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BUDGET 2004-2005 : Budget Paper No. 3 : Executive Summary: Commonwealth-State Financial Relations: Fiscal Developments in the States



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1

EXECUTIVE SUMMARY

• From 2004-05 onwards, every State and Territory (the States) will receive more

revenue from the GST than they would have under the previous system of Financial Assistance Grants and the state taxes that were abolished by The New Tax System. In 2004-05, the States will be better off by a total of $1.6 billion due to the Australian Government’s tax reforms. From 2004-05 onwards, no State will require Budget Balancing Assistance.

• After only four years since the introduction of the GST, tax reform has delivered to

the States a secure, growing and broad-based revenue source that has more than replaced various narrow and inefficient state taxes. The States now have the ability to deliver better services on a sustainable long term basis.

• In 2004-05, the States will receive GST revenue totalling an estimated

$34.5 billion (Chart 1). This amount will be distributed among the States in accordance with recommendations of the Commonwealth Grants Commission set out in its Report on State Revenue Sharing Relativities 2004 Review of 25 February 2004.

• The Australian Government and the States have agreed to abolish bank account

debits tax by 1 July 2005 and to review the need to retain certain state business stamp duties. As GST revenue grows, it can fund these tax reductions.

• In addition, the Australian Government will provide the States with Specific

Purpose Payments (SPPs) and National Competition Policy Payments totalling an estimated $25.4 billion in 2004-05. Specific Purpose Payments comprise the overwhelming majority of these funds (Chart 2).

• Fiscal developments in the States indicate most States are expected to record small

general government fiscal deficits in 2004-05, partly reflecting the expected downturn in revenue from property-related taxes, and higher expenses. By 2006-07, all States forecast an increase in their fiscal balances, with most expected to achieve small surpluses. Most States are also set to continue the trend of reducing non-financial public sector net debt. An increasing number of States are forecasting a net financial asset position in their general government sector by 2006-07.

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Chart 1: GST revenue provision to the States in 2004-05 (estimated)

SA

$3,212.7 million

TAS

$1,407.8 million ACT $663.8 million

NT

$1,678.7 million

NSW

$9,648.3 million

VIC

$7,151.4 million

QLD

$7,168.5 million

WA

$3,528.9 million

Chart 2: Australian Government payments to the state/local sector in 2004-05 (estimated)

SPPs through the States $6,362.9 million

SPPs direct to local government $304.7 million

National

Competition Policy Payments $777.7 million

Compensation for GST Deferral $330.0 million

SPPs to the States $17,924.8 million

Note: Specific Purpose Payments through the States are payments to state governments to be passed on to local governments and others.

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COMMONWEALTH-STATE FINANCIAL RELATIONS

The States will receive revenue and payments totalling an estimated $57.0 billion in 2003-04 (Table 1) and $60.2 billion in 2004-05 (Table 2).

All GST revenue is paid to the States under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations. The GST revenue pool is distributed to the States on the basis of recommendations by the Commonwealth Grants Commission (CGC). The CGC’s recommendations are based on the principles of Horizontal Fiscal Equalisation.

From 2004-05 onwards, all States will fully benefit from tax reform, with GST revenues for each State and Territory in excess of what they would have received from Australian Government Financial Assistance Grants and their own inefficient taxes abolished under tax reform.

Since tax reform commenced on 1 July 2000, the Australian Government has been paying Budget Balancing Assistance to the States to cover any difference between GST revenue and a State’s Guaranteed Minimum Amount. This has ensured that no State is worse off after the changes made to Commonwealth-State financial relations as part of the Australian Government’s New Tax System. From 2004-05 onwards, Budget Balancing Assistance will no longer be required as each State and Territory will receive an amount in excess of its entitlement had the old system continued.

The Australian Government also provides the States with National Competition Policy Payments to implement National Competition Policy and related reforms, as well as Specific Purpose Payments, including Financial Assistance Grants to local government, to contribute towards the costs of state and local government responsibilities.

Other features of Commonwealth-State financial relations include the First Home Owners Scheme and mirror tax arrangements.

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Table 1: GST revenue provision and total Australian Government payments to the state/local sector in 2003-04 (estimated)

NSW VIC QLD WA SA TAS ACT NT Total

$m $m $m $m $m $m $m $m $m

(1) Provision of GST revenue to the States(a) 9,690.5 6,973.6 6,574.9 3,159.8 3,154.3 1,399.0 660.7 1,684.2 33,297.0

(2) Budget Balancing Assistance 46.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 46.0

(3) National Competition Policy Payments 203.5 178.7 87.9 33.6 40.7 17.2 11.0 5.9 578.5

(4) Total Specific Purpose Payments (4.1)+(4.2)+(4.3) 7,731.6 5,401.5 4,327.7 2,540.5 1,803.5 569.0 400.6 342.4 23,116.9

(4.1) Specific Purpose Payments to the States 5,658.0 3,810.0 3,145.2 1,882.3 1,327.0 417.2 274.6 273.3 16,787.6

(4.2) Specific Purpose Payments through the States 1,961.0 1,510.1 1,112.6 610.1 450.7 138.3 121.0 63.4 5,967.3

(4.3) Specific Purpose Payments direct to local government 112.6 81.5 69.8 48.1 25.8 13.4 5.0 5.7 361.9

(5)

7,981.2 5,580.2 4,415.5 2,574.1 1,844.2 586.1 411.6 348.4 23,741.4

(6) GST revenue and total Commonwealth payments (1)+(5) 17,671.7 12,553.8 10,990.5 5,733.8 4,998.6 1,985.1 1,072.3 2,032.5 57,038.4

Total Commonwealth payments to the state/local sector (2)+(3)+(4)

(a) The GST estimate has been adjusted by $57 million to account for the final 2002-03 outcome, reflecting cash collections in 2002-03 exceeding the Commissioner’s determination. (Further details are provided on p17.)

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Table 2: GST revenue provision and total Australian Government payments to the state/local sector in 2004-05 (estimated)

NSW VIC QLD WA SA TAS ACT NT Total

$m $m $m $m $m $m $m $m $m

(1) Provision of GST revenue to the States 9,648.3 7,151.4 7,168.5 3,528.9 3,212.7 1,407.8 663.8 1,678.7 34,460.0

(2) Budget Balancing Assistance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

(3) Compensation for GST Deferral 95.9 70.6 67.6 33.5 30.2 12.3 6.0 13.9 330.0

(4) National Competition Policy Payments 259.8 191.8 151.4 76.6 59.2 18.8 12.4 7.7 777.7

(5) Total Specific Purpose Payments (5.1)+(5.2)+(5.3)(a) 7,684.1 5,473.7 4,325.0 2,640.1 1,845.9 560.5 404.7 335.1 24,592.4 (5.1) Specific Purpose Payments to the States(a) 5,509.0 3,792.5 3,071.5 1,956.6 1,333.4 399.0 272.5 267.0 17,924.8

(5.2) Specific Purpose Payments through the States 2,086.3 1,609.7 1,192.3 642.8 490.8 149.6 128.0 63.2 6,362.9

(5.3) Specific Purpose Payments direct to local government 88.8 71.5 61.2 40.7 21.7 11.8 4.2 4.9 304.7

(6)

8,039.8 5,736.1 4,543.9 2,750.2 1,935.3 591.7 423.1 356.6 25,700.1

(7) GST revenue and total Commonwealth payments (1)+(6)(a) 17,688.1 12,887.5 11,712.4 6,279.1 5,148.0 1,999.4 1,086.9 2,035.3 60,160.1

Total Commonwealth payments to the state/local sector (2)+(3)+(4)+(5)

(a) Individual state and territory AusLink allocations are not yet available and accordingly are not included in individual state and territory estimated amounts for 2004-05. These allocations will be announced as part of the AusLink White Paper in June 2004. The aggregate AusLink amount of $1,323.4 million for 2004-05 is included in the aggregate state and territory total.

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GST REVENUE PROVISION TO THE STATES

All GST revenue collected is received by the States. Consequently, they have a secure, growing and broad-based revenue source. States can spend the GST revenue according to their own budgetary priorities. The States’ GST revenue has grown significantly since its introduction in 2000-01 (Table 3).

Table 3: GST revenue provision to the States (cash), 2000-01 to 2004-05 (estimated) Increase from 2000-01

2000-01 to 2004-05

$m $m $m $m $m $m % %

NSW 7,257.6 8,132.0 9,080.2 9,690.5 9,648.3 2,390.7 32.9 7.5

VIC 5,099.3 5,593.1 6,365.1 6,973.6 7,151.4 2,052.1 40.2 8.9

QLD 4,658.2 5,018.6 5,887.6 6,574.9 7,168.5 2,510.3 53.9 11.4

WA 2,374.6 2,518.1 2,910.2 3,159.8 3,528.9 1,154.3 48.6 10.5

SA 2,278.9 2,476.6 2,859.1 3,154.3 3,212.7 933.8 41.0 9.1

TAS 988.1 1,059.8 1,246.7 1,399.0 1,407.8 419.6 42.5 9.4

ACT 472.6 543.9 615.7 660.7 663.8 191.2 40.5 9.0

NT 1,225.6 1,289.8 1,514.5 1,684.2 1,678.7 453.1 37.0 8.4

Total 24,354.9 26,632.0 30,479.1 33,297.0 34,460.0 10,105.1 41.5 9.1

Increase

Average annual increase 2001-02 2002-03 2003-04 2004-05

GST revenue

Estimates of GST revenue in accrual terms for the years 2003-04 to 2006-07 are shown in Table 4. These estimates have been revised since the 2003-04 Budget and the Mid-Year Economic and Fiscal Outlook 2003-04 (MYEFO) to account for policy decisions and parameter variations.

Table 4: Reconciliation of GST revenue (accrual), 2003-04 to 2006-07 (estimated) 2003-04 2004-05 2005-06 2006-07

$m $m $m $m

GST revenue at 2003-04 Budget 32,050 33,815 35,680 37,690

Changes from 2003-04 Budget to MYEFO Effect of policy decisions -26 -20 -20 -20

Effect of parameter and other variations 1,026 835 940 1,040

Total variations 1,000 815 920 1,020

GST revenue at 2003-04 MYEFO 33,050 34,630 36,600 38,710

Changes from MYEFO to 2004-05 Budget Effect of policy decisions 0 -332 -18 -19

Effect of parameter and other variations 1,125 892 788 839

Total variations 1,125 560 770 820

GST Revenue at 2004-05 Budget 34,175 35,190 37,370 39,530

Estimated GST revenue in 2003-04 has been revised upwards by $1.1 billion in accrual terms, reflecting upward revisions in the consumption and dwellings forecasts.

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The GST revenue estimate for 2004-05 has been revised up since MYEFO by $560 million, reflecting the flow-on effect of the stronger expected outlook for GST revenue in 2003-04. Some unwinding of this strength is expected in the forward years. Estimates of GST receipts in cash terms are shown in Table 5.

Table 5: GST receipts (cash), 2004-05 to 2007-08 (estimated) 2004-05 2005-06 2006-07 2007-08

$m $m $m $m

GST receipts 34,460.0 36,610.0 38,720.0 40,850.0

GST revenue measures

Policy decisions affecting GST revenue estimates include: the decision to allow taxpayers (mainly small businesses) that are voluntarily registered for GST to pay and lodge annually; changes to Australia’s duty-free concessions; changing the treatment of barter trade exchange schemes; and changing the treatment of first aid and life saving courses. The revenue effect of these GST measures is estimated for 2004-05 to 2007-08 (Table 6). Detailed information on each measure is in Appendix A.

The measure to allow annual payment and lodgement of GST is an important means of improving the operation of The New Tax System through reducing compliance costs for up to 740,000 small businesses and up to 30,000 non-profit organisations. Given the reduction in GST revenue in 2004-05 associated with this measure (because GST remitted by the eligible taxpayers will be deferred until 2005-06), the Australian Government will offer to fully compensate the States should each of them agree to the policy. This compensation will mean that the full financial impact of the measure will be taken by the Australian Government and none of the impact will affect the States.

Table 6: GST revenue measures since the 2003-04 Budget (estimated) 2004-05 2005-06 2006-07 2007-08 $m $m $m $m

Barter trade exchange schemes -2.0 -2.0 -2.0 -2.0

Changes to Australia's duty free concessions -17.0 -17.0 -17.0 -17.0

Compulsory third party insurance transactions * * * *

Extension of the GST-free car concessions for injured veterans .. .. .. ..

GST-free ibuprofen - - - -

Income tax consolidation - interaction with the GST - - - -

Long-term non-reviewable contracts - * * *

Payments out of the National Guarantee Fund - - - -

Small business - annual payment and lodgement -330.0 -16.4 -17.2 -18.2

Small business - annual private apportionment * * * *

Treatment of first aid and life saving courses -3.0 -3.0 -3.0 -3.0

Total impact of GST revenue measures -352.0 -38.4 -39.2 -40.2

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GST revenue provision

The Australian Government will distribute 2004-05 GST revenue among the States in accordance with the recommendations of the Commonwealth Grants Commission (CGC).

The CGC recommends relativities to calculate each State’s share of GST by applying the principles of Horizontal Fiscal Equalisation. Broadly, the CGC recommends relativities so that if each State made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each State could provide services at the same standard.

The CGC takes into account differences in States’ capacities to raise revenues and differences in the costs States incur in providing an average standard of government services. The CGC’s recommended relativities reflect these differences. GST relativities are shown for 2003-04 and 2004-05 (Table 7).

The CGC also recommends Financial Assistance Grants (FAGs) forgone relativities (Table 7), which are used for the calculation of each State’s Guaranteed Minimum Amount (Tables 11 and 12).

Table 7: GST relativities and Financial Assistance Grants forgone relativities, 2003-04 and 2004-05 NSW VIC QLD WA SA TAS ACT NT

GST relativities 2003-04 0.89117 0.87010 1.01902 0.96946 1.21215 1.59948 1.14979 4.38638

2004-05 0.86750 0.86534 1.05504 1.03054 1.20407 1.55939 1.12930 4.26538

FAGs relativities 2003-04 0.84317 0.84030 1.04870 0.92093 1.30919 1.79057 1.19727 5.34163

2004-05 0.80363 0.83480 1.10104 1.00781 1.30402 1.74908 1.16529 5.22707

Source: CGC Report on State Revenue Sharing Relativities 2004 Review.

The GST relativities are applied to state populations to determine a weighted population for each State. The Australian Government uses the weighted populations to distribute the GST revenue pool. Each State receives a share of the GST revenue pool equal to its weighted population share of combined GST revenue and unquarantined Health Care Grants, less its unquarantined Health Care Grants. This calculation determines the distribution of GST revenue in 2003-04 and 2004-05 (Tables 8 and 9).

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Table 8: Distribution of GST revenue in 2003-04 (estimated)

(1)x(2) (5)-(6)

(a) (%) ($m) ($m) ($m)

(1) (2) (3) (4) (5) (6) (7)

NSW 6,718,063 0.89117 5,986,936 30.0 12,108.1 2,417.5 9,690.5

VIC 4,947,771 0.87010 4,305,056 21.5 8,706.6 1,733.0 6,973.6

QLD 3,841,027 1.01902 3,914,083 19.6 7,915.9 1,340.9 6,574.9

WA 1,966,423 0.96946 1,906,368 9.5 3,855.5 695.7 3,159.8

SA 1,531,880 1.21215 1,856,868 9.3 3,755.4 601.0 3,154.3

TAS 480,149 1.59948 767,989 3.8 1,553.2 154.2 1,399.0

ACT 323,329 1.14979 371,760 1.9 751.9 91.2 660.7

NT 198,613 4.38638 871,192 4.4 1,761.9 77.7 1,684.2

Total 20,007,255 na 19,980,253 100.0 40,408.3 7,111.3 33,297.0

Projected population as at 31 December 2003

GST revenue/HCGs pool according to (4) Unquarantined HCGs

Distribution of GST revenue

Per capita relativities

Weighted population

Share of weighted population

(a) Total weighted population differs from the total population in column (1) as the CGC calculates the per capita relativities using population numbers for 1997-98 to 2001-02, then rounds these figures. Note: HCGs means Health Care Grants.

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Table 9: Distribution of GST revenue in 2004-05 (estimated)

(1)x(2) (5)-(6)

(a) (%) ($m) ($m) ($m)

(1) (2) (3) (4) (5) (6) (7)

NSW 6,776,851 0.86750 5,878,918 29.1 12,183.2 2,534.9 9,648.3

VIC 5,003,201 0.86534 4,329,470 21.4 8,972.2 1,820.8 7,151.4

QLD 3,927,404 1.05504 4,143,568 20.5 8,586.9 1,418.4 7,168.5

WA 1,996,095 1.03054 2,057,056 10.2 4,262.9 734.0 3,528.9

SA 1,539,177 1.20407 1,853,277 9.2 3,840.6 628.0 3,212.7

TAS 485,402 1.55939 756,931 3.7 1,568.6 160.9 1,407.8

ACT 324,575 1.12930 366,543 1.8 759.6 95.8 663.8

NT 199,107 4.26538 849,267 4.2 1,760.0 81.3 1,678.7

Total 20,251,812 na 20,235,030 100.0 41,934.1 7,474.1 34,460.0

GST revenue/HCGs pool according to (4) Unquarantined HCGs

Distribution of GST revenue

Projected population as at 31 December 2004 Per capita relativities

Weighted population

Share of weighted population

(a) Total weighted population differs from the total population in column (1) as the CGC calculates the per capita relativities using population numbers for 1998-99 to 2002-03, then rounds these figures. Note: HCGs means Health Care Grants.

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The Effect of Horizontal Fiscal Equalisation

One way to view the effect of the Commonwealth Grants Commission’s (CGC) application of Horizontal Fiscal Equalisation is to compare each State’s distribution of the GST revenue/Health Care Grants pool using the CGC’s relativities with the distribution on an equal per capita basis. In 2004-05, approximately $3.2 billion (7.7 per cent) of the total GST revenue/Health Care Grants pool will be redistributed among the States, compared with an equal per capita distribution (Table 10).

Table 10: Effect of Horizontal Fiscal Equalisation 2004-05 Difference Population

(1) - (2) (3) / (4)

($m) ($m) ($m) (million) ($)

(1) (2) (3) (4) (5)

NSW 12,183.2 14,032.4 -1,849.2 6.8 -272.9

VIC 8,972.2 10,359.8 -1,387.6 5.0 -277.3

QLD 8,586.9 8,132.2 454.7 3.9 115.8

WA 4,262.9 4,133.2 129.8 2.0 65.0

SA 3,840.6 3,187.1 653.6 1.5 424.6

TAS 1,568.6 1,005.1 563.5 0.5 1,161.0

ACT 759.6 672.1 87.5 0.3 269.7

NT 1,760.0 412.3 1,347.7 0.2 6,768.7

Total 41,934.1 41,934.1 0.0 20.3 na

GST/HCG pool distributed under HFE

Equal per capita distribution of GST/HCG pool

Per capita redistribution

Note: HCG means Health Care Grants. HFE means Horizontal Fiscal Equalisation.

New South Wales and Victoria receive less than equal per capita shares under the Horizontal Fiscal Equalisation arrangements because the CGC assessed their fiscal capacities to be relatively strong. For example, the CGC assessed that New South Wales has a relatively stronger capacity to raise revenue from land tax and stamp duty on property transfers and payroll tax, while Victoria has a relatively lower cost in providing state government services. The remaining States receive more than an equal per capita share of funding because the CGC assessed their revenue capacities to be lower and/or their costs of service delivery to be higher.

The CGC finalised its five-yearly review into its methodology in February 2004, under terms of reference developed in consultation with all the States and Territories. The changes the CGC made to its methodology have been incorporated in its recommended relativities for 2004-05.

Budget Paper No. 3

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Review of Horizontal Fiscal Equalisation Methodology

At the March 2004 meeting of the Ministerial Council for Commonwealth-State Financial Relations, the majority of States and Territories, with the support of the Australian Government, agreed to a work programme to examine aspects of the Commonwealth Grants Commission’s (CGC) methodology for the allocation of the GST to the States.

There was also majority agreement that the Australian Government and State and Territory Heads of Treasuries will undertake the work programme, and will draw on the expertise of the CGC. The work programme will include a consideration of whether the present approach is appropriate and necessary, the size and trend of the redistributions, simplification, and data issues. The work programme will not examine the underlying principles of horizontal fiscal equalisation.

Arrangements are underway to establish a steering committee to oversee the review and report to Heads of Treasuries. A secretariat will support the steering committee. The Australian Government Treasury will lead the organisational arrangements for conducting the review, with representation from the States and the CGC. Additional funding of $1.3 million has been included in the budget for the secretariat (see Budget Paper No. 2, Budget Measures 2004-05 for a description of the measure).

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DELIVERING MORE FUNDING TO THE STATES

In 2004-05, all States will receive a windfall over the Guaranteed Minimum Amount (GMA). Including the compensation for the annual payment of GST (a measure which requires unanimous agreement from the States), the States will receive a total gain from tax reform of over $1.6 billion more than the GMA (Table 13). The GMA is an estimate of funding each State would have had available to it had tax reform not been implemented. Components of the GMA comprise estimates of Australian Government Financial Assistance Grants forgone, state taxes abolished by tax reform and other items. Narrow and inefficient state taxes that have been abolished include Financial Institutions Duty, stamp duty on quoted marketable securities, and accommodation taxes (bed taxes).

As the GST is a secure, growing and broad based revenue source, the States’ gain from tax reform is estimated to continue growing to over $2.9 billion by 2007-08 (Table 13). This means that the Australian Government’s tax reform will deliver to the States an extra $1.6 billion in 2004-05, growing to over $2.9 billion in 2007-08, to spend according to their own budgetary priorities. States can use this additional funding for essential community services such as hospitals, schools, public transport, roads and police, and to lower their tax burdens.

Under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, the Australian Government guaranteed that in the transitional years after the introduction of The New Tax System in July 2000, each State’s budgetary position would be no worse off than had the reforms to Commonwealth-State financial relations not been implemented. To meet this guarantee, the Australian Government has paid Budget Balancing Assistance (BBA) to any State whose GMA exceeds its GST revenue entitlement.

On the basis of the Budget estimates, in 2003-04 only New South Wales requires BBA to ensure that it is no worse off. All other States are estimated to benefit from a total gain from tax reform of over $1.1 billion in 2003-04. As all States are expected to receive GST revenue in excess of their GMA from 2004-05, the Australian Government will no longer be required to provide BBA.

Tables 11 and 12 show the estimated GMA components, GST revenue entitlement and the BBA calculation for each State in 2003-04 and 2004-05. Table 13 shows the estimated GMA, GST revenue entitlement, BBA and gains from tax reform for each State from 2003-04 to 2007-08.

Budget Paper No. 3

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Table 11: Guaranteed Minimum Amount components, GST revenue provision and Budget Balancing Assistance in 2003-04 (estimated)

NSW VIC QLD WA SA TAS ACT NT Total

$m $m $m $m $m $m $m $m $m

State Revenues Forgone Financial Assistance Grants 5,410.5 4,012.6 4,225.7 1,806.9 2,170.5 1,033.9 443.8 1,388.4 20,492.3

Revenue Replacement Payments 2,544.0 1,702.4 1,543.4 1,064.1 661.8 224.7 113.1 143.6 7,997.0

Financial Institutions Duty 703.0 398.3 na 150.7 100.1 24.2 20.0 16.7 1,413.0

Marketable Securities Duty 456.0 236.5 27.0 29.3 15.6 0.8 24.8 1.1 791.1

Marketable Securities Duty Needs -22.7 11.2 13.6 2.8 3.9 2.6 -12.2 0.9 0.0

Accommodation Taxes 82.0 na na na na na na 9.0 91.0

plus Reduced Revenues Gambling Taxes 583.2 393.3 236.7 62.7 98.5 25.9 24.3 17.4 1,442.0

plus Interest Costs Interest Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

plus Additional Expenditures First Home Owners Scheme 237.9 195.8 168.8 93.9 57.0 19.5 11.3 7.8 792.0

GST Administration Costs 191.7 141.2 109.6 56.1 43.7 13.7 9.2 5.7 570.9

plus Other Items WST Payments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

minus Reduced Expenditures Off-road Diesel Subsidies 141.2 58.8 137.4 177.7 37.7 2.3 0.0 4.0 559.1

Savings from Tax Reform 179.1 122.9 101.6 60.6 44.1 14.9 10.1 14.8 548.0

Low Alcohol Beer Subsidies 25.3 17.5 4.9 8.0 4.7 1.7 1.0 1.2 64.4

minus Growth Dividend Remaining State Taxes 99.1 64.0 33.5 20.0 16.1 4.1 3.1 2.2 242.0

Plus Adjustments 2002-03 GMA Adjustment -4.4 6.5 -6.1 -2.5 -0.6 2.1 0.3 0.7 -4.0

Total Guaranteed Minimum Amount (1) 9,736.5 6,834.6 6,041.2 2,997.8 3,047.9 1,324.4 620.3 1,569.0 32,171.8

GST Revenue Provision (2) 9,690.5 6,973.6 6,574.9 3,159.8 3,154.3 1,399.0 660.7 1,684.2 33,297.0

Budget Balancing Assistance (1)-(2) 46.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 46.0

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Table 12: Guaranteed Minimum Amount components, GST revenue provision and Budget Balancing Assistance in 2004-05 (estimated)

NSW VIC QLD WA SA TAS ACT NT Total

$m $m $m $m $m $m $m $m $m

State Revenues Forgone Financial Assistance Grants 5,184.2 4,099.1 4,710.6 2,117.3 2,216.9 1,042.5 440.3 1,393.8 21,204.7

Revenue Replacement Payments 2,614.0 1,749.1 1,584.9 1,090.6 679.7 230.7 116.3 147.4 8,212.6

Financial Institutions Duty 737.0 410.2 na 155.8 103.7 24.8 20.5 18.2 1,470.2

Marketable Securities Duty 483.0 250.7 28.0 31.1 16.5 0.8 25.4 1.1 836.6

Marketable Securities Duty Needs -29.1 12.4 13.8 3.9 2.4 2.8 -7.5 1.1 0.0

Accommodation Taxes 88.0 na na na na na na 9.5 97.5

plus Reduced Revenues Gambling Taxes 608.2 415.3 250.7 63.7 102.5 26.2 24.9 18.2 1,509.7

plus Interest Costs Interest Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

plus Additional Expenditures First Home Owners Scheme 232.8 191.6 165.2 91.9 55.8 19.1 11.1 7.6 775.2

GST Administration Costs 194.9 143.9 112.9 57.4 44.3 14.0 9.3 5.7 582.3

plus Other Items WST Payments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

minus Reduced Expenditures Off-road Diesel Subsidies 142.7 59.6 140.8 180.7 37.9 2.3 0.0 4.0 568.0

Savings from Tax Reform 191.2 131.5 108.4 64.6 47.1 15.9 10.7 15.7 585.0

Low Alcohol Beer Subsidies 25.9 17.9 5.0 8.2 4.8 1.8 1.0 1.3 65.8

minus Growth Dividend Remaining State Taxes 122.9 79.3 41.5 24.7 19.9 5.1 3.9 2.7 300.0

Total Guaranteed Minimum Amount (1) 9,630.5 6,984.1 6,570.5 3,333.4 3,112.0 1,335.8 624.7 1,578.9 33,169.9

GST Revenue Provision (2) 9,648.3 7,151.4 7,168.5 3,528.9 3,212.7 1,407.8 663.8 1,678.7 34,460.0

Budget Balancing Assistance (1)-(2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Budget Paper No. 3

16

Table 13: Estimates of Budget Balancing Assistance and State and Territory gains from tax reform

(a)

2003-04 ($m) NSW VIC QLD WA SA TAS ACT NT Total

(1) Guaranteed Minimum Amount 9,736.5 6,834.6 6,041.2 2,997.8 3,047.9 1,324.4 620.3 1,569.0 32,171.8

(2) GST Revenue 9,690.5 6,973.6 6,574.9 3,159.8 3,154.3 1,399.0 660.7 1,684.2 33,297.0

(3) Budget Balancing Assistance (1) - (2)(b) 46.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 46.0

(4) State and Territory gains from tax reform (2) - (1)(b) 0.0 139.0 533.7 162.0 106.4 74.6 40.4 115.1 1,171.2

2004-05 ($m) NSW VIC QLD WA SA TAS ACT NT Total

(1) Guaranteed Minimum Amount 9,630.5 6,984.1 6,570.5 3,333.4 3,112.0 1,335.8 624.7 1,578.9 33,169.9

(2) GST Revenue 9,648.3 7,151.4 7,168.5 3,528.9 3,212.7 1,407.8 663.8 1,678.7 34,460.0

(3) Budget Balancing Assistance (1) - (2)(b) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

(4) Compensation for GST Deferral 95.9 70.6 67.6 33.5 30.2 12.3 6.0 13.9 330.0

(5) State and Territory gains from tax reform (2)+(4)-(1) 113.7 237.9 665.6 229.1 130.9 84.3 45.1 113.6 1,620.1

2005-06 ($m)(c) NSW VIC QLD WA SA TAS ACT NT Total

(1) Guaranteed Minimum Amount(d) 10,228.1 7,522.6 7,159.4 3,487.3 3,260.6 1,412.3 655.5 1,649.8 35,375.6

(2) GST Revenue 10,317.4 7,691.1 7,629.9 3,660.1 3,371.6 1,486.8 696.5 1,756.5 36,610.0

(3) Budget Balancing Assistance (1) - (2)(b) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

(4) State and Territory gains from tax reform (2)-(1) 89.2 168.5 470.5 172.9 111.0 74.5 41.0 106.7 1,234.4

2006-07 ($m)(e) NSW VIC QLD WA SA TAS ACT NT Total

(1) Guaranteed Minimum Amount 10,601.9 7,940.5 7,449.6 3,541.4 3,390.7 1,463.6 674.9 1,723.8 36,786.4

(2) GST Revenue 10,921.8 8,268.9 8,067.7 3,783.4 3,556.4 1,560.3 726.8 1,834.7 38,720.0

(3) State and Territory gains from tax reform (2)-(1) 319.9 328.4 618.2 242.0 165.7 96.7 51.8 110.9 1,933.6

2007-08 ($m) NSW VIC QLD WA SA TAS ACT NT Total

(1) Guaranteed Minimum Amount 10,825.9 8,278.0 7,720.4 3,628.9 3,497.9 1,503.9 692.3 1,796.5 37,943.7

(2) GST Revenue 11,446.6 8,839.6 8,540.7 3,988.7 3,734.0 1,623.1 763.4 1,914.1 40,850.0

(3) State and Territory gains from tax reform (2)-(1) 620.7 561.6 820.3 359.8 236.1 119.1 71.1 117.6 2,906.3

(a) Projections will be affected by variations in Guaranteed Minimum Amount components, GST revenue growth and recommendations by the Commonwealth Grants Commission on the distribution of GST to each of the States and Territories in future years. (b) Where the difference between the Guaranteed Minimum Amount and GST Revenue (and vice versa) is less than zero, the reported amount is zero. (c) In 2005-06 and beyond there may be small flow-on effects from compensation for the GST deferral which will be subject to negotiation with the States. (d) As agreed at the 26 March 2004 meeting of the Ministerial Council for Commonwealth-State Financial Relations, bank account debits tax is to be abolished by 1 July 2005.

The revenue forgone by the States and Territories is included in their Guaranteed Minimum Amount from 2005-06 to ensure the States are no worse off. Accordingly, State and Territory gains from tax reform decrease in 2005-06 compared to 2004-05. However, the estimates of Guaranteed Minimum Amounts do not contain reductions in the following state taxes: non-residential conveyances; non-quotable marketable securities; leases; mortgages, bonds, debentures and other loan securities; credit arrangements, instalment purchase arrangements and rental arrangements; cheques, bills of exchange and promissory notes, which are the subject of review by the Ministerial Council in 2005. (e) The transition period in which the Australian Government guarantees that no State will be worse off due to tax reform expires on 30 June 2006.

Commonwealth-State Financial Relations

17

Adjustments in 2003-04

GST revenue provision in 2003-04 has been adjusted to account for the final 2002-03 outcome (Table 1). In 2002-03 the final GST cash collections outcome was $57 million higher than the amount determined by the Commissioner of Taxation in June 2003 and provided to the States in 2002-03 under the terms of the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 (the Act).

Consistent with the provisions of the Act, the amount of GST revenue determined by the Commissioner and provided to the States in 2003-04 will take account of this variation. The BBA entitlement for New South Wales for 2003-04 has also been calculated to account for this variation (Table 11).

Adjustments in 2004-05

Consistent with the terms of the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, the Australian Government has advanced BBA to the States in four quarterly instalments in 2003-04. These advances were based on the estimated BBA entitlements of the States at the time of each advance. The upward revision to GST revenue estimates and the downward revision to GMA in the Budget have resulted in lower than previously estimated BBA entitlements of the States. Based on current estimates, the advances to the States in the year to date exceed the States’ entitlements to BBA in 2003-04 by $397 million (Table 14).

Consistent with the provisions of the Act, the Australian Government will deduct the amount of excess BBA paid in 2003-04 from payments to be made to the States under the Act in 2004-05. The final amount to be deducted from State payments in 2004-05 will be known when the final determination of each State’s BBA entitlement is made under the Act in June 2004.

Table 14: Overpayment of Budget Balancing Assistance in 2003-04 (estimated) NSW VIC QLD WA SA TAS ACT NT Total

$m $m $m $m $m $m $m $m $m

Payments to date 316.7 104.2 0.0 0.0 22.0 0.0 0.0 0.0 443.0

BBA entitlement 46.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 46.0

BBA overpayment 270.7 104.2 0.0 0.0 22.0 0.0 0.0 0.0 397.0

Residual Adjustments

The Australian Government has introduced a mechanism to ensure that all States receive their appropriate payments under the Act as they come off BBA. It came into effect when the A New Tax System (Commonwealth-State Financial Arrangements) Amendment Act 2004 received Royal Assent on 23 March 2004.

Budget Paper No. 3

18

Residual adjustments will give effect to any underestimate or overestimate of payments in a previous financial year that, prior to the amendments, could not be paid or reclaimed using existing mechanisms under the Act.

Queensland and the Northern Territory no longer required BBA in 2002-03. The residual adjustment amounts for 2002-03 will reflect an underestimate of payments in 2001-02. As the legislative requirements were not in place last year, these adjustments will be paid in 2003-04.

Current estimates show that Victoria, Western Australia, South Australia, Tasmania and the Australian Capital Territory will no longer require BBA in 2003-04. Based on the current estimates, the residual adjustment amounts for 2003-04 will reflect an overestimate of payments in 2002-03.

As final payments for 2003-04 will not be known until the June 2004 determinations, it will not be known until after that time whether a residual adjustment for 2004-05 will be needed.

Table 15 shows estimates of the residual adjustment amounts that will be paid in 2003-04.

Table 15: Residual adjustment amounts for 2002-03 and 2003-04 (estimated) NSW VIC QLD WA SA TAS ACT NT Total

$m $m $m $m $m $m $m $m $m

2002-03 0.0 0.0 38.8 0.0 0.0 0.0 0.0 11.0 49.8

2003-04 0.0 -5.7 0.0 -8.0 -5.9 -0.1 -0.7 0.0 -20.4

Total adjustment in 2003-04 0.0 -5.7 38.8 -8.0 -5.9 -0.1 -0.7 11.0 29.4

Commonwealth-State Financial Relations

19

DELIVERING FURTHER TAX REFORM

Under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, all the States and Territories committed to abolish the bank account debits tax, subject to review by the Ministerial Council for Commonwealth-State Financial Relations. At the March 2004 Ministerial Council meeting, the Australian Government and State governments agreed to abolish bank account debits tax by 1 July 2005.

The abolition of this tax continues the implementation of the reforms contained in the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, signed by Australian Government and all State and Territory leaders in 1999.

The Australian Government’s tax reforms made it possible to abolish this narrow and inefficient tax. The abolition of bank account debits tax is expected to directly save taxpayers around $1 billion each year.

The Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations also provides that the Ministerial Council will, by 2005, review the need to retain stamp duty on the following:

• non-residential conveyances;

• non-quotable marketable securities;

• leases;

• mortgages, bonds, debentures and other loan securities;

• credit arrangements, instalment purchase arrangements and rental arrangements;

and

• cheques, bills of exchange and promissory notes.

The Ministerial Council committed to this review at its March 2004 meeting and will consider the review at its March 2005 meeting.

Budget Paper No. 3

20

First Home Owners Scheme

Eligible home buyers have received over $4.4 billion through original and additional First Home Owners Scheme grants since July 2000.

The First Home Owners Scheme, introduced on 1 July 2000, is funded out of GST revenues and guaranteed by the Australian Government through Budget Balancing Assistance. The scheme provides all eligible first home buyers with a $7,000 grant. The States administer the scheme which has provided over 568,000 grants. The Scheme is ongoing and its cost to the States is part of the Guaranteed Minimum Amount (Tables 11 and 12).

In March 2001, the Australian Government made an additional $7,000 grant available to first home buyers building or purchasing new homes before 31 December 2001. The Australian Government fully funds the additional First Home Owners Scheme with a Specific Purpose Payment through the States to meet the cost of grants. The Australian Government extended the additional First Home Owners Scheme at a rate of $3,000 for new homes built or purchased between 1 January 2002 and 30 June 2002. To date, the additional First Home Owners Scheme has provided around 69,000 grants to eligible home buyers.

Although the additional First Home Owners Scheme has ended, grants continue to be paid to eligible applicants due to the time needed to complete construction and the one-year period allowed to lodge an application, once construction is complete. Estimates of payments are shown in the Specific Purpose Payments tables (Appendix B).

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Commonwealth-State Financial Relations

21

NATIONAL COMPETITION POLICY PAYMENTS

The Australian Government makes National Competition Policy Payments (NCPPs) to the States for implementing National Competition Policy and related reforms. These reforms include a commitment to review legislation that restricts competition, apply competitive neutrality to government business activities and introduce specific reforms in electricity, gas, water and road transport.

NCPPs commenced in July 1997 with the first of three tranches of payments. The third tranche commenced in July 2001 at an annual level of $600 million in 1994-95 prices.

Each State’s NCPPs are subject to that State making satisfactory progress with the implementation of reform commitments. Prior to the scheduled payment of NCPPs in each year, the National Competition Council (NCC) assesses whether each State has met the specified conditions and provides recommendations for consideration by the Australian Government.

Out of an estimated maximum level of payments in 2003-04 of $759 million, the NCC recommended permanent deductions of $53.9 million and suspensions of $126.9 million. The NCC has indicated that it will recommend that suspensions be lifted or reduced and the release of suspended monies if and when jurisdictions sufficiently progress reform.

Table 16 shows estimates of NCPPs from 2003-04. Each State’s amount for 2003-04 reflects that permanent deductions and suspensions recommended by the NCC have been applied. The amounts reported below for 2004-05 and 2005-06 are the current estimates of each State’s maximum level of payment (that is, if no permanent deductions or suspensions apply).

Table 16: National Competition Policy Payments NSW VIC QLD WA SA TAS ACT NT Total

$m $m $m $m $m $m $m $m $m

2003-04 203.5 178.7 87.9 33.6 40.7 17.2 11.0 5.9 578.5

2004-05 259.8 191.8 151.4 76.6 59.2 18.8 12.4 7.7 777.7

2005-06 264.5 195.5 155.1 78.4 59.8 18.9 12.6 7.8 792.5

Budget Paper No. 3

22

SPECIFIC PURPOSE PAYMENTS

Specific Purpose Payments (SPPs) constitute a significant amount of Australian Government funding to the States. In 2004-05, the Australian Government will provide the States with $24.3 billion in SPPs. These payments represent almost 13 per cent of total Australian Government expenditure in 2004-05.

The Australian Government makes SPPs to the States as a contribution to important areas of state responsibility. In 2004-05, there will be over 90 different payments covering a broad range of policy areas such as education, health, social security, housing and transport (Chart 3).

Chart 3: Composition of Specific Purpose Payments ‘to’ and ‘through’ the States in 2004-05 (estimated)

0

1

2

3

4

5

6

7

8

9

Education Health Social

Security

Housing Transport Local

Government Other

0

1

2

3

4

5

6

7

8

9

SPPs 'To' SPPs 'Through'

$ billion $ billion

More detailed information, including payments on a state-by-state basis, for 2003-04 and 2004-05 is in Appendix B.

Commonwealth-State Financial Relations

23

SPPs can be classified into three groups:

• those paid ‘to’ the States — payments direct to State governments, totalling an

estimated $17.9 billion in 2004-05;

• those paid ‘through’ the States — payments to State governments to be passed on to

local governments (for example, Financial Assistance Grants to local government) and to others (for example, to non-government schools). This category is estimated to total $6.4 billion in 2004-05; and

• those paid direct to local government to help fund roads, child-care programmes

and disability services administered by local governments. These payments are estimated to total $304.7 million in 2004-05.

SPP agreements often include agreed national objectives. However, in making these payments, the Australian Government does not seek to take over responsibility for state functions.

SPP agreements generally contain conditions to help ensure those objectives are achieved. These conditions may include:

• general policy requirements (for example, the provision of free public hospital

access for Medicare patients);

• matching funding arrangements; and

• reporting of performance information (see box below).

Accountability for SPPs

The Australian Government is seeking greater accountability in SPP agreements to improve policy outcomes and deliver better value for money.

All new and renegotiated SPP agreements will include statements of key objectives and the respective responsibilities of the Australian Government and the States, combined with agreed reporting of financial information and detailed performance indicators.

To encourage increased accountability, an amount appropriate to each SPP will be contingent on States’ timely reporting of the agreed financial and performance information to the satisfaction of the responsible Australian Government Minister.

Budget Paper No. 3

24

Financial Assistance Grants to local government

The Australian Government provides financial assistance to local government for roads and other local government services. Assistance is paid in the form of general purpose assistance and untied local road funding. Local governments can spend both forms of funding according to their own priorities.

The Australian Government is providing a total of $1.5 billion in Financial Assistance Grants to local government in 2003-04 and an estimated $1.5 billion in 2004-05 (Table 17). The annual increase in funding is based on an escalation factor, which the Treasurer determines with reference to population growth and CPI.

This financial assistance is paid to the States as a SPP, on condition that all the funds are passed on to local government. In 2004-05, as in previous years, the general purpose component of local government assistance will be distributed between the States on an equal per capita basis and untied local road funding will be distributed on the basis of historical shares (Table 17). State grants commissions determine the intra-state distribution of the grants to local governments.

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Commonwealth-State Financial Relations

25

Table 17: Financial Assistance Grants to local government in 2003-04 and 2004-05 (estimated)

(a)

NSW VIC QLD WA SA TAS ACT NT Total

$m $m $m $m $m $m $m $m $m

2003-04 General Purpose Assistance 353.2 260.0 199.2 103.0 80.9 25.2 17.0 10.4 1,049.0

Untied Local Road Funding 135.0 96.0 87.2 71.2 25.6 24.7 14.9 10.9 465.5

Total Financial Assistance Grants(b) 488.3 355.9 286.4 174.2 106.5 49.9 32.0 21.3 1,514.5

2004-05 General Purpose Assistance 356.6 262.0 204.4 104.3 81.3 25.5 17.2 10.6 1,061.9

Untied Local Road Funding 136.7 97.1 88.3 72.0 25.9 25.0 15.1 11.0 471.2

Total Financial Assistance Grants(c) 493.3 359.2 292.6 176.4 107.2 50.5 32.3 21.6 1,533.1

(a) Total Financial Assistance Grants are the cash payments that the State receives on behalf of local government. It is equal to the estimated entitlement for a given year adjusted for an overpayment or underpayment from the previous year. (b) The 2003-04 figure takes into account an underpayment of $6 million in 2002-03. The Treasurer will determine the final 2003-04 escalation factor in June 2004; currently the 2003-04 escalation factor is estimated to be 1.0288. (c) The 2004-05 figure includes an estimate of the amount necessary to adjust for the difference between the 2003-04 escalation factor estimated in June 2003 and

used to calculate payments in 2003-04 and the final factor for 2003-04 to be determined in June 2004. On the basis of the current estimate of the 2003-04 escalation factor, this adjustment is estimated to be a decrease of $11.5 million. The 2004-05 escalation factor is currently estimated to be 1.0318. Financial Assistance Grants in 2004-05 will be paid on the basis of the escalation factor that the Treasurer will estimate in June 2004. The Treasurer will determine the final escalation factor for 2004-05 in June 2005.

Budget Paper No. 3

26

MIRROR TAX ARRANGEMENTS

The Australian Government introduced mirror tax arrangements in 1998 to ensure the States were not financially disadvantaged by the High Court decision in Allders International Pty Ltd v Commissioner of State Revenue (Victoria), which invalidated state

taxes on Commonwealth places.

These arrangements mirror certain state taxes including payroll taxes, land taxes, debits tax and stamp duties on activities in or on Commonwealth places.

The States collect these mirror taxes on behalf of the Australian Government and bear the administrative costs of collection. All mirror tax revenues are automatically credited to the Australian Government and automatically appropriated to the States at the same time. Hence, mirror taxes are recorded as both Australian Government revenue and negative revenue, with no net impact on the Budget.

Table 18 shows estimates of accrued mirror taxes from 2003-04 to 2007-08.

Table 18: Accrued mirror taxes on behalf of the States, 2003-04 to 2007-08 (estimated) 2003-04 2004-05 2005-06 2006-07 2007-08

$m $m $m $m $m

Mirror taxes 311.8 330.9 347.7 365.3 383.5

27

FISCAL DEVELOPMENTS IN THE STATES

Most States are expected to record small general government fiscal deficits in 2004-05, partly reflecting the expected downturn in revenue from property-related taxes,1 and higher anticipated expenses.2 However, by 2006-07, all States are forecasting an increase in their fiscal balances, with most expected to achieve small surpluses.

Most States are set to continue the trend of reducing non-financial public sector net debt as a per cent of gross state product (GSP). An increasing number of States are forecasting to be in a net financial asset position in their general government sector by 2006-07. This trend is primarily due to States implementing medium term fiscal

strategies and asset sales.

STATE GENERAL GOVERNMENT SECTOR FISCAL BALANCE

The aggregate state fiscal balance for the general government sector is estimated to be -0.2 per cent of GDP, lower than in 2003-04. Only South Australia and Tasmania expect fiscal surpluses as a per cent of GSP in 2004-05 (Chart 4).

The fiscal balance measures, in accrual terms, the gap between government savings plus net capital transfers, and investment in non-financial assets. A fiscal surplus indicates that a government is lending to other sectors. A fiscal deficit indicates that a government is borrowing.

The aggregate state fiscal balance is expected to rise over the forward estimates period, reaching a small surplus in 2006-07. Looking forward, most States are expecting to achieve fiscal surpluses by 2006-07.

1 See, for example, NSW 2003-04 Half-Yearly Review, pp1, 6-7 and Victorian 2004-05 Budget Paper No.2 Strategy and Outlook , p42. 2 See, for example, NSW 2003-04 Half-Yearly Review, p9, SA 2003-04 Mid-Year Budget Review and Victorian 2004-05 Budget Paper No.2 Strategy and Outlook, p46.

Budget Paper No. 3

28

Chart 4: Individual state general government sector fiscal balance(a)(b)

-2

-1

0

1

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

-2

-1

0

1

Vic

NSW

All States

Qld

WA

Per cent of GSP Per cent of GDP

-4

-3

-2

-1

0

1

2

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

-4

-3

-2

-1

0

1

2

NT

SA All States

ACT

Tas

Per cent of GSP Per cent of GDP

(a) Accrual time series data are being reviewed by the ABS, in consultation with all Treasuries in 2004, as accrual reporting is now established in all jurisdictions. This should result in improved quality in time series data, and may result in some changes to these series. (b) States’ fiscal balances are expressed as a per cent of GSP (left hand axis) and the all States fiscal

balance is expressed as a per cent of GDP (right hand axis). Sources: ABS Cat. No. 5512.0, state 2003-04 mid-year reports, Victoria, WA and the ACT 2004-05 Budgets and Treasury estimates.

Trends in the aggregate fiscal balance for state/local general government, public non-financial corporations and the non-financial public sector are presented in Tables 1, 2 and 3, Statement 12, Budget Paper No. 1.

Fiscal developments in the States

29

STATE GENERAL GOVERNMENT SECTOR CASH SURPLUS

In aggregate terms, the general government sector cash surplus is estimated to be 0.3 per cent of GDP in 2004-05. This compares to an estimated 0.2 per cent in 2003-04. Cash surpluses are estimated for all States, except Western Australia and the Australian Capital Territory, in 2004-05 (Chart 5).

Chart 5: Individual state general government sector cash surplus(a)(b)

-3

-2

-1

0

1

2

3

1996-97 1998-99 2000-01 2002-03 2004-05 2006-07

-3

-2

-1

0

1

2

3

NSW

All States

Vic

Qld

WA

Per cent of GSP Per cent of GDP

-3

-2

-1

0

1

2

3

1996-97 1998-99 2000-01 2002-03 2004-05 2006-07

-3

-2

-1

0

1

2

3

SA

Tas

ACT

All States

NT

Per cent of GSP Per cent of GDP

(a) Accrual time series data are being reviewed by the ABS, in consultation with all Treasuries in 2004, as accrual reporting is now established in all jurisdictions. This should result in improved quality in time series data, and may result in some changes to these series. (b) States’ cash surpluses are expressed as a per cent of GSP (left hand axis) and the all States cash

surplus is expressed as a per cent of GDP (right hand axis). Sources: ABS Cat. No. 5512.0, state 2003-04 mid-year reports, Victoria, WA and the ACT 2004-05 Budgets and Treasury estimates.

Budget Paper No. 3

30

An underlying cash surplus reflects the extent to which cash is available to a government to increase financial assets or decrease liabilities (assuming no revaluations or other changes occur). An underlying cash deficit measures the extent to which a government requires cash, either by running down financial assets or by borrowing.

Over the forward estimates period, the aggregate state general government sector cash surplus is expected to remain steady at 0.3 per cent of GDP. Despite considerable variation in the States’ cash positions in recent years, from 2005-06 cash surpluses are

forecast by all States (Chart 5).

Trends in the aggregate cash surplus for state/local general government, public non-financial corporations and the non-financial public sector are presented in Chart 2, Statement 12, Budget Paper No. 1.

STATE NET DEBT

In aggregate, state general government sector net debt3 is expected to be -1.2 per cent of GDP in 2004-05, relative to -1.1 per cent in 2003-04. Net debt for the aggregate state public non-financial corporations sector is estimated to be 4.6 per cent of GDP in 2003-04,4 up from 4.5 per cent in 2002-03. The public non-financial corporations sector nearly exclusively owns the stock of state non-financial public net debt.

The higher the net debt of a government, the greater the call it will impose on future revenue flows to service that debt.

Most States continue to reduce their levels of general government sector net debt (Chart 6). For example, between 1996-97 and 2006-07, South Australia and Tasmania are expected to reduce general government net debt by more than 12 percentage points of GSP. This primarily reflects the electricity privatisation process in South Australia,5 and the application of budget surpluses and proceeds of assets sales in Tasmania to paying off debt.

3 Net debt is the sum of selected financial liabilities (deposits held, advances received, government securities, loans and other borrowing) less the sum of selected financial assets (cash and deposits, advances paid, and investments, loans and placements). Net debt does not include superannuation or superannuation related liabilities.

4 Estimates for the public non-financial corporations sector and the non-financial public sector are unavailable after 2003-04 in most States. The public non-financial corporations sector comprises bodies that provide goods and services (such as electricity, gas and water) that are mainly market, non-regulatory and non-financial in nature, and are financed predominantly through sales to the consumers of these goods and services. 5 SA Budget Paper No. 3, Budget Statement 2002-03, p63.

Fiscal developments in the States

31

Aggregate state general government net debt is estimated to be -1.7 per cent of GDP by 2006-07. This reflects that an increasing number of States are forecasting to be in a net financial asset position in their general government sector by 2006-07. New South Wales is expected to join Queensland and the Australian Capital Territory in recording a net financial asset position from 2004-05, with South Australia forecasting to be in a similar position by 2006-07.

Budget Paper No. 3

32

Chart 6: Individual state net debt by sector (as at end of financial year)(a)(b) General Government

-13

-8

-3

3

8

13

18

1996-97 2001-02 2006-07

-13

-8

-3

3

8

13

18

Qld

NSW

WA

Vic

All States

Per cent of GSP Per cent of GDP

-13

-8

-3

3

8

13

18

1996-97 2001-02 2006-07

-13

-8

-3

3

8

13

18

NT

All States

ACT

Tas SA

Per cent of GSP Per cent of GDP

Public non-financial corporations

0

2

4

6

8

10

12

14

16

18

20

1996-97 2001-02 2006-07

0

2

4

6

8

10

12

14

16

18

20

NSW

Vic

All States

Qld

WA

Per cent of GSP Per cent of GDP

0

2

4 6

8

10

12

14 16

18

20

1996-97 2001-02 2006-07

0

2

4 6

8

10

12

14 16

18

20

Tas

ACT

NT

SA

All States

Per cent of GSP Per cent of GDP

Non-financial public sector

-10

-5

0

5

10

15

20

25

30

35

1996-97 2001-02 2006-07

-10

-5

0

5

10

15

20

25

30

35

NSW

Vic

WA

All States

Qld

Per cent of GSP Per cent of GDP

-10

-5

0

5

10

15

20

25

30

35

1996-97 2001-02 2006-07

-10

-5

0

5

10

15

20

25

30

35

All States

SA

NT

Tas

ACT

Per cent of GSP Per cent of GDP

(a) Accrual time series data are being reviewed by the ABS, in consultation with all Treasuries in 2004, as accruals reporting is now established in all jurisdictions. This should result in improved quality in time series data, and may result in some changes to these series.

(b) States’ net debt is expressed as a per cent of GSP (left hand axis) and the all States net debt is expressed as a per cent of GDP (right hand axis). Sources: ABS Cat. No. 5512.0, state 2003-04 mid-year reports, Victoria, Western Australia and the Australian Capital Territory 2004-05 Budgets and Treasury estimates.

Fiscal developments in the States

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LOAN COUNCIL ARRANGEMENTS

The Australian Loan Council is a Commonwealth-State Ministerial Council that coordinates public sector borrowing. The Loan Council comprises the Australian Government Treasurer as Chairman, and State and Territory Treasurers.

Present Loan Council arrangements operate on a voluntary basis and emphasise transparency of public sector financing rather than adherence to strict borrowing limits. These arrangements are designed to enhance financial market scrutiny of public sector borrowing and facilitate informed judgments about each government’s financial performance.

The Loan Council traditionally meets annually in March to consider jurisdictions’ Loan Council Allocation nominations for the forthcoming year. As part of the agreed arrangements, the Loan Council considers these nominations, having regard to each jurisdiction’s fiscal position and the macroeconomic implications of the aggregate figure. The Loan Council Allocation is a headline measure of a government’s call on financial markets.

Outcome of March 2004 Loan Council meeting

The Loan Council met on 26 March 2004 to consider Loan Council Allocation nominations for 2004-05. In aggregate, the nominations represent a surplus of $2.5 billion (Table 19). The Loan Council approved each State’s nominated Allocation.

Budget Paper No. 3

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Table 19: Loan Council Allocation nominations for 2004-05(a)

NSW VIC QLD WA SA TAS ACT NT C/wlth Total

$m $m $m $m $m $m $m $m $m $m

Nominated 2004-05 LCAs General government sector cash deficit(+)/surplus(-) -1,447 12 -429 130 -211 -75 -22 0 -3,829 -5,871

PNFC sector cash deficit(+)/surplus(-) 1,590 -128 727 681 -65 -75 -21 9 -1,412 1,306

Non-financial public sector cash deficit(+)/surplus(-)(b) 144 -186 297 811 -275 -150 -44 9 -5,241 -4,635

minus

Net cash flows from investments in financial assets for policy purposes(c) -59 48 0 13 5 30 14 7 -968 -910

plus

Memorandum items(d) 724 221 138 -170 -200 20 -6 0 524 1,251

Loan Council Allocation 927 -13 435 628 -481 -160 -64 2 -3,749 -2,475 2004-05 tolerance limit 1,033 589 595 322 205 83 53 57 4,819

(a) Loan Council Allocation (LCA) nominations for 2004-05 reflect current best estimates of non-financial public sector deficits/surpluses. Nominations have been provided on the basis of policies announced up to and included in jurisdictions’ mid-year reports. Nominations are based on preliminary estimates of general government finances provided by jurisdictions for purposes of their mid-year reports, and projected bottom lines for each jurisdiction’s public non-financial corporations sector, where actual estimates are unavailable. Each jurisdiction will publish an updated LCA estimate as part of its budget documentation. The two per cent (of non-financial public sector cash receipts from operating activities in each jurisdiction) tolerance limits around each jurisdiction’s 2004-05 LCA are designed, amongst other things, to accommodate changes to the LCA resulting from changes in policy. (b) The sum of the surpluses of the general government and the public non-financial corporations sectors may not equal the non-financial public sector surplus due to

intersectoral transfers being netted out. (c) This comprises net lending by governments with the aim of achieving government policy, as well as net equity sales and net lending to other sectors or jurisdictions. Such transactions involve the transfer or exchange of a financial asset and are not included within the cash deficit. However, the cash flow from investments in

financial assets for policy purposes has implications for governments’ call on financial markets. (d) Memorandum items are used to adjust the non-financial public sector deficit/surplus to include in LCAs certain transactions — such as operating leases — that have many of the characteristics of public sector borrowings but do not constitute formal borrowings. They are also used, where appropriate, to deduct from the non-financial public sector deficit/surplus certain transactions that Loan Council has agreed should not be included in LCAs — for example, the funding of more than

employers’ emerging costs under public sector superannuation schemes, or borrowings by entities such as statutory marketing authorities. Where relevant, memorandum items include an amount for gross new borrowings of government home finance schemes. Note: Governments’ contingent exposures under infrastructure projects with private sector involvement are identified in the Loan Council report, rather than included as components of LCAs. These exposures, which are measured as governments’ contractual liabilities in the event of termination of projects, are unlikely to be realised and are thus materially different from actual borrowings undertaken to finance the public sector deficit. A government’s outlays under these projects, such as equity contributions and ongoing commercial payments to the private sector, continue to be included in annual total public sector deficits, and hence the LCA.