth Grants Commission, which was tabled in the Senate on the 17th September last, and to provide for the payment during the current financial year of special grants totalling £2,300,000 to the States of South Australia, Western Australia and Tasmania. As honorable senators are aware, the commission was set up in 1933 to inquire into and report on appli cations from States for financial assistance under section 96 of the Constitution. The recommendations of the commission for the last seven years have been approved by the Commonwealth Government and adopted by Parliament.

The grants which the commission has recommended for the year 1941-42 compared with those paid during 1940-41 are as follows : -

In assessing the grants the commission has followed the principle it laid down in its third report, viz., the grant is determined by " the amount of help found necessary to make it possible for a claimant State, by reasonable effort, to function at a standard not appreciably below that of other States ". It should be pointed out, however, that, on this basis, the commission's assessment for South Australia this year is £1,400,000, or £250,000 more than the commission recommends should actually be paid. This variation of the assessment is due to special factors which I shall explain.

It is important to remember that the grants recommended are based largely on the budgetary results of the States for 1939-40, the latest year for which complete information was available to the commission when it conducted its investigations. The commission also takes into consideration special conditions obtaining in years following that in respect of which the grant is assessed. Thus, in 1937-38 the grant assessed for Western Australia on the budgetary results of 1935-36 was £439,000, but a special repayable advance of £136,000 was added in order to assist the State over a difficult, period caused by severe drought. That advance of £136,000 was recovered from Western Australia in 1939-40. when the assessment was £731,000 and the amount actually paid was £595,000.

This year the commission has recommended that this procedure be reversed in the case of South Australia. The grant assessed for that State is £1,400,000, but for certain reasons which I shall give later the commission considered that this amount would be more than adequate to meet the needs of South Australia in 1941-42. Consequently, the commission has recommended that the grant to be paid this year should be £1,150,000, and that £250,000 should be withheld to be paid to South Australia in the succeeding year, when it maj' be appropriate to the needs of the State to pay an amount greater than the assessment. The reason for this apparent reduction in the grant to South Australia is explained in the commission's eighth report as follows: -

Tlie grant was assessed on the basis of the relative financial position of the States in 1939- 40. and it will, if approved, be paid in 1941-42. There is clear evidence of improving conditions in South Australia; and, with the growing economic stimulus created by war industries and war expenditure, it is likely that in the near future the finances of the State will further improve. Thus the grant indicated by our calculations may be in excess of actual needs in 1941-42 . . . We realize that it is unwise to forecast in these uncertain times, but it is probable that the improved situation in South Australia in 1940- 41 will lead, under our method of assessment, to a reduced grant in 1942-43. We have considered various methods by which the South Australian grant of £1,400.000 might fairly be adjusted to meet the special circumstances of the State. One method considered was that any surplus in 1941-42 arising from the increased grant should be supplied to the reduction of past revenue deficits. Another course is to defer payment of a part of the grant. On the whole we believe this latter method would best serve the interests of South Australia, and wo accordingly recommend that payment of £250,000 be deferred by the Commonwealth until the succeeding year, thus reducing the payment for 1941-42 to £1,150,000.

For the information of honorable senators, I submit the following statement showing the trend of grants in recent years : -

I shall now briefly explain the main reasons for the difference between the grants for 1940-41 and those recommended for 1941-42. lt is desirable that these differences should be clearly understood.

The grant assessed in respect of South Australia was £1,400,000, but, as I have explained, the commission recommended that £250,000 of this amount should be withheld. The amount assessed is £400,000 greater than the grant paid in 1940-41. This is due to a combination of factors. There was a considerable decline in the relative taxable capacity of the State because of drought and low prices for wool and wheat in the income year 193S-39. At the same time, collections of State taxes increased in 1939- 40 as the result, partly of the imposition of higher rates of income tax, and partly of an abnormally large increase of estate duty revenue which fluctuates considerably from year to year. The severity of taxation for 1939-40 was, therefore, relatively higher for South Australia, and, consequently, the adjustment on account of relative severity of taxation was £518,000 more favorable than for the previous year.

The grant assessed in respect of Western Australia was £630,000, which is £20,000 less than that paid in 1940-41. This reduction was due to a combination of factors. There was an increase of £117,000 in the adjustment account of the relative deficit of the State for 1939-40, but this was almost exactly offset by a decrease of £119,000 in the adjustment for severity of taxation due largely to an improvement in the relative taxable capacity of Western Australia. It should be pointed out, however, that despite this decrease, the adjustment in respect of severity of State taxation in Western Australia was £150,000 in favour of that State. A new correction appears this year under the head " Road Debt Charges ", and it is this correction which is responsible for the reduction of the grant recommended. The commission believes that this adjustment is reasonable, and explains that it has been made because of the failure of Western Australia to bring its road finances reasonably into line with those of other States by making provision for meeting at least. some portion of the annual interest and sinking fund payments on road debt from the proceeds of motor taxation. In this connexion it is appropriate to point out that in 1939-40 and 1940-41 the Government of Western Australia introduced legislation designed to bring its road finances more into line with those of other States, but on each occasion it was rejected by the Legislative Council. This action resulted in considerable loss to the State budget. The commission considers that, in fairness to other States which use a large proportion of motor taxation to pay annual charges on road debt, this factor should not be ignored in arriving at a final assessment.

The grant recommended to Tasmania is £120,000 higher than that for last year. This increase is due mainly to the fact that the Tasmanian deficit in 1939-40, the year on which, the calculations are based, was 6s. lid. per head higher than in 1938-39, whilst the average deficit per head in the non-claimant, or " standard ", States fell by 7s. 2d. Because of this absolute and relative increase in Tasmania's deficit the grant was favorably affected to the extent of £169,000. An adjustment was also made in the case of Tasmania because the road finances of the State were out of line with other States. The commission's eighth report indicates that the special problems associated with roads in Tasmania were taken into consideration in making the correction.

It may seem anomalous to honorable senators that the special grant for South Australia should be increased in a year when the financial position of that State is showing considerable improvement. It must be remembered, however, that the grants recommended for 1941-42 were based, not on the relative financial position of the States in 1940-41, but on the relative financial position of the States in 1939-40, the latest year for which complete information was available to the commission when it conducted its investigations. The commission, in paragraphs 67 to 70 and paragraph 192 of its eighth report, emphasizes that there is no escape from this procedure if grants are to be assessed on actual budgetary results. The commission believes that any attempt to assess grants on budget estimates would lead to grave error and dissatisfaction. The commission's experience extending over eight years has shown that estimated figures are very unreliable. The commission also expresses the view that, so long as its methods are consistently applied from year to year, any apparent injustice in any particular year will be adjusted within a short period. Any possible error is not cumulative. The eighth report points out also that the commission does not adhere rigidly to the grants indicated by its basic calculations. In special circumstances, such «s I have already explained, it adjusts the calculated figures so that the grants finally recommended may be in reasonable harmony with current financial needs.

I understand that the improved position of South Australia in 1940-41, arising from war expenditure and other causes, is now being investigated by the commission and will be taken into account fully in the grant recommended for 1942-43.

The commission has commented as follows on the fact that the total of the grants recommended for 1941-42 is above that paid in recent years : -

Owing to the war and to the very large and increasing obligations of the Commonwealth, it may be suggested that special grants should not bc increased in a time of national emergency. The commission fully appreciates this point of view; but, at the same time, it must bear in mind the function it has to perform in preserving a reasonable financial balance among the States. It must always be remembered that the special grant is the basic grant designed to adjust the financial inferiority of the claimant States and to enable these States effectively to discharge their functions in the federation. If wo recommended grants below the amounts justified by a careful investigation of the relative financial position of the States, it would be tantamount, as we stated in our seventh report, to placing a discriminatory burden on the claimant States in a time of difficulty. If the pressure of war finance requires some reduction in the amount of assistance to the States it should, we believe, bc applied equitably to all States. As the commission deals only with applications from the claimant States for special grants, this is not a matter on which it has power to make any recommendation.

There is considerable evidence that the work of the commission is thorough and impartial, and that all matters affecting the " financial needs " of the claimant States have been investigated. The Government, therefore, believes that the amounts recommended by the commission will meet adequately the needs of the claimant States. Consequently, as in past years, the Government has decided to accept the recommendations of the commission. I commend the bill to honorable senators.

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