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Commonwealth Grants Commission State revenue sharing relativities 2005 update


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Australian Government

Commonwealth Grants Commission

COMMONWEALTH GRANTS COMMISSION

Report on

State Revenue Sharing Relativities

2005 Update

A ustralian G overn m en t

Commonwealth Grants Commission

R E P O R T O N

S T A T E R E V E N U E S H A R IN G R E L A T IV IT IE S

2 0 0 5 U P D A T E

CANBERRA

© Commonwealth of Australia 2005

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth available from the Department of Communications, Information Technology and the Arts. Requests and inquiries concerning reproduction and rights should

be addressed to the Commonwealth Copyright Administration, Intellectual Property Branch, Department of Communications, Information Technology and the Arts, GPO Box 2154, Canberra ACT 2601 or posted at http://www.dcita.gov.au/ip/commonwealth copyright.

This document does not necessarily conform to Commonwealth style.

Working Papers

This report and the accompanying volume of supporting information are supplemented by the following working papers, copies of which are being made available to major parties to the inquiry. Other copies are being deposited in the National Library of Australia and State and Territory reference libraries.

Volume I Assessment Methods and the Equalisation Budget ISBN 1741 611555 Volume 2 Assessment Results Revenue ISBN 1741 611563

Volume3 Assessment Results Expense ISBN 1741 611571

Volume 4 Assessment Results User Charges and the Common Factors ISBN 1741 61158X Set of four volumes ISBN 1741 611598

Electronic Versions

The report, supporting information volume, and working papers are available on the Commission’s web site at http://www.cgc.gov.au.

Report

This report is accompanied by a volume of supporting information.

Report Supporting Information Set of two volumes

ISBN 1741 611873 ISBN 1741 611881 ISBN 1741 611547

Printed by CanPrint Communications Pty Limited, Canberra.

A ustralian G overnm ent

Commonwealth Grants Commission

The Hon Dr Sharman Stone MP Parliamentary Secretary to the Minister for Finance and Administration Parliament House

CANBERRA ACT 2600

Dear Parliamentary Secretary

As members of the Commonwealth Grants Commission appointed under the Commonwealth Grants Commission Act 1973, we have prepared this report to provide updated per capita relativities for use in distributing Commonwealth payments to the States and Territories in 2005-06. Terms of reference asking that this work be done were dated 23 December 2004.

In accordance with those terms of reference, the results of the update were provided to the States and Territories on 18 February 2005.

Yours sincerely

A G Morris Chairman

R A Williams Member

G P Appleyard Member

H J Owens Member

25 February 2005

Cypress Court 5-7 Torrens Street Braddon ACT 2612 Tel: (02)6229 8800 Fax: (02)6229 8821 Email: secretarv@cgc.gov.au Internet: http://www.cgc.gov.au

I I I

ACKNOWLEDGEMENTS

We are grateful for the ready co-operation extended to the Commission and its staff during this inquiry by Australian and State Treasury officers and by staff of the Australian Bureau of Statistics.

We also acknowledge the dedication and professionalism shown by the staff of the Commission during the period of the inquiry.

iv

TERMS OF REFERENCE

The Hon Dr Sharman Stone MP Federal Member for Murray Parliamentary Secretary to the Minister for Finance and Administration

Mr Alan Morris Chairman Commonwealth Grants Commission Cypress Court

5 Torrens Street BRADDON ACT 2612

Dear Mr Morris

i am writing to convey to you the terms o f reference for the Commonwealth Grants Commission’s (the Commission) 2005 Update o f the State Revenue Sharing Relativities.

The Icons o f reference require the Commission to provide the relativities to the Australian Government and the State and Territory Governments by 18 February 2005 and the report by 25 February 2005. This would enable the Australian and State and Territory Governments to have sufficient time to prepare for the Ministerial Council meeting in late March 2005.

Some o f the States have raised concerns relating to clauses 10 and 11 in the terms o f reference; however, approval o f the Stales is not mandatory.

I have been advised by the Treasurer that the Commission has been kept informed o f developments in the drafting process o f the terms o f reference

Yours sincerely

Dr Sharman Stone

23 December 2004

Pariiamcni House, Canberra ACT 2600 Tel: (02) 6277 2016 Fax: (02) <>277 8483 Kmaii: s.itone.mp#*ph-go*.a« 426 Wyndham Street, PO Bax 884. Sbcpparton VIC 3632 Tel: (03) 5821 5371 Toll Free: !30Q 132 413 Fax: (03) 582 $ 8429 Departmental website: www.fmance.gov.su Electorate website: wwwAhMmsnslanecotn

V

Terms o f Reference

Terms of Reference for the 2005 Update of State Revenue Sharing Relativities

COMMONWEALTH GRANTS COMMISSION ACT 1973

1. 1, Sharman Stone, Parliamentary Secretary to the Minister for Finance and Administration, pursuant to sections 16, 16A and 16AA of the Commonwealth Grants Commission Act 1973, refer to the Commission for inquiry into and report upon, by 25 February 2005, the question of the per capita relativities to be used to distribute the combined pool of GST revenue and health care grants among the States, the Northern Territory and the Australian Capital Territory (collectively referred to as the States) in

2005-06. The Commission should provide the per capita relativities to the Australian Government and the States by 18 February 2005.

2. The Commission’s assessments of per capita relativities should be based on the review period 1999-2000 to 2003-2004 inclusive. Where possible, the Commission should use the latest available data.

3. The Commission should provide per capita relativities for determining the distribution of:

(a) a combined pool of GST revenue grants and health care grants; and

(b) a combined pool of financial assistance grants and health care grants (based on the assumption of a continuation of the Commonwealth-State financial arrangements which applied in 1999-2000).

4. Subject to paragraphs 5 to 11, the Commission’s assessments should be based on the application of the same:

(a) principles;

(b) items of revenue and government services;

(c) methods of assessment of those items;

(d) range and methods of measuring revenue and expenditure disabilities; and

(e) range and methods of treatment of Australian Government revenue payments

that the Commission used to calculate the per capita relativities in its 2004 Report on State Revenue Sharing Relativities.

5. The Commission should continue to prepare its assessments on the basis that Specific Purpose Payments quarantined in previous terms of reference should continue to not affect the per capita relativities. These payments include (but are not necessarily limited to):

(a) National Competition Payments;

Terms o f Re ference

(b) States’ contribution to the Australian Government’s deficit reduction strategy;

(c) payments to the States to reimburse them for revenue lost as a result of the establishment of a national scheme of companies, securities and future regulation;

(d) payments which are funded from the Natural Heritage Trust of Australia and the Regional Telecommunications Infrastructure Fund;

(e) payments for the Fringe Benefit Tax Transitional Grants for the public and not-for-profit hospitals;

(f) payments for Building IT Strengths - Tasmanian ‘Intelligent Island’;

(g) payments for Connecting‘Tasmanian Schools;

(h) payments for the Extension of the First Home Owners Scheme;

(i) payments for the Roads to Recovery program;

(j) Commonwealth payments made to the Sinking Fund on State Debt; and

(k) payments for the Victorian Cytology Service made under the Public Health Outcome Funding Agreements.

6. The Commission should prepare its assessments on a basis consistent with the Commonwealth’s intention that the following components of the Australian Health Care Agreements between the Commonwealth and a State should not directly influence the per capita relativities:

(a) payments in relation to mental health;

(b) payments in relation to the National Health Development Fund;

(c) payments in relation to the Pathways Home Initiative;

(d) all payments under an adjustment module, including those related to the Critical and Urgent Treatment (CUT) Waiting List Initiative;

(e) compliance payment arrangements (in this case including the maximum available compliance payments in the assessments);

(f) payments to South Australia for the administration and management of the hospital at Woomera; and

(g) payments to Queensland in recognition of the cost associated with the movement of Papua New Guinea’s citizens across the Torres Strait.

vii

Terms o f Reference

7. The Commission’s assessments should take into account the

Intergovernmental Agreement on the Reform o f Commonwealth-State Financial Relations that was signed by Heads of Government in June 1999.

8. Where it is necessary to accommodate later budget developments, the Commission’s assessments should be based on the principles, methods of measuring revenue and expenditure disabilities, and methods of treating Australian Government revenue payments that conform to those applied in similar circumstances in the 2004 Report

on State Revenue Sharing Relativities.

9. In preparing its assessments the Commission should have regard for the need to observe policy neutrality in relation to a reduction in the level of a Specific Purpose Payment resulting from non-compliance by a State or Territory with the conditions of the payment. Any such reductions should not directly influence the Commission’s assessments

of the per capita relativities. Given the complexity and variety of Specific Purpose Payment agreements, additional guidance in relation to any actual reductions for non-compliance will be provided to the Commission if and when the need arises.

10. The Commission is no longer required to assess Special Revenue Assistance for the Australian Capital Territory. The Commission should take into account all relevant fiscal needs of the Australian Capital Territory, as for the other States and Territory.

11. The Commission should review its assessment of the Northern Territory’s debt charges and depreciation needs as part of its update of the per capita relativities, to apply from 2005-06 onwards.

12. The Commission should consult the Australian Government and the States before deciding on any changes in methods considered appropriate to fulfil its obligations in respect of these terms of reference.

13. To the extent possible, the Commission should, upon reporting, provide all parties with details underpinning its calculations and assessments, and endeavour to meet requests for supplementary calculations.

SHARMAN STONE

CONTENTS

Chapter Page

Terms of reference v

Overview xi

1 INTRODUCTION I

Current Commonwealth-State financial arrangements I

The terms of reference 2

Structure of the report 3

2 THE EQUALISATION PRINCIPLE AND THE COMMISSION’S APPROACH 4

The Commission’s method for implementing equalisation 5

Bringing the assessments together 7

3 MAIN CHANGES IN THIS UPDATE 8

Conducting the update 8

Taking account of more recent circumstances 9

Compiling data on State expenses 9

Land revenue 11

Abolition of bank accounts debits tax 12

New South Wales’ vendor duty 12

Insurance taxation 13

Roads data 13

ACT special fiscal needs 14

Northern Territory’s depreciation and debt charges 16

4 THE RELATIVITIES FOR 2005-06 19

The assessed relativities 19

GST relativities 19

FAG relativities 19

Applying the relativities 20

5 WHY THE RELATIVITIES HAVE CHANGED 23

Relativities over time 23

Changes since the 2004 Review 25

Changes in revenue assessments 29

Expense assessments 33

6 MAIN CHANGES FOR EACH STATE SINCE THE 2004 REVIEW 38

Contents

Attachments

A Illustrative pools and populations and how the Commission’s relativities are used 47

B Calculation of relativities — GST relativities 50

C Calculation of relativities — FAG relativities 58

D Contribution of assessments to the differences from an equal per capital distribution 66

Acronyms 79

Index 80

x

OVERVIEW

1. The Commission’s role is to advise the Australian Government on per capita relativities for use in distributing the Goods and Services Tax (GST) revenue and Health Care Grants (HCGs) among the States and Territories1. The distribution of the GST revenue and HCGs pool is intended to ensure all States have the same financial capacity to

provide services to their populations. The amount to be distributed is the sum of the collections from the GST during the year plus the total health care grants as determined by the terms of the Australian Health Care Agreements negotiated between the Australian Government and the States.

2. Since 1988, procedures have been in place for reviewing the methods used to calculate relativities every five years. The last such review was completed in 2004. Between reviews, the relativities have been updated annually to ensure that they reflect changes over time in the circumstances of the States.

3. The terms of reference for this update, received from the Parliamentary Secretary to the Minister for Finance and Administration, ask the Commission to provide updated per capita relativities for use in distributing the combined GST revenue and HCGs pool between the States in 2005-06. These GST relativities are shown in Table I, together with the comparable relativities assessed in the 2004 Review.

Table 1 GST RELATIVITIES

2004 Review 2005 Update

New South Wales 0.86750 0.86846

Victoria 0.86534 0.87552

Queensland 1.05504 1.04389

Western Australia 1.03054 1.02500

South Australia 1.20407 1.20325

Tasmania 1.55939 1.55299

Australian Capital Territory 1.12930 1.14300

Northern Territory 4.26538 4.26682

In the remainder of this report, the words State’ and "States’ include the Australian Capital Territory and the Northern Territory unless the context indicates otherwise

Xi

Overview

4. As required by the terms of reference, the relativities assessed in this update are based on the methods and principles used in the 2004 Review and the latest available data for the years 1999-2000 to 2003-04.

5. The terms of reference also ask us to:

(i) Provide a set of relativities based on the assumed continuation of the intergovernmental arrangements in place before the GST was introduced. These relativities are for use in determining whether any State should receive funds under the transitional provisions of the Intergovernmental Agreement on the Reform o f Commonwealth-State Financial Relations. The latest data on GST collections indicate that no State is likely to be eligible for funds under those provisions in 2005-06. The required relativities are shown in Chapter 4.

(ii) Take account of all relevant fiscal needs of the ACT in the same way as for the States rather than assessing special revenue assistance where additional costs incurred by the ACT stemmed from cost legacies inherited at self-government. We have done so. Allowances to reflect the additional expenses incurred by the ACT in providing police

services and road maintenance are included in the relativities. We have not assessed an allowance comparable to the special fiscal needs previously assessed to compensate the ACT for its exclusion from arrangements whereby the other States receive specific purpose payments in lieu of revenue forgone from corporate regulation.

(iii) Review the assessment of the Northern Territory’s debt and depreciation needs. We have reviewed the assessments and revised aspects of them. The effects of those revisions are reflected in the recommended relativities. We have not changed the assessment

methods in these areas. The issues require more consideration than has been possible in this update and they could not have been addressed without also affecting the assessments of the other States.

Implications o f2005 Update relativities

6. Table 2 compares the latest estimates of the revenue each State was expected to receive from the GST revenue and HCGs pool in 2004-05 with our illustrative estimates of the amounts they might receive in 2005-06. Those illustrative estimates are based on the relativities assessed in this update, the latest Australian Government estimates of the GST

revenue and HCGs pool for 2005-06 and the latest Australian Bureau of Statistics (ABS) projections of State populations in December 2005.

7. The estimated State revenues from the GST and HCGs pool in 2004-05 and the illustrative revenues for 2005-06 will change with later estimates of the GST revenue for those years.

xii

Overview

Table 2 DISTRIBUTION OF 2004-05 GST REVENUE AND HCGS AND ILLUSTRATIVE 2005-06 GST REVENUE AND HCGS(a)(b)

NSW Vic Qld WA SA Tas ACT NT Aust

$m $m $111 $m $m $111 $m $m $m

Esli mated 2004-05 GST and HCGs 12 406.2 9 141 6 8 746.9 4 349.0 3911 2 1 597.9 771.8 1 794 2 42 718 7

Illustrative 2005-06 GST and HCGs 13 062 0 9 743.3 9 210.3 4 576.9 4 092.1 1 674.2 818.4 1 884.8 45 062.0

Increase 655.8 601 6 463 4 227.9 180 9 76.4 46.6 90.6 2 343.2

(a) From the Commonwealth of Australia, Mid-year Economic and Fiscal Outlook 21)04-05. (b) Excludes any budget balancing assistance that may be paid

8. The illustrative increases in State revenue from the GST and HCGs pool between 2004-05 and 2005-06 are due to changes between: the 2004 Review and the 2005 Update relativities; State populations at December 2004 and 2005; and the GST and HCGs pool for the two years. The changes in the relativities are the only ones affected by our work. Table 3 shows the contribution of changes in relativities to the illustrative change

in each State’s revenue from the GST and HCGs pool between 2004— 05 and 2005-06. The changes in relativities redistributed $127.7 million, which is less than the amounts redistributed by the 2001, 2002, and 2003 updates (each of them redistributed between $150 million and $260 million).

Table 3 CONTRIBUTION OF CHANGE IN RELATIVITIES TO ILLUSTRATIVE INCREASES IN STATE REVENUES FROM THE GST REVENUE AND HCGS POOL BETWEEN 2004-05 AND 2005-06

Source o f change NSW Vic Qld WA SA Tas ACT NT Aust

$111 $m $111 $m $ni $111 $m $m $m

Change in relativitiesla, 12.0 106 2 -93.7 -24.0 -3.2 -6.8 9.2 0.3 0.0

(a) The effects of apply ing the 2005 Update GST relativities instead of those assessed in the 2004 Review to the 2004-05 estimated GST and HCGs pool and the December 2004 State populations

Main reasons for changes in relativities

9. The 2005 Update relativities differ from the 2004 Review relativities because we have:

(i) used revised and updated data for the years 1999-2000 to 2002-03, which are common to the two inquiries;

(ii) replaced data for 1998-99 used in the 2004 Review with data for 2003-04; and

(iii) included allowances to reflect the additional expenses incurred by the ACT in providing police services and road maintenance.

xm

Overview

The first two reasons for change each explain over 45 per cent of the total change in revenue redistribution.

10. For each State, the main reasons for change are as follows.

(i) The relativity for New South Wales has increased because the effects of an increase in the relative costs of service provision (largely due to an above average increase in underlying wage levels) exceeded those of the increase in its relative revenue raising capacity. Its relative capacity to raise revenue rose for land taxation, insurance taxation, and stamp duties on loans, mortgages and conveyances — which are related to the high property values in the State. Revisions to data for

insurance taxation and stamp duty on loans and mortgages suggest its relative revenue raising capacity was understated in the 2004 Review.

(ii) The increase in Victoria’s relativity is due to a large fall in its relative revenue raising capacity, especially for stamp duty on conveyances, payroll taxation, and insurance taxation. There is also an increase in its relative costs of providing services largely due to revisions to data on the use of courts by Indigenous people and revisions to data on costs incurred in natural disaster relief in 2002-03.

(iii) The reduction in Queensland’s relativity is due to increases in its relative capacity to raise revenue from stamp duties on conveyances and motor vehicle registrations. There is also a decrease in its relative costs of providing services because of below average increases in

underlying wage levels and revisions to data on the use of courts by Indigenous people.

(iv) The declines in the relativities of Western Australia, South Australia, and Tasmania are the result of declines in their relative costs of providing services. This is largely due to falls in their relative costs of hospital inpatient services and superannuation. Those effects were

partly offset by falls in their relative revenue raising capacities, particularly for stamp duty on conveyances.

(v) The increase in the ACT’s relativity is due to an increase in its costs of providing services, mostly due to the inclusion of allowances for its higher costs of police and road maintenance resulting from its status as the national capital. There is an increase in its revenue raising capacity, especially for stamp duty on conveyances.

(vi) The Northern Territory’s relativity is virtually unchanged because the fall in its revenue raising capacity, especially for stamp duty on conveyances, was offset by a decline in its costs of providing services. This was primarily due to data revisions (which removed an overstatement in the measure of court use by Indigenous people), and a fall in its assessed underlying wage levels.

xiv

CHAPTER 1

INTRODUCTION

1. The Commission's role is to advise the Australian Government on ‘per capita relativities’ which can be used to distribute the Goods and Services Tax (GST) revenue and Health Care Grants (HCGs) among the States. The distribution of GST revenue and HCGs is intended to ensure all States have the same financial capacity to

provide services to their populations. The Commission has no role in determining the amount to be distributed.

2. The funds distributed under the equalisation arrangements are important for State budgets. In 2003-04, GST revenue and HCGs were $40.4 billion1, which was 70 per cent of the total funds provided to the States by the Australian Government and 43 per cent of total State budget revenues. The actual percentages vary from State to State.

3. Since 1988, procedures have been in place for reviewing the methods used to calculate relativities every five years2. The last such review was completed in 2004. Between reviews, the relativities are updated annually to ensure that they reflect changes over time in the circumstances of the States. This 2005 Update is part of that cyclical

process.

4. The March 2004 meeting of the Ministerial Council for

Commonwealth-State Financial Relations decided Heads of Treasury should review aspects of the implementation of equalisation and report on that work in March 2005. The terms of reference for this update direct us to apply the principles and methods used in the 2004 Review. The analysis for this update has not been affected by the work of the Heads

of Treasury.

CURRENT COMMONWEALTH-STATE FINANCIAL ARRANGEMENTS

5. The current arrangements for payments to the States reflect the provisions of the A New Tax System (Commonwealth-State Financial Arrangements) Act 1999 and the associated Intergovernmental Agreement on the Reform o f Commonwealth-State Financial

Commonwealth of Australia Budget Paper No 3, Federal Financial Relations 2004-05, Table 8, p 9. The Commission had previously reported on reviews of per capita relativities in 1981, 1982, and 1985. Since 1988 it has reported on reviews of the methods used to derive per capita relativities in 1993, 1999 and 2004.

I

Chapter I

(i) all revenue from the GST, after deducting the costs of collection, to be paid to the States to be spent according to their budget priorities;

(ii) distribution of the GST revenue and HCGs pool among the States to be based on horizontal equalisation principles and using per capita relativities based on the Commission’s recommendations; and

(iii) each State to receive a guaranteed minimum amount (GMA) in the transitional years, so that its budget is no worse off than it would have been had the tax reforms not been implemented4. Based on the latest estimates and the relativities in this report, every State’s revenue from the pool is expected to exceed its GMA in 2005-06.

6. The per capita relativities recommended by the Commission are considered by the Ministerial Council for Commonwealth-State Financial Relations. The Australian Treasurer subsequently makes a formal determination of how the revenues are to be shared.

7. Attachment A outlines the procedures followed by the Australian Treasury in applying the relativities to the GST revenue and HCGs pool.

Relations (IGA)’, signed by the Australian and State Governments in June 1999. Among other things, these provide for:

THE TERMS OF REFERENCE

8. We received terms of reference for this update from the Parliamentary Secretary to the Minister for Finance and Administration. They are included at the front of this report.

9. The terms of reference require us to report, by 25 February 2005, on per capita relativities for use in distributing funds among the States in 2005-06.

10. Two sets of per capita relativities are required. They are:

(i) relativities for distributing the combined pool of GST revenue and HCGs — the GST relativities; and

(ii) relativities that would have been applicable if the

Commonwealth-State financial arrangements that applied in 1999-2000 had continued — the FAG relativities.

11. As required by the terms of reference, the relativities:

The IGA is reproduced in Budget Paper No. 3 for 1999-2000 and the Commission’s 2000 Update deport (Supporting Information Volume). This is achieved by the Australian Government providing additional assistance (called budget balancing assistance) over and above the GST revenue and the HCGs.

2

Introduction

(i) have been calculated using the same principles and methods used in the 2004 Review;

(ii) have been calculated using the latest available information for the years 1999-2000 to 2003-04; and

(iii) are not affected by the specific purpose payments (SPPs) to the States listed in paragraphs 5 and 6 of the reference.

12. The requirements described in paragraphs 10 and II are standard for

updates. On this occasion, the reference also says that we:

(i) are not required to assess special revenue assistance for the ACT, but should take into account all relevant fiscal needs of the ACT, as for the other States; and

(ii) should review the assessment of the Northern Territory’s debt and depreciation needs.

STRUCTURE OF THE REPORT

13. Chapter 2 explains the equalisation principle and the Commission’s method for implementing fiscal equalisation.

14. Chapter 3 discusses the new developments in State finances and other issues we considered during the update and how we dealt with them. It also provides our response to the clauses in the terms of reference relating to the ACT and the Northern Territory issues.

15. Chapter 4 presents the relativities for 2005-Ό6. Chapter 5 explains why they differ from those calculated in the 2004 Review. Chapter 6 provides a summary of the main changes for each State. Further details and data supporting the calculations are in attachments to this report, the supporting information volume, and the working papers that

accompany this report. 1 6

16. The report, supporting information volume, and working papers are available on the Commission’s website at .

3

CHAPTER 2

THE EQUALISATION PRINCIPLE AND THE COMMISSION’S APPROACH

1. In this update, we applied the definition of the principle of fiscal equalisation used by the Commission in its 2004 Review Report. It is as follows:

State governments should receive funding from the pool o f goods and services tax revenue and health care grants such that, if each made the same effort to raise revenue from its own sources and operated at the same level o f efficiency, each would have the capacity to provide services at the same standard.

2. The principle is intended to ensure that all States have the same financial capacity to provide the same level of services to their populations1. Under this principle, each State receives a different per capita amount of revenue from the GST and HCGs pool because there are differences between States in:

(i) the per capita amounts they would need to spend if they were to provide the same level of services;

(ii) their per capita capacities to raise revenue; and

(iii) their per capita receipts of SPPs.

3. However, the distribution offsets differences that arise only for reasons that are beyond the control of individual States. Each State's share is calculated on the assumption that it and all the other States apply the average policies and practices in delivering services and that they all make the same effort to raise revenue.

4. The Commission’s approach ensures that a State’s own policies do not directly affect its share. States can and do make different efforts to raise revenue. But decisions to make below average efforts to raise revenue do not lead to increases in the share of GST revenue and HCGs. If a State makes a below average effort, it bears the

resulting budgetary implications. Similarly, a State’s decision to provide above average services does not lead to an increase in its share of the GST revenue and HCGs pool.

Whether the same level of services is actually provided is a matter of policy for each State,

4

The equalisation principle

THE COMMISSION’S METHOD FOR IMPLEMENTING EQUALISATION

5. Our assessments are based on standard levels of expense for each service States provide and on standard levels of revenue for each tax and charge they impose. These financial standards are the national average per capita expenses and revenues. They are not the actual expenses and revenues of any individual State.

6. The figures for expenses are mainly derived from State accounting records using data provided by State Treasuries through the Government Finance Statistics (GFS) collection prepared by the ABS. Data on State tax revenues and some supplementary detail on expenses are collected directly from the States. All State financial transactions are

classified on a functional or head-of-tax basis. The financial standard for each expense and revenue category is then derived by dividing the Australian total of State general government sector expenses or revenues by the Australian mean resident population.

7. The equalisation budget is the collection of all the expense and revenue categories for which the Commission makes assessments. It includes only financial transactions that have a direct impact on the operating statements of the States.

8. The next steps in the process are to identify and measure the differences between the States in:

(i) what it costs to provide each service to their populations at the average standard the relative costs of services; and

(ii) the revenue they could raise from each tax or charge if they made the average effort — the relative revenue raising capacity.

9. These calculations are based on the assumption that each State applies standard policies and practices that are an average of what all States do.

10. Expense assessment methods are based on measuring the effects of each State’s disabilities on the standard expenses.

11. Disabilities are influences beyond the control of individual States that require a State to spend more (or allow it to spend less) per capita than other States to provide the average standard of service. Disabilities can be broadly classified into two types — use disabilities and cost disabilities — according to whether they affect the rate of

use or the cost of each unit of service. 1 2

12. Use disabilities reflect differences between States in the use of services arising from features such as population characteristics and the availability of private services. The first step in assessing use disabilities is to identify to whom the services are provided, in many cases, services are provided to the whole population. However some services are provided for a part of the population: for example, school services are provided to the student age group and aged care services to older people. Some services are provided to business units such as the manufacturing or mining industries.

5

Chapter 2

13. The second step is to examine data on the use of services to see whether across Australia some groups in the population use them more or less than others. For example, hospital services are used more intensively by some age groups and by Indigenous people; some welfare services are used more intensively by people on low incomes; some

services are used more by people in remote areas; and other services are used more intensively by people in urban areas. States are assessed to have a positive expense disability if the groups that use a service are a larger proportion of their population than they are of the national population. Conversely, they have a negative disability if the size of the group is smaller than the national average.

14. Cost disabilities are influences that affect the cost per unit of service provided to particular groups of people or regions. For example, cultural and communication factors can increase the costs of providing some services to people from cultural and linguistically diverse backgrounds, and more resources can be devoted to

providing school services to students from low-income families. In addition, higher costs might be incurred when providing some services in large cities or in remote and dispersed areas. States with relatively larger populations in the groups that cost more (or living in

regions that cost more) are assessed to have positive disabilities.

15. Other cost disabilities arise because the prices of inputs used in providing State services vary between States for reasons that are beyond the control of individual States. For example, wage rates and office accommodation costs differ across the States and some States have higher cost structures because of diseconomies of small scale.

However, higher costs arising from a decision by a State to provide a higher standard of service do not constitute a disability.

16. Revenue assessment methods take account of the influences beyond a State’s control that would result in it raising more (or less) revenue per capita than other States if it applied Australian average tax rates to its tax bases — that is, if it made the average effort to raise revenue.

17. Tax bases are generally measured using the value of transactions in each State that would be taxed if the average tax policy were applied. For example, the tax base for payroll tax is the estimated annual value of payrolls paid by medium sized and large private sector businesses2 and most public trading enterprises. The tax base for stamp duty on conveyances reflects the value of property sold. In a few cases, other economic indicators are used as proxies for the tax base. A State has a revenue raising advantage if the per capita value of its tax base exceeds the national value.

18. There are some cases where we consider that:

(i) all differences in costs or revenues are due to differences in State policies, implying that no State has a disability;

(ii) there are disabilities but they cannot be adequately measured; or

Small businesses are excluded because it is a common policy of all States to exempt them from payroll tax

6

The equalisation principle

(iii) there are disabilities but we do not measure them because they would not have a material effect on equalisation.

In these cases, we assess the revenue capacity or costs of service provision to be the same in all States and we apply an equal per capita (EPC) assessment.

Bringing the assessments together

19. A State’s total per capita requirement for revenue from the GST and HCGs pool in each year for which assessments are made ( 1999-2000 to 2003-04 in this update) is calculated as an equal per capita share of the total amount available, adjusted ' for:

(i) the effect of assessed unavoidable influences on, or disabilities relating to, the use and costs of providing services — expense needs;

(ii) the effect of assessed unavoidable influences on revenue raising capacities — revenue needs; and

(iii) its above or below average per capita revenue from specific purpose payments from the Australian Government that are available to fund its expense requirements4 — SPP needs.

20. A relativity is calculated for each State for each assessment year by expressing its per capita requirement for GST revenue and HCGs as a proportion of the national average per capita amount distributed in the year.

21. The per capita relativities recommended for use in 2005-06 (the application year for this update) are the average of the assessments for the five assessment years.

22. When weighted by population shares the relativities average one.

A relativity below one indicates that a State requires less than an equal per capita share of the GST revenue and HCGs pool; a relativity above one indicates that a State requires more than an equal per capita share. Expressing relativities in this way makes it clear that no

State can have its relativity increased without one or more of the other States having theirs reduced.

Each of these adjustments can have a negative or positive value The treatment of SPPs is described in the supporting information volume that accompanies this report.

7

CHAPTER 3

MAIN CHANGES IN THIS UPDATE

1. The changes to assessments we may make in an update are determined by the requirements of the terms of reference and the update guidelines previously agreed by the Australian Government and the States.

2. The terms of reference for this update require the relativities to be calculated using the principles and methods adopted in the 2004 Review and the latest available data for 1999-2000 to 2003-04. They also include clauses directing us to consider issues regarding the Northern Territory’s debt charges and depreciation assessments and the

ACT’s special fiscal needs. Our decisions on these issues are presented below.

3. Under the update guidelines, we may make changes to:

(i) incorporate the latest available financial and other data in series presently used in assessments;

(ii) take account of major changes in Commonwealth-State financial relations and major new or changed SPPs;

(iii) accommodate other budget developments;

(iv) amend assessment methods where data previously used are no longer available;

(v) apply new or better data not previously considered; and

(vi) correct errors in calculations.

Conducting the update

4. Requests for data relating to 2003-04 were sent to the States in August 2004 and arrangements were made to obtain other data for the calculations, mainly from the ABS.

5. In September 2004, we circulated a discussion paper on new issues for this update1 to the States and the Australian Treasury for comment.

6. The matters covered included proposals for:

Discussion Paper CGC 2004/2, Proposals fo r the Treatment o f New Developments in Stale Finances, and Data Changes Relevant to the 2005 Update o f Relativities, September 2004.

8

Main changes in this update

(i) dealing with new or changed Commonwealth-State financial arrangements — mainly new SPPs and changes under the IGA;

(ii) updating and assessment issues, such as how we might deal with:

• changes in State circumstances or the data available to measure revenue bases for insurance taxation and land taxation;

• the abolition of bank account debits tax as from I July 2005;

• the vendor tax introduced by New South Wales in June 2004; and

• new items in State budgets and changes in accounting methods;

(iii) addressing the assessment of fiscal needs for the ACT; and

(iv) addressing the requirement to review the assessment of the Northern Territory’s debt and depreciation needs.

7. The main changes we have made in this update, after considering State responses to the new developments discussion paper, are outlined below. A summary of all changes is in the supporting information volume that accompanies this report.

Taking account of more recent circumstances

8. Data used in many assessments for the years common to the 2004 Review and the 2005 Update ( 1999 2000 to 2002-03) were revised by the ABS and the States. The revisions included the replacement of estimates of State expenses and school enrolments for 2002-03 with data on actual expenses and enrolments.

9. In addition, the terms of reference require us to base this update on data for the years 1999-2000 to 2003-04. The 2004 Review was based on the years 1998-99 to 2002-03. We therefore removed the assessments for 1998-99 used in the 2004 Review and replaced them with assessments for 2003-04.

Compiling data on State expenses

10. As was the case in the 2004 Review, we experienced problems using the data in the ABS GFS collection to compile expenses data that are comparable for all States and all five years. The problems included year-to-year volatility in expenses classified to detailed functional categories and difficulty in obtaining data at the level of detail used in our assessments for the last assessment year (2003-04).

11. Our approach in this update is consistent with that used in the 2004 Review. It is as follows:

(i) For the first four assessment years (1999-2000 to 2002^03), we used the latest ABS GFS data2, supplemented by information collected

Data provided by the States for the ABS Government Finance Statistics (Catalogue 5512.0) publications

9

Chapter 3

directly from the States. In some cases, we used data provided by the States to adjust the GFS data if it was clear that the State data would be provided to and used by the ABS. We applied functional smoothing' to the data for those States where the data appeared to be

unreliable.

(ii) For the last assessment year (2003-04), GFS data were not available from the ABS, so we used data prepared by the States using the GFS Uniform Presentation Framework (UPF).

However, in some cases (for example in disaggregating hospital costs into those attributable to inpatients and to outpatients, accident, and emergency services), the data did not appear to be correctly classified. It did not accord with historical trends, or with information provided by

States or published in their budget papers. In these cases, we applied functional smoothing.

(iii) For the ACT, we used data supplied by the Territory for all assessment years, because the ABS data included municipal transactions.

12. Replacing 2002-03 UPF data with GFS data. In the 2004 Review, expense data for 2002-03 were compiled using State provided UPF data. In this update, we replaced those data with ABS GFS data. This updating led to large revisions in the financial standards for some categories. However, the net impact of the revisions to 2002-03

financial data on State shares of GST revenue and HCGs was small4.

13. The revisions in the financial data were due to some differences in the coverage of the UPF and GFS data collections, and to revisions and corrections by the States to their data before they were provided to the ABS for the GFS collection. Such revisions were expected because 2002-03 was the first year States applied detailed

functional classifications in the UPF data. Many States have also undertaken work explicitly aimed at improving the accuracy of the detailed functional classification of their GFS data. Those efforts typically began with 2002-03 data, and are expected to flow through to other years in the future.

14. Other issues. Several States have provided revised data for 1999-2000 to 2001-02 to the ABS and asked us to use those revisions in this update. Consistent with our approach of using ABS GFS data, we used revised State data when the ABS considered they were of publishable quality.

15. We are aware that the ABS is working with the States to improve the accuracy and interstate comparability of the GFS data series from 1998-99 onwards.

A process of reallocating expenses among the detailed purpose classifications in a broad expense function based on patterns observed in previous years or in other State data. The total amount that would have been redistributed if the actual data had been available for use in the 2004 Review was $9.5 million. Details of the effect on each State are in the supporting information volume that

accompanies this report

10

Main changes in this update

Commission staff are assisting with this work. As the work proceeds, the data for these years may be further revised in future updates.

Lund revenue

16. In the 2004 Review Report, the Commission said that during the 2005 Update it would work on improving the quality and comparability of data used to measure the non-principal residential land component of State revenue bases for land revenue.

17. The Commission has had extensive discussions with the State Treasuries, State Valuers-General, State Revenue Offices (SROs) and the Australian Valuation Office (AVO) on the possibility of using SRO data to measure the revenue base for the tax on non-principal residential land.

18. Commission decisions. The Commission collected updated data on the value of commercial and industrial land and all residential land from each Valuer-General and data on the value of taxable land from the SROs. We passed both sets of data to the AVO for an independent assessment of their suitability and comparability.

19. In its report to the Commission, the AVO said that the data on the value of commercial and industrial land, and the total value of residential land provided by the State Valuers-General were suitable for the Commission’s purposes because the data:

(i) were assessed on a consistent basis; and

(ii) followed, in broad terms, the expected pattern of changes.

20. However, the AVO was not able to complete a full examination of the data provided by the SROs in time for this update. The work it did indicated the data were not comparable. We also noted that New South Wales, Queensland, South Australia, Tasmania, the ACT, and the Northern Territory each expressed concerns about the data they provided,

and that Western Australian data were not available. In these circumstances, we decided to retain the approach adopted in the 2004 Review. Under that approach, the value of land used for non-principal residential purposes was estimated using data on the value of all residential land provided by the Valuers-General and the proportion of households living in privately rented properties.

21. Given that decision, and in response to the concerns of some States, we examined the merits of using Census data instead of the data from the Australian Social Trends to estimate the non-principal residence component of all residential land. 2 2

22. Neither source aligned adequately with the scope of the assessment. The Census data had the advantage that they covered holiday homes/accommodation, dwellings in remote areas, and dwellings housing domestic/international visitors, all of which were potentially subject to land tax. On the other hand, the Census was self-enumerated and

subject to respondent error. (For example, while our assessment relates to dwellings on private land, respondents did not always distinguish between public and private housing). Also, rental proportions based on the Census data could not be updated.

Chapter 3

23. We decided to continue to base the calculation on data from the Australian Social Trends. We considered that while there was some conceptual advantage in switching to the Census data, the approximate nature of the adjustment and the measurement issues involved meant we could not be confident that doing so would improve the assessment.

24. We have also reviewed the 2004 Review allowance for interstate differences in the proportion of properties with higher values. We did so because the ACT submitted that its allowance was counter-intuitive, since a large proportion of its commercial/industrial buildings was not taxable. We found the calculations were correct. We also noted that the

AVO had not mentioned any difficulties with the ACT valuation data.

25. For future updates, our preference is to use the SRO data in the assessment, if they can be made comparable across States. We will work with the States and the AVO to obtain data that are suitable for our purposes.

Abolition of bank accounts debits tax

26. As foreshadowed under the IGA and as confirmed at the Ministerial Council meeting in March 2004, all States will abolish bank accounts debits (BAD) tax by I July 2005. New South Wales abolished it on 1 January 2002.

27. In the new developments discussion paper, the Commission proposed to reflect the abolition of the BAD tax in its assessments for the 2005 Update because it is a common policy of all States and it is in line with the IGA. As a result, revenue in the Financial Transaction Taxes category now consists mainly of stamp duty on mortgages and

loan securities. In the discussion paper, it was also noted that a consequential adjustment would be required to the measure of the revenue base for the category, to reflect better the ability of States to collect revenue from duties on mortgages and loans securities.

28. Commission decision. No State disagreed with the proposals and we have implemented them. The revenue base is now measured by reference to total private expenditure plus an allowance for the level of activity on capital markets.

New South Wales ’ vendor duty

29. In its mini-budget of 6 April 2004, New South Wales introduced a vendor transfer duty of 2.25 per cent on the sale or disposal of investment properties. It was payable from 1 June 2004 if the sale price of the property exceeded the vendor’s purchase price by more than 12 per cent. It does not apply to principal places of residence or farms.

30. In the new developments discussion paper, the Commission proposed to treat revenue raised from the duty in 2003-04 as non-standard revenue because no other State imposed the tax and it was payable by sellers of some properties not buyers. It proposed to classify it as other revenue and assess it by the equal per capita method. 3 1 * *

31. Most States opposed the proposal. They said the duty is a tax on property transactions and it is irrelevant that the duty falls on the seller rather than the buyer. They said the revenue should be treated as stamp duty on conveyances.

12

Main changes in this update

32. Commission decision. We have reconsidered the proposal and concluded that the vendor duty is part of the package of taxes on property transfers in New South Wales. We have treated the revenue as if it were stamp duty on conveyances.

Insurance taxation

33. On I July 2002, the Australian Prudential Regulation Authority (APRA) introduced a new prudential framework for insurers. Among other things, the new framework changed the basis for recognising and reporting premium revenues for private insurers, which is the key information for our measure of the revenue base for Insurance Taxation.

34. Linder the new framework, reported premium revenues are based on the gross written premium (the aggregate amount of premiums written by an insurer during a specified period of time, including both earned and unearned premiums). In addition, premiums are allocated between States on the basis of where the risk is located, as reported

by the insurers. Previously the data were based on earned premiums and were allocated between States according to where the business was written.

35. The new basis on which premiums are reported, including the State allocation of them, better matches the way States levy insurance taxes. In all States, insurance tax is imposed on the value of premiums paid for risks located in the State. The new data will improve the accuracy of the assessments. We have used them to calculate the

revenue bases for 2002-03 and 2003-04 in this update. For 1999-2000 to 2001-02, we continued to use the data provided by APRA under the previous framework because information was not available to revise them reliably.

Roads data

36. In its submission to the update, Queensland said that its Department of Main Roads had reviewed the functional classification of its roads using Austroads classifications. It said some roads had been inappropriately classified as local roads and that, as a result, the length of arterial roads in the State had been underestimated in the 2004 Review. Queensland asked that its revised data be used in this update.

37. Our examination of these issues has not yielded a set of information on road length and use that is comparable across the States and which we are confident would reliably update those used in the 2004 Review. At the time we needed to complete the calculations for this update, AustRoads had not completed its processes for consulting with the State roads authorities on the most recent data it had collected from them. However, our

examinations have raised broader concerns about the volatility and interstate comparability of data on roads. Similar concerns were also expressed by the ABS in a review of data used in the Commission’s assessments, conducted as part of the Heads of Treasury review of the implementation of equalisation. 3 8 *

38. Commission decision. Given our concerns about the quality and interstate comparability of the data on roads, we are not confident that varying the roads data to

13

Chapter 3

reclassify the roads in Queensland or using more recent data provided by the States would improve the equalisation result. We therefore decided to continue to use the roads data used in the 2004 Review. We propose to comprehensively review the roads data during 2005.

ACT special fiscal needs

39. In the 2004 Review, the Commission assessed special fiscal needs (SFNs) to allow for additional costs incurred by the ACT stemming from cost legacies inherited at self-government and where the Commission considered it was not appropriate for these additional costs to be funded by the States through reduced shares of the GST revenue and

HCGs pool.

40. SFNs were assessed for corporate affairs compensation, police, and roads.

(i) Corporate affairs compensation. The SFN compensated the ACT for an SPP it did not receive but which the other States received to reimburse them for revenue they lost when the Commonwealth assumed the corporate affairs regulation function from the States.

(ii) Police. The SFN recognised the above-average police salary expenses the ACT incurred under its contract with the Australian Federal Police (AFP). The Commission accepted that the ACT had no practical alternative but to use the AFP, and that it had no alternative but to meet the above average salary costs paid by the AFP.

(iii) Roads. The SFN recognised the higher maintenance costs associated with the wider arterial roads the ACT inherited from the

Commonwealth at self-government.

41. The Australian Government is making payments to the ACT in 2004-05 to cover those SFNs based on the Commission’s recommendations. The payments are being made as special revenue assistance and are funded outside the GST revenue pool.

42. In the 2004-05 budget, the Australian Government decided that it would cease providing special revenue assistance to the ACT from 2005-06. The terms of reference for the 2005 Update state that the Commission is no longer required to assess this assistance for the ACT and that it should take into account all relevant fiscal needs of the

ACT, as for the other States and the Northern Territory.

43. The Commission sought views from all parties on the interpretation of the terms of reference and whether any, or all, of the SFNs should be brought within the scope of fiscal equalisation. 4 4 * * * *

44. Australian and State Treasury views. The Australian Treasury said that the appropriate interpretation of the terms of reference is that the Commission is no longer required to conduct a separate assessment of the ACT’s SFNs. However, if, in the Commission’s view, the SFNs previously addressed by special revenue assistance should be considered as disabilities, they should be included in the calculation of relativities.

14

Main changes in this update

45. States differed in their views of whether the ACT’s SFNs should be included in the calculation of relativities and subsequently paid from the GST revenue and HCGs pool. New South Wales, Victoria, South Australia, and Tasmania opposed any payment from the pool because the ACT’s special needs stemmed from past or ongoing actions of the Australian Government and should be met by it, not the States. Queensland and

Western Australia acknowledged that the ACT faced special needs in the areas of police and roads. While they also considered the SFNs should be funded outside the pool, they said that funding them from the pool was more equitable than not funding them at all. However, they said the SFN for corporate affairs compensation should not be funded from the pool

because the terms of reference directed that the comparable SPPs received by the States should not affect the relativities. Both Territories said that the special needs should be assessed in the pool, although the Northern Territory said the Commission should seek clarification from the Australian Government.

46. Commission decisions. The Australian Government’s decision to cease the payments from 2005-06 means that any funding provided to the ACT for these needs must come from the pool of GST revenue and HCGs. This is at odds with the view of the Commission in the 2004 Review, that the Australian Government should fund these needs outside the pool. We are now asked to decide whether the other States should fund them through reduced shares of the GST revenue and HCGs pool or whether the ACT should

receive less funding.

47. We considered whether each of the SFNs assessed in the 2004 Review could be regarded as needs in the equalisation sense — costs incurred that are outside the control of the ACT Government. We decided to include the SFNs for police and roads in the calculation of relativities, but to exclude that for corporate affairs compensation,

48. We decided to include the police special needs because the ACT has no practical alternative but to use the AFP to provide police services and must meet the costs of these services, Wages are an important component of the costs of services and the ACT has little control over the level of wages paid by the AFP, which on the whole is above the

Australian average. We consider the higher costs incurred by the ACT because of the above average wages paid by the AFP constitute a disability that should be included in the calculation of relativities.

49. In the case of roads, we acknowledge that some of the roads the ACT inherited from the Commonwealth at self-government were wider than normal standards and that engineering work to vary their width would not be economic in the short term. In the meantime the ACT has no practical alternative but to meet the higher road maintenance costs. We conclude that the SFN for roads should be included in the calculation of

relativities. This decision does not change the view, stated in the 2004 Review Report, that the ACT should have full responsibility for the maintenance costs when sufficient time has elapsed to allow it to economically rebuild or restructure the roads (in the 2004 Review, the

Commission assumed that would be 15 years from 2004). 5 0

50. These disabilities are assessed, in this update, in new national capital components and disability factors in the Police and Roads expense categories. The size of each component and factor has been calculated using assessment methods similar to those used in the 2004 Review.

15

Chapter 3

51. The SPP for corporate affairs received by the States is quarantined from our assessments by the terms of reference. This implies that any needs the ACT has because Australian Government decisions deny it similar revenues are outside the scope of our analysis. Therefore, no assessment for the ACT has been included in the calculation of

relativities for the 2005 Update.

Northern Territory's depreciation and debt charges

52. In the 2004 Review Report, the Commission expressed concerns that the Northern Territory’s actual expenses for depreciation and debt charges were much larger than what might be expected if it had followed standard policies in its circumstances. The terms of reference ask us to review this.

53. State views. All States except the Northern Territory opposed a wide- ranging review of the Depreciation and Debt Charges assessments. They did so because it could result in method changes (which should not occur in an update), which in turn could set a precedent for method changes in other areas. Many States also said that method

changes should not be introduced for the Northern Territory alone and any such changes would also affect other States.

54. The Northern Territory said that the arguments presented in its submission had not sought to overturn the methods developed in the 2004 Review. It said that most of the issues it raised could be addressed with minor changes to the existing assessments.

55. On the specific issues, the Northern Territory said:

(i) there were problems with the classification of depreciation expenses, but time and resource constraints meant improvements would be unlikely for the 2005 Update;

(ii) the treatment of some SPPs for capital purposes within the debt charges assessment should be reconsidered;

(iii) at least part of the general purpose capital grants should not be treated as funds available to offset borrowing requirements because there was no direct relationship between general purpose capital grants and non-replacement capital spending, and in its case funds for road maintenance were included in its general purpose capital grants during the 1980s;

(iv) the 1975 takeover by the Australian Government of $1 billion of State debt reduced State debt and should be reflected in the calculation of the level of borrowing States would have undertaken under standard policies;

(v) all States had gross interest payments that significantly exceeded their net interest payments, which meant there was a strong case for applying the cost of borrowing disabilities to the interest payments on gross borrowings;

16

Main changes in this update

(vi) the impact of climate on depreciation was extensively explored during the 2004 Review, and further progress may not be achievable in the 2005 Update;

(vii) consideration should be given to introducing an allowance for the effects on debt servicing costs of the very different timing of development and capital expenditure in the Northern Territory relative to the other States; and

(viii) the effects of differences between States in their capacity to fund capital expenditure from the proceeds of privatisation had not yet been examined.

56. Commission decisions. As required by the terms of reference, we have reviewed the Northern Territory's debt charges and depreciation needs.

57. We have amended:

(i) the classification of some of the Northern Territory’s actual expenses based on revised data on depreciation expenses for 2001-02 and 2002-03 as provided by the Territory; and

(ii) the treatment of some SPPs for capital purposes within the debt charges assessment to reflect extra information provided by the States and to comply better with our guidelines for the treatment of SPPs.

58. We decided that, in calculating the level of borrowing States would have undertaken under standard policies, we should continue to:

(i) take account of State receipts from general purpose capital assistance because those funds reduced the need to borrow, regardless of whether they were provided to fund new capital expenditure or other State expenses; and

(ii) not allow for the 1975 takeover of State debt because we consider those transactions were the start of the ongoing annual Australian Government contributions to the sinking fund on behalf of the States, which are quarantined by the terms of reference.

59. We have not changed the methods applied in the depreciation and debt charges assessments.

60. We continue to apply the cost of borrowing disabilities to net interest payments, rather than gross payments. This is because the method adopted in the 2004 Review, is based on the Commission’s acceptance of the view of Heads of Treasury that needs should not be assessed for debt charges paid on borrowings to acquire financial assets. 6 1

61. We have not included an allowance for the effects of climate on depreciation costs. Despite extensive examination of the issue during the 2004 Review, it was not

17

Chapter 3

possible to devise a reliable method for measuring the effects and new information was not available in this update.

62. Nor did we amend the methods used to allow for further effects on debt charges of differences between States in the timing of capital acquisitions or to introduce an allowance for the effects of differences in their ability to use the proceeds of privatisation to fund capital acquisitions. Such influences may have an above average effect on debt

servicing expenses in the Northern Territory, but the issues are contentious and little information is available to identify and measure them reliably for the Northern Territory or the other States. In particular, we note that the debt charges assessment already makes an allowance for the timing of development in the Northern Territory and the other States by assuming the timing of capital acquisition is linked with population growth. If this assumption is inappropriate for the Northern Territory, it may also be for the other States.

63. We are also aware that the extent of privatisation undertaken by each State is highly influenced by its policy choices. Determining the extent to which interstate differences in privatisation were due to the effect of disabilities rather than policy choice would be extremely difficult and heavily reliant on judgment.

64. Without reliable information, we could not be confident that making additional allowances in any of these areas would improve equalisation outcomes.

65. The differences between actual and standardised expenses for the Northern Territory remain large despite the actions taken in this update to review the classification of debt charges and depreciation expenses in the Northern Territory and the treatment of capital SPPs in the calculation of State borrowing requirements.

18

C H A P T E R 4

THE RELATIVITIES FOR 2005-06

1. This chapter presents the relativities we assess for use in 2005-06. It also provides an illustration of the effect of the GST relativities on the revenue from the GST and HCGs pool received by each State.

THE ASSESSED RELATIVITIES

GST relativities

2. Table 4-1 shows the GST relativities we regard as appropriate for use in distributing the pool of GST revenue and HCGs among the States in 2005-06. It also compares them with the relativities assessed in the 2004 Review and used in 2004— 05. Attachment B provides details of the calculation of the 2005 Update relativities.

Table 4-1 PER CAPITA GST RELATIVITIES: 2004 REVIEW AND 2005 UPDATE

2004 Review 2005 Update

New South Wales 0.86750 0.86846

Victoria 0.86534 0.87552

Queensland 1.05504 1.04389

Western Australia 1.03054 1.02500

South Australia 1.20407 1.20325

Tasmania 1.55939 1.55299

Australian Capital Territory 1.12930 1.14300

Northern Territory 4.26538 4.26682

FAG relativities

3. The FAG relativities are used to derive the Guaranteed Minimum Amounts (GMAs) States would receive under the transitional provisions of the IGA. They differ

19

Chapter 4

from the GST relativities because they reflect the revenue capacities and expense responsibilities the States would have if the reforms to Commonwealth-State relations that accompanied the introduction of the new tax system on I July 2000 had not occurred.

4. Table 4-2 presents the FAG relativities for the 2004 Review and the

2005 Update. It is unlikely that, in 2005-06, any State will receive payments under the transitional provisions. Details of the calculation of these relativities for the 2005 Update are in Attachment C.

Table 4-2 PER CAPITA FAG RELATIVITIES: 2004 REVIEW AND 2005 UPDATE

2004 Review 2005 Update

New South Wales 0.80363 0.80494

Victoria 0.83480 0.84699

Queensland 1.10104 1.08397

Western Australia 1.00781 0.99807

South Australia 1.30402 1.30342

Tasmania 1.74908 1.75127

Australian Capital Territory 1.16529 1.17714

Northern Territory 5.22707 5.30427

APPLYING THE RELATIVITIES

5. The relativities we assess in this update are for use, together with State population estimates, in determining State shares of the GST revenue and HCGs pool for 2005-06. 6 7

6. Table 4-3 compares estimates of the revenue each State was expected to receive from the GST revenue and HCGs pool in 2004-05, and our illustrative estimates of the amounts they might receive in 2005-Ό6 based on:

(i) the relativities we assess in this update;

(ii) estimates of the GST revenue and HCGs pool for 2005-06 based on data in the Mid-year Economic and Fiscal Outlook 2004-05; and

(iii) the latest ABS projections of States’ populations at December 2005.

7. The increase in revenue for each State shown in Table 4-3 is the combined effect of changes between:

20

The relativities for 2005-06

(i) its per capita relativity assessed by the Commission in the 2004 Review and the 2005 Update;

(ii) its estimated population as at December 2004 and December 2005; and

(iii) the estimated total GST revenue and HCGs pool for 2004-05 and the estimated pool for 2005-06.

The Commission’s work affects only the change in per capita relativities.

Table 4-3 DISTRIBUTION OF 2004-05 GST REVENUE AND HCGS POOL AND ILLUSTRATIVE 2005-06 GST REVENUE AND HCGS POOL

NSW Vic Qld WA SA Tas ACT NT Aust

$ni $m $m $m $m $m $m $m $m

Estimated 2004-05 GST and HCGs 12 406.2 9 141 6 8 746.9 4 349.0 3911.2 1 597.9 771 8 1 794 2 42 718.7

Illustrative 2005-06 GST and HCGs“" 13 062 0 9 743.3 92103 4 576 9 4 092 1 1 674.2 818.4 1 884 8 45 062.0

Increase 655.8 601 6 4634 2279 180 9 76 4 466 906 2 343.2

(a) Excludes any budget balancing assistance that may be paid. Source: The pools of GST revenue and HCGs for 2004 05 and 2005-06 are taken from the Commonwealth of Australia Mid-year Economic unit l iscul Outlook 2004-05.

8. Table 4-4 identifies the impact of each of these components. The change in the relativities redistributed $127.7 million. Chapter 5 discusses the main reasons for the changes in the relativities assessed by the Commission.

9. Table 4— 4 shows that the growth in the GST revenue and HCGs pool has the largest effect on the change in State revenues, increasing them by $2.3 billion. The change in State populations redistributed funds to the States with above average population growth — Queensland and Western Australia. The total amount redistributed by the changes in

State populations was $92.1 million.

10. We emphasise that each State’s GST revenue and HCGs for 2004-05 and 2005-06 shown in Table 4-3 are estimates only. The amount each State actually receives in each year will vary from that shown in the table because:

(i) the GST revenue and HCGs available for distribution in each year will change from that estimated for the Mid-year Economic and Fiscal Outlook 2004-05·,

(ii) decisions taken at the 2005 meeting of the Ministerial Council for Commonwealth-State Financial Relations, including whether the relativities recommended in this report should be applied; and ( iii)

(iii) revised projections of State populations at December 2004 and 2005.

21

Chapter 4

Table 4-4 REASONS FOR CHANGE IN DISTRIBUTION OF GST REVENUE AND HCGS POOL BETWEEN 2004-05 AND 2005-06

Source o f change NSW Vic Old WA SA Tas ACT NT Aust

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

Change in relativities*31 12.0 106.2 -93.7 -24.0 -3.2 -6.8 9.2 0.3 0.0

Change in application year population"” -3 5 .4 - 11.2 78,1 13.9 -2 8 .6 -3 .9 -5 .2 -7 .7 0.0

Change in size o f pool,cl 679.2 506.7 478.9 238.0 212.8 87.1 42.6 98.0 2 343.2

Total change 655.8 601.6 463.4 227.9 180.9 76.4 46.6 90.6 2 343.2

(a) Effects on the distribution of the 2004-05 estimated GST and HCGs pool of applying the 2005 Update GST relativities instead of those assessed in the 2004 Review. (b) Effects on the distribution of the 2004-05 estimated GST and HCGs pool of using estimated State populations as at December 2005 instead of populations as at December 2004. (c) The effects of applying the 2005 Update relativities to the increase in the GST revenue and HCGs pool between

2004-05 and 2005-06.

22

C H A P T E R 5

WHY THE RELATIVITIES HAVE CHANGED

1. This chapter presents the 2005 Update relativities in their historical context. It then identifies the main reasons for the changes between the relativities assessed in the 2004 Review and the 2005 Update.

RELATIVITIES OVER TIME

2. The financial capacity of each State varies from year to year as changes in its demographic and economic circumstances lead to changes in its revenue raising capacity and the use and costs of services. The relativities assessed by the Commission summarise the relative financial capacities of all the States.

3. Australia’s equalisation process is a dynamic one. The cycle of periodic reviews of methods and annual updates is designed to keep the relativities up-to-date. Figure 5-1 shows the relativities assessed for use in each year since 1999-2000 and illustrates how changes in States’ circumstances can cause the relativities to move from year to year. The changes in relativities between:

(i) 1999-2000 and 2003-04 reflect changes in State circumstances (including the effects of the introduction of the GST) because, in general1, the relativities were based on the methods adopted in the 1999 Review;

(ii) 2003-04 and 2004— 05 reflect the new methods introduced in the 2004 Review as well as changes in State circumstances; and

(iii) 2004-05 and 2005-06 reflect the outcomes of this update, which are driven mainly by changes in State circumstances shown in revised and more recent data.

In the 2001 Update, the data on State revenues and expenses changed from a cash to an accrual basis. In addition, in response to a request in the terms of reference, the Commission reviewed and changed the assessment method for superannuation expenses to take unfunded liabilities into account.

23

Chapter 5

Figure 5-1 FLUCTUATIONS IN STATE PER CAPITA RELATIVITIES, 1999-2000 TO 2005-06

Tasmania

South Australia

I I - Western Australia

Queensland

New South Wales Victoria

1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

4. Figure 5-2 shows the aggregate effects of relativities assessed by the Commission on the distribution of the pool, relative to an equal per capita distribution of that pool. The proportion of the pool redistributed under the equalisation arrangements varies over time because of:

(i) changes in State circumstances;

(ii) changes in methods used to measure State financial capacities following the periodic reviews of methods (for example in 1988-89, 1993-94 and 2004-05); and

(iii) the effects of the introduction of the GST and the subsequent abolition of a number of State taxes (for example in 2000-01 and 2001 -02). 5

5. Figure 5-2 shows that the proportion of the pool redistributed by

equalisation exhibits a long-term decline between 1981-82 and 2005-06.

24

Why the relativities have changed

Figure 5-2 PROPORTION OF POOL REDISTRIBUTED, 1981-82 TO 2005-06

CHANGES SINCE THE 2004 REVIEW

6. The relativities we assess in this update differ from the 2004 Review

relativities used to distribute the pool of GST revenue and HCGs in 2004-05. Table 5-1 illustrates the potential effect of those differences on the revenue each State may receive from the GST and HCGs pool. It does so by applying the relativities from both the 2004 Review and this update to a constant pool of $42 718.7 million (the latest estimate of the amount available for distribution in 2004-05 from the Commonwealth of Australia's Mid-year Economic and Fiscal Outlook 2004-05) and State populations at 31 December 2004.

Table 5-1 EFFECT OF 2004 REVIEW AND 2005 UPDATE GST RELATIVITIES ON DISTRIBUTION OF 2004-05 GST REVENUE AND HCGS POOL

NSW Vic Old WA SA Tas ACT NT Aust

$m $nt $m $m $m $m $m $nt $ni

2004 Review131 12 406.2 9 1416 8 746.9 4 349 0 3911 2 1 597.9 771 8 1 7942 42 718 7

2005 Update'1 ” 12418.1 9 247.8 8 653.2 4 325.0 3 908.0 1 591.1 781.0 1 794.5 42 718 7

Change 120 106.2 -93 7 -24.0 -3.2 -6 8 9.2 03 0.0

(a) Derived from Commonwealth of Australia, Mid-year Economic and Fiscal Outlook 2004 05. (b) Derived by applying the 2005 Update relativities to the 2004-05 pool and State populations as at December 2004

25

Chapter 5

7. The figures in the last row of Table 5-1 show that, in total, using the 2005 Update relativities instead of the 2004 Review relativities would redistribute $127.7 million. This is less than the amounts redistributed by the 2001, 2002, and 2003 Updates of between $150 million and $260 million.

8. The changes since the 2004 Review arise because we have made the relativities as up-to-date as possible by using the most recent data on State finances, demographic and economic trends, and the use and costs of State services. Specifically we:

(i) revised and updated data used in the 2004 Review for the years 1999-2000 to 2002-03; and

(ii) reflected more recent State circumstances in the calculations by including data for 2003-04 and deleting data for 1998-99 from our five year moving average.

9. Consistent with the terms of reference, we also decided to change the assessment methods to include allowances for the higher police salary and road maintenance costs incurred by the ACT stemming from cost legacies inherited at self­ government. Table 5-2 dissects the changes in the distribution of the GST revenue and

MCGs pool implied by the changed relativities into those due to data revisions, changes in State circumstances and the change in method in the ACT assessments.

Table 5-2 EFFECT OF DATA REVISIONS AND CHANGES IN STATE CIRCUMSTANCES AND METHOD ON THE DISTRIBUTION OF THE 2004-05 POOL

NSW V ic Q ld WA SA Tas A C T NT C hange

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

R evisions'”* -9.9 76.4 -32.6 3.9 -12.4 -13.8 2.5 -14.0 82.8

C hanges in circum stances'1 ” 24.8 31.8 -59.0 -26.8 9.9 7.4 -2.6 14.7 885

C hange in m ethod'01 -3.2 -2.4 -1 8 -0.9 -0.7 -0.2 9 4 -0.1 9.4

Total 12.0 106.2 -93.7 -24.0 -3.2 -6.8 9.2 0.3 1277

(a) That is, revising and updating data for 1999-2000 to 2002-03. (b) That is, replacing 1998 99 data with 2003-04 data (c) That is, assessing a national capital factor in the Police and Roads categories.

10. Table 5-2 indicates that in this update, the effects on the change in the distribution of the GST revenue and HCGs pool of including more recent State circumstances were a little larger than those of revising data for the years that were common to the 2004 Review and the 2005 Update ( 1999-2000 to 2002-03). The method change for the ACT had comparatively small effects.

11. The most significant revisions to data, which are discussed later in this chapter, were made to data on:

26

Why the relativities have changed

(i) State expenses from GFS, especially the availability of more reliable and comparable data on the elements of superannuation expenses and the revised expenses data for 2002-03;

(ii) the use of courts by Indigenous and non-lndigenous people;

(iii) Victorian expenses on natural disaster relief in 2002-03; and

(iv) insurance premiums collected by insurers in each State.

12. Taking account of more recent State circumstances has meant that the increases between 1998-99 and 2003-04 in the relative revenue raising capacities of New South Wales, Queensland, Western Australia, and the ACT are reflected in the assessments. The assessments also reflect the changes in the relative use and costs of services between

1998-99 and 2003-04. These included above average increases in underlying wage levels in New South Wales, changes in the proportion of the population in different States that use high cost hospital services and changes in school enrolments.

13. Table 5-3 provides a different perspective. It identifies the effects on State revenues from the 2004-05 GST and HCGs pool of changes introduced in this update in the assessments of State:

(i) relative revenue raising capacities;

(ii) relative costs of providing services; and

(iii) revenues received from SPPs.

Table 5-3 CHANGE IN DISTRIBUTION OF 2004-05 GST REVENUE AND HCGS POOL BY SOURCE OF CHANGE

Source o f change NSW Vic Old WA SA Tas ACT NT Change

$m $m $m Sm Sm Sm Sm Sm Sm

Revenue assessments -87.6 75.4 -37.0 7.1 25.2 13.5 -4.1 7.6 128.8

Expense assessments 93 6 32.1 -49.3 -30.4 -28.1 -25.5 13.0 -5.5 138.7

SPPs 5.7 -1.7 -7.2 -0.6 -0.3 5.3 0.3 -1.5 11.3

Total change 12.0 106.2 -93.7 -24.0 -3.2 -6.8 9.2 0.3 127.7

14. The table shows that:

(i) changes in the revenue assessments (caused by data revisions and including more recent State circumstances) were the primary reason for the increase in the share of Victoria;

(ii) changes in expense assessments were primarily responsible for the increase in the revenue from the GST and HCGs pool received by

27

Chapter 5

New South Wales and the ACT, and the reductions for Western Australia, South Australia and Tasmania;

(iii) in Queensland, the effects of increases in its relative revenue raising capacity were reinforced by reductions in its relative costs of providing services; and

(iv) in the Northern Territory, the effects of reductions in its relative revenue raising capacity were almost offset by reductions in its relative costs of providing services and increases in its share of SPPs.

15. The following sections explain the influences that contributed to the changes in revenue and expense assessments. Our revenue assessments change over time because of changes in:

(i) the relative revenue raising capacity of the States — for example, between 1998-99 and 2003-04, the per capita value of real estate transfers in Queensland increased by 150 per cent compared with an average increase of 113 per cent, thereby increasing its relative revenue raising capacity; and

(ii) changes in the importance of a State tax within the budgets of the States as a whole — for example, between 1998-99 and 2003-04, revenue from stamp duty on conveyances increased by 138 per cent, which increases the effect on State shares of the GST and HCGs pool of their relative capacity to raise that tax.

16. Our expense assessments vary over time because:

(i) circumstances that are outside the control of individual States vary at a different rate from the Australian average, including:

• shifts in the per capita use of services in a State differ from those for Australia as a whole — for example, relative use of educational services would decrease if the proportion of school-aged people in a State’s population rose more slowly than the Australian average; and

• changes in the average unit costs of providing those services — for example, a State’s relative costs would increase if its proportion of population living in remote areas increased more than average; and

(ii) the priorities the States as a whole attach to services change — for example, an increase in the importance attached to hospital inpatient services would increase the revenue from the GST and HCGs pool of States assessed to have above average per capita costs of providing those services.

17. Box 5-1 provides an overview of the direction of the effects on State shares of the GST revenue and HCGs pool of changes in the various elements of our assessments.

28

Why the relativities have changed

Box 5-1 EFFECTS ON GST AND HCGS SHARES OF VARIOUS CHANGES

C h a n g in g rev en u e ra isin g ca p a city

Increase in relative revenue raising capacity (Assuming no change in the importance o f the tax)

Decrease in GST and HCGs share

Decrease in relative revenue raising capacity (Assuming no change in the importance o f the tax)

Increase in GST and HCGs share

C h a n g in g co sts o f se r v ic e p ro v isio n

Increase in relative cost o f service provision (Assuming no change in the average priority o f the service)

Increase in GST and 1 ICGs share

Decrease in relative cost o f service provision (Assuming no change in the average priority o f the service)

Decrease in GS T and HCGs share

( h a n g in g im p o r ta n ce o f tax (as m ea su red by c h a n g in g rev en u e sta n d a r d s)

Increase in importance (revenue standard) State assessed to have high revenue raising capacity'

State assessed to have low revenue raising capacity

Decrease in GST and HCGs share

Increase in GST and HCGs share

Decrease in importance (revenue standard) State assessed to have high revenue raising capacity

State assessed to have low revenue raising capacity

Increase in GST and HCGs share

Decrease in GST and HCGs share

C h a n g in g p rio rity in S ta te ex p e n se s (a s m ea su re d by c h a n g in g e x p e n se sta n d a rd s)

Increase in priority (expense standard) State assessed to have a low cost o f service provision

State assessed to have a high cost o f service provision

Decrease in GST and HCGs share

Increase in GST and HCGs share

Decrease in priority (expense standard) State assessed to have a low cost o f service provision

State assessed to have a high cost o f service provision

Increase in GST and HCGs share

Decrease in GST and HCGs share

Changes in revenue assessments

18. Table 5-4 shows the percentage changes between 1998-99 and 2003-04 in some indicators that are broadly related to the capacities of States to raise revenue. They generally support the movements in relative revenue raising capacities indicated by our assessments in this update. The movements in the indicators do not explain all the

movements in our assessments because they do not fully reflect our measures of State revenue bases. The bases we apply reflect the activities that would be taxed under an

29

Chapter 5

average of the tax policies adopted by the States. For example, we allow for a non-taxable threshold when assessing the capacity to raise payroll tax from employee compensation. If the growth in employment in a State is heavily concentrated in small businesses that are below the threshold then its revenue raising capacity will be lower than otherwise.

Table 5-4 CHANGES IN SELECTED INDICATORS RELEVANT TO TAX BASES, 1998-99 TO 2003-04

Indicator NSW Vic Qld WA SA Tas ACT NT Aust

% % % % % % % % %

Population'10 5.2 6.0 10.6 7.1 2.5 1.8 4.1 4.0 6.2

Gross State product'1 ” 35.6 37.7 44.5 39.9 36.1 27.8 35.7 40.1 37.9

Household disposable income'1 ” 31.2 33.2 32.8 35.8 30.5 30.1 32.9 28.0 32.4

House price index — capital cities'”' 91.1 86.9 98.2 64.0 94.5 52.2 96.9 26.7 87.1

Commercial and industrial land values'”1 81.1 62.8 57.4 30.8 50.7 0.1 45.7 69.6 64.4

Mining value o f production'0 1.9 7.8 31.7 34.1 40.8 -21.0 0.0 10.3 24.7

Compensation o f employees'10 30.9 32.6 37.0 37.0 25.7 24.9 28.2 28.1 32.4

(a) Mean resident population, ABS, special data request, December 2004.

(b) Figures are in nominal prices. ABS, Australian National Accounts, State Accounts, 2003-04, Catalogue No. 5220.0, Tables 3. (c) ABS, Australian National Accounts, State Accounts, 2003AM, Catalogue No. 5220.0, Table 33 (d) ABS, House Price Indexes: Eight ( 'apital Cutes, June Quarter 2001 and 2004, Catalogue No. 6416.0, Table I (e) State data returns for the 2005 Update. (f) State data returns for the 2005 Update and Australian Bureau of Agriculture and Resource Economics,

(g) ABS, Australian National Accounts, State Accounts, 2003-04, Catalogue No 5220.0, Table 23.

19. Table 5-5 shows the revenue sources that made the largest contributions to the changes in State revenues from the 2004-05 GST and HCGs pool implied by the 2005 Update relativities.

Table 5-5 EFFECT OF CHANGES IN REVENUE ASSESSMENTS ON DISTRIBUTION OF GST REVENUE AND HCGS POOL(a)

Source o f change NSW Vic Qld WA SA Tas ACT NT Change

$m $m $m $m $ni $m $m $m $m

Stamp duty on conveyances -13.5 43.8 -88.7 19.6 30.8 6.6 -4.4 5.9 106.6

Insurance taxation -46.2 17.4 13.9 4.9 5.0 3.6 -0.5 1.8 46.7

Payroll taxation -18.1 23.2 21.0 -23.1 -2.3 0.3 0.9 -2.0 45.5

Land revenue -36.8 6.7 9.1 17.3 2.0 2.6 -1.1 0.2 37.8

Mining revenue 13.3 -3.0 22.1 -30.3 -3.6 1.8 -0.2 -0.1 37.2

Other effects 13.6 -12.8 -14.4 18,6 -6.7 -1.5 1.2 1.9 35.3

Total -87.6 75.4 -37.0 7.1 25.2 13.5 -4.1 7.6 128.8

(a) Calculated as the effect on the distnbution of the 2004-05 GST revenue and HCGs pool of $42 718,7 million of the assessments in the 2005 Update compared with the assessments from the 2004 Review.

30

Why the relativities have changed

20. Stamp duty on conveyances. The changes in this category are the largest of all our assessments. The nationwide property boom has increased the importance of this tax as a source of State revenue over the years 1998-99 to 2003-04. This, together with the well above average capacity of New South Wales to raise revenue from conveyances, has

reduced its revenue from the GST and HCGs pool.

21. However, the biggest reason for change in this category was a large increase in the value of real estate transactions in Queensland between 1998-99 and 2003-04. Queensland’s revenue base has been increasing for some time, as acknowledged, for example, by Queensland Treasury. Its 2003-04 Queensland Economic Review said that dwelling construction had proceeded at a much stronger pace than nationally2. It also said that the State is experiencing by far the strongest growth in property prices of any state over the year to the June quarter3. The above average movement in the house price index for

capital cities, shown in Table 5-4 further supports the increase in Queensland’s assessed capacity to raise revenue from conveyances.

22. The level of real estate activity in the ACT was low in 1998-99 as a consequence of the fall in economic activity in the mid 1990s. However strong growth between 1998-99 and 2003-04 has sharply increased the ACT’s revenue raising capacity. The growth in the house price index for capital cities shown in Table 5-4 is consistent with the increased capacity for the ACT to raise this duty.

23. Insurance taxation. The State revenue bases for this tax are measured using data on insurance premiums collected from insurers by APRA. Changes in the reported value of premiums have driven the changes in our assessments of State revenue raising capacities. The premium data for 2002-03 onwards have been affected by APRA’s

introduction of a new data collection framework. Under APRA’s new framework, insurers report premium revenues for each State on the basis of where the risk is located and on premiums collected in the year. (Previously the data were based on where the business was written and premiums earned in the year.) The new data accord better with how the States

impose the tax.

24. The reported data show above-average growth in premium revenues for New South Wales, which increased its assessed capacity to raise revenue from insurance taxation. This increase in capacity is consistent with trends in the insurance industry as implied by movements in the State’s revenue collections. For example, in its 2003-04

Budget Paper, New South Wales said, ‘Insurance duty revenue in 2002-Ό3 declined by 8.6 per cent on 2001-02 with the cut in the general insurance duty rate from 10.0 percent to 5.0 percent from August 2002. However, the revenue from insurance duty in 2002-03 was above the original estimate due to the unexpected continuation of high premium increases’4.

25. Payroll taxation. The revenue base for this tax is measured using estimates of the per capita value of compensation to employees paid by businesses whose annual payroll exceeds the Australian average tax free threshold ($650 000 in 2003-04).

Queensland Economic Review 2004 3, Office of Statistical Research, Queensland Treasury, p 7. Ibid. New South Wales, Budget Statement, Budget Paper No.2, 2003-04, p 3-17.

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Chapter 5

26. The main reason this assessment changed was an above average increase in the measured taxable proportion of payrolls in New South Wales, Western Australia, and the Northern Territory (and reductions for the other States) between 1998-99 and 2003-04. The extent of these movements is partly affected by the introduction during the 2004

Review of a new approach to measuring the revenue base for 2001-02 onwards, in particular a new approach to the exclusion of amounts below the tax-free threshold. The new approach, which relies on independent data collected by the ABS, provides a more reliable and robust measure of State revenue raising capacities than the approach applied for

1998-99 to 2000-01, which included data from State tax collection systems.

27. While Queensland had the equal highest increase in total compensation of employees between 1998-99 to 2003-04, this was more than offset by the disproportionate increase for firms below the threshold and its above average population growth. The net effect was a decrease in Queensland’s relative capacity to raise payroll tax.

28. Land revenue. The revenue raising capacity for land revenue reflects the per capita value of land used for commercial, industrial, and non-principal residential purposes. Relative capacities to raise land revenue in 2003-04 differed from those in 1998-99 because of changes in land values. The reduction in New South Wales’s revenue from the GST and HCGs pool attributable to this tax arose primarily because the value of commercial and industrial land in the State increased by 17 percentage points more than the

Australian average. On the other hand, Western Australia’s land value increased more slowly than the Australian average.

29. In the ACT, the reduction in its revenue from the GST and HCGs pool reflected an above average increase in the value of non-principal residential land. This was partly due to an increase in the proportion of rental properties in the State.

30. Mining. Our assessment of the relative capacities to raise mining revenue depends largely on interstate differences in the value of coal and other mineral production. Between 1998-99 and 2003-04, the value of export open-cut and underground coal fell relative to the value of other mining products. As a result, the revenue base (and hence

revenue raising capacity) for New South Wales and Queensland (the two States which produce these types of coal) fell relative to the other States.

31. In addition, Western Australia’s revenue from offshore oil and gas more than doubled between 1998-99 and 2003-04, which reduced its revenue from the GST and HCGs pool. However, that effect was partly offset by a correction to our treatment of revenue received in 1999-2000 to 2002-03 from the SPP relating to the Western Australian

Submerged Land Act5.

The revenue was included in our assessments for the 2004 Review, but should have been excluded

32

Why the relativities have changed

Expense assessments

32. Table 5-6 shows the percentage changes between 1998-99 and 2003^)4 in some indicators that are broadly related to the relative costs of service provision. They generally support the movements in relative costs assessed in this update.

Table 5-6 CHANGES IN SELECTED INDICATORS RELEVANT TO SERVICE COSTS, 1998-99 TO 2003-04

Indicator NSW Vic Old WA SA Tas ACT NT Aust

% % % % % % % % %

Population18’ 5.2 6.0 10.6 7.1 2.5 1.8 4.1 4.0 6.2

Wages and salaries level11” 24.5 23.2 2 0 3 23.5 22.7 24.4 27.2 16.9 23.2

Building price index, capital cities101 19.9 29.4 21.6 15.4 17.6 7.7 15.0 10.0 16.8

Employed persons'"” 9.3 9.5 134 9.0 9.5 7.6 11.4 1.7 10.0

Unemployment rate1® 1 - l.l -1.8 -1.8 - 1.1 -2.6 -3.1 -2.1 1.2 -1.6

Per capita use o f inpatient hospital services'1’ -2.1 4.8 -7.1 -6.0 -0.8 4.6 -0.9 6.0 -1.2

Government school enrolments per 1000 pop'8’ -6.8 -4.2 -5.3 -9.8 -7.7 -3.9 -9.3 -6.3 -6.2

Non-government school enrolments per 1000 pop"” 6.5 -0.8 1.9 5.8 8.5 0.1 6.5 3.1 3.6

(a) Mean resident population, ABS, special data request, December 2004. (b) Data derived from Mean Weekly Earnings in all Jobs, Employee Earnings, Benefits and Trade Union Membership, ABS Catalogue No. 6310.0, August 2003, Table 1.

(c) From Rawlinsons, Australian ( '(instruction Handbook, 2004, p3. The changes are between 1998 and 2003 (d) Average employment over the financial year, ABS, Australian Economic Indicators, November 2004, Catalogue No. 1350.0, Table 9.9.

(e) Average unemployment rate over the financial year ABS, Australian Economic Indicators, November 2004, Catalogue No. 1350.0, Table 9.10, expressed as percentage change (0 Australian Hospital Statistics, Australian Institute of Health and Welfare, 1999-2000 and 2001 02. (g) 1998, 1999 and 2003 data from ABS, Schools Australia. Catalogue No 4221.0 2004 student data supplied by

State education authorities. 1998 and 1999 data were averaged for 1998-99 and 2003 and 2004 data were averaged for 2003-04. (h) 1998, 1999 and 2003 data from ABS, Schools Australia. Catalogue No. 4221.0 2004 student data supplied by Department of Education, Science and Training. 1998 and 1999 data were averaged for 1998-99 and 2003 and

2004 data were averaged for 2003-04.

33. Table 5-7 shows the expense categories (or government services) that made the largest contributions to the changes in the funds each State receives from the GST and HCGs pool between the 2004 Review and this update. Because different influences affect the costs of providing each service, the size and direction of the changes can vary from

service to service. 3 4 * *

34. Table 5-8 provides an alternative dissection of the effects of the expense assessments. It dissects those effects according to the changes between the 2004 Review and this update in our assessments of the influences (or disabilities) that caused them.

33

Chapter 5

Table 5-7 EFFECT OF CHANGES IN EXPENSE ASSESSMENTS ON THE DISTRIBUTION OF 2004-05 GST REVENUE AND HCGS POOL, BY FUNCTION00

Source o f change NSW Vic Qld WA SA Tas ACT NT Change

$m $m $m $m $m $m $nt $m $m

Administration o f justice 10.9 31.5 -13.4 -7.6 2.4 -1.7 1.0 -23.2 45.8

Inpatient services 31.0 -7.8 8.6 -14.7 -6.1 -5.7 2.4 -7.6 41.9

Superannuation 9.3 9.8 -0.5 -11.7 -10.0 -6.4 11.1 -1.6 30.1

Government schools education 12.0 15.5 -0.4 -16.1 -5.0 0.1 -2.8 -3.3 27.6

Debt charges -7.7 10.5 1.0 -15.3 1.5 1.1 4.1 4.7 23.0

Public safety - user charges -19.0 5.1 6.0 2.5 4.1 1.2 - 0.1 0.3 19.1

Roads 6.8 -10.0 -6.6 6.1 -1.4 0.4 2.2 2.4 17.9

Public safety — expenses -8.8 15.2 -6.2 1.2 -1.0 -0.4 -1.2 1.3 17.7

Other effects 59.3 -37.7 -37.9 25.1 -12.6 -14.0 -3.6 21.4 105.8

Total 93.6 32.1 -49.3 -30.4 -28.1 -25.5 13.0 -5.5 138.7

(a) Calculated as the effect on the distribution of the 2004-05 GST revenue and HCGs pool of $42 718.7 million of the assessments in the 2005 Update compared with the assessments from the 2004 Review.

35. For a variety of reasons, the overall costs of providing services have increased faster in New South Wales, Victoria, and the ACT than they have in the other States. The main reasons for the changes are outlined below.

36. Administration of justice. The main reason for the change in this category is that we corrected a misclassification of data on Indigenous court appearances provided by Western Australia for the 2004 Review. (The Indigenous court appearances data provided to the Commission were incorrectly labelled as non-lndigenous and vice-versa.) This

resulted in an increase in the Australian average use rates for non-lndigenous people and decreased use rates for Indigenous people. Therefore, GST revenue shares of States with a below average proportion of Indigenous people in their population (Victoria in particular, but also New South Wales and the ACT) increased. Conversely the shares of States with

above average proportions of Indigenous people in their population (especially the Northern Territory) decreased.

37. Inpatient services. Replacing the 1998-99 hospital use and cost disabilities with 2003-04 disabilities6 increased the relative costs of providing services in New South Wales, Queensland, and the ACT. Relative costs were reduced in the other States. This is because New South Wales, Queensland, and the ACT experienced an above average

increase in the proportions of their populations in the groups that are now using hospitals more intensively and cost more per service.

The 1998^99 hospital use disabilities were based on hospital use data for 1999-2000 and the Rural Remote and Metropolitan Area regional classification of 2001 Census population The 2003-04 disabilities were based on hospital use data for 2001-02 and the State based Accessibility/Remoteness Index of Australia classification of 2001 Census population

34

Why the relativities have changed

38. A relatively greater increase in underlying wage levels in New South Wales between 1998-99 and 2003-04 also increased its relative costs of inpatient services, which contributed to an increase in revenue from the GST and HCGs pool.

39. While the changes in the disabilities assessed in this category are relatively small, their effects on the relativities and shares of the GST and HCGs pool are large because inpatient services are a large part of State budgets (about 14 per cent of total expenses).

Table 5-8 EFFECT OF CHANGES IN EXPENSE ASSESSMENTS ON THE DISTRIBUTION OF 2004-05 GST REVENUE AND HCGS POOL, BY DISABILITY181

NSW Vic Qld WA SA Tas ACT NT Change

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

Indigenous influences1151 10.9 57.4 -27.1 -1 1 7 7.8 -5.1 0.9 -33.1 77.0

Other socio-demographic composition influences"5’ 19.1 15.6 0.4 -39.6 -9.9 -1.8 12.5 3.9 51.4

Wage levels 81.7 -26.1 -27.1 -1.4 -13.4 -3.2 0.6 - 11.1 82.3

Other input costs"” 12.0 11.7 2.2 - 10.0 -10.9 -6.7 2.7 -1.5 28.8

Scale o f service provision'0 20.9 12.0 2.6 -2.3 -3.9 -5.9 -12.6 -10.7 35.5

Urban influences'” 3.8 3.0 -2.1 -1.4 -0.6 -2.3 0.2 -0.6 7.0

Population dispersion'8' -5.0 2.0 2.1 -2.6 3.0 -0.5 0.5 0.4 8.0

Economic environment’"’ -16.2 -4.5 -15.4 23.4 2.4 - 1.0 10.5 0.7 37.0

Physical environment"’ -8.3 11.1 -11.7 7.6 -0.9 0.2 -0.8 2.9 21.8

Expenditure — others"' -25.1 -50.2 26.8 7.6 -1.6 0.7 -1.5 43.6 78.6

Total expenses 93.6 32.1 -49.3 -30.4 -28.1 -25.5 13.0 -5.5 138.7

(a) Calculated as the effect on the distribution of the 2004-05 GST and HCGs pool of $42 718.7 million of the assessments in the 2005 Update compared with the assessments from the 2004 Review (b) Includes the effects o f above average use of services by Indigenous people and higher costs of servicing them, and the effects of land rights and native title legislation. (c) Includes socio-demographic effects arising from age, sex, cultural and linguistic diversity, income, and the cross­

border use of services.

(d) Includes costs of office rent and electricity; interest rates; the isolation of some States from major sources of supply in south-east Australia; and accrued expenses and historical costs of superannuation (e) Includes diseconomies of small scale in administration and in provision of services from many small centres.

(f) Includes urban influences, urban complexity, urban traffic management and subsidies to PTEs.

(g) Includes the effects of population dispersion and of geographic location on hospital costs and patient transport (h) Includes effects of structure and nature of State economies, road use, availability of private medical services, and the ACT’s status as the national capital (i) Includes the effects of climate, natural hazards, conservation task, water availability, other aspects of the

physical environment, and road and bridge length. (j) Includes some miscellaneous factors and interactions between factors

35

Chapter 5

40. Superannuation. The main change in this assessment arose from revising data on superannuation expenses. In particular, we have used GFS data, which the ABS now considers reliable and comparable, to identify the interest on unfunded liabilities elements of superannuation expenses. That approach has resulted in expenses that are

assessed as having the same per capita cost across the States becoming a bigger proportion of superannuation costs. For States like Victoria and the ACT, with lower relative costs for other elements of superannuation costs, this change reduces their overall cost advantage (the weighted average of their relative costs for all types of superannuation expenses) and raises their revenue from the GST and HCGs pool.

41. In addition, superannuation has become a less important expense in State budgets. For States with a superannuation cost advantage, such as Victoria and the ACT, this reduction means that their cost advantage has a smaller impact on their overall relative costs of service provision, raising their revenue from the GST and HCGs pool.

42. The above average increases in wage levels between 1998-99 and 2003-04 in New South Wales have also increased its relative superannuation costs.

43. In Western Australia, South Australia and Tasmania all three effects reinforce each other in reducing their relative superannuation costs. The superannuation cost disadvantages of each of those States have been reduced by an assessed relative decline in their wage costs. Moreover, the impact of those disadvantages on their overall relativities has been decreased by the fall in the importance of superannuation in State budgets.

44. Government schools education. The main causes of changes in this assessment were two trends in school enrolments between 1998-99 and 2003-04.

(i) There has been a fall in the proportion of school age children in the population for Australia as a whole. The fall in Western Australia, the ACT, and the Northern Territory was above average, which reduced their relative use of schools and their relative costs of providing the

services.

(ii) There has also been a move of students towards non-government schools. This movement was below the national average in Victoria and Tasmania. This increased the relative costs of providing services in those States because the cost to State budgets of government schools is greater than that of non-government schools.

45. In New South Wales, the impact of the above average movement of students from government to non-government schools was offset by the effects of above average increases in underlying wage levels between 1998-99 and 2003-04. 4 6 * * * * *

46. Debt charges. There has been a substantial fall in the importance of debt charges in the budgets of the States — the Australian average debt charges expenses fell from $117.42 per capita in 1998-99 to $0.90 per capita in 2003-04. This is the result of declines in the levels of State debt and large increases in interest earnings, which we offset against interest expenses. These developments significantly reduced the importance of debt charges in determining the overall relativities, thereby reducing the revenue from the GST

36

Why the relativities have changed

pool for States with cost disadvantages (such as New South Wales and Western Australia) and increasing that for States with assessed cost advantages (such as Tasmania, the ACT and the Northern Territory).

47. Our reconsideration in this update of the treatment of capital SPPs in the calculation of the amounts each State might have borrowed if it had followed standard policies also affected the outcomes for some States. The changes in the treatment of some SPPs led to increases in the revenue from the GST and HCGs pool for Victoria and Queensland and reductions for Western Australia and Tasmania.

48. Public safety — user charges. The changes attributable to this assessment primarily reflect an increase in the relative capacity of New South Wales to recoup costs from levies on insurers. We assess this capacity using data on premiums for fire and industrial special risk and house owners’ policies provided by APRA. The increase in the assessed capacity to raise revenue reflects the above average increases in premiums in New

South Wales discussed in paragraphs 23 and 24.

49. Public safety — expenses. Details of expenses Victoria incurred on natural disaster relief in 2002-03 were not received in time to be included in the calculations for the 2004 Review. Those data have been included in this update and have increased its revenue from the GST and HCGs pool. By contrast, a fall in expenses on disaster relief between

1998-99 and 2003-04 in New South Wales and Queensland, reflecting a lower incidence of severe disasters, has reduced their needs and their revenue from the GST and HCGs pool.

50. Roads. The changes reflect a number of effects. These included an increase in the Australian average level of expenses on roads between 1998-99 and 2003-04, which reduced the revenue from the GST and HCGs pool for States with cost advantages (such as Victoria) and increased that for States with cost disadvantages (such as Western Australia and the Northern Territory). There was also an increase within the category in the

importance of expenses on bridge maintenance, which increased the effects of the associated cost disadvantages of New South Wales and Western Australia and the cost advantages of Victoria and Queensland. An increase in the importance of expenses on arterial road maintenance increased the effects of Victoria’s cost advantages in that area.

51. The above average increase in underlying wage levels in New South Wales also increased its cost disadvantages and its revenue from the GST and HCGs pool.

52. Wages input costs. Relative wage disabilities across States have a big impact on GST revenue shares because wages constitute a large proportion of State expenses. Thus, even small changes in disabilities between years can lead to large changes to GST revenue shares. 5 3

53. Our assessments of differences between States in wage levels are based on analysis done during the 2004 Review of wages paid to comparable employees in each State in 1997 and 2001. The assessments showed that wage levels for comparable employees in New South Wales were about 1.5 per cent above the average in 1997 and 4 per cent above average in 2001. The assessments for this update have given greater emphasis to the data

for 2001 and reduced the impact of the 1997 data. This resulted in an increase in GST revenue share to New South Wales.

37

CHAPTER 6

MAIN CHANGES FOR EACH STATE SINCE THE 2004 REVIEW

1. The relativity for any State depends on the combined effect of many influences'. Overall, compared with the 2004 Review, the relativities of New South Wales, Victoria and the ACT increased, that of the Northern Territory was virtually unchanged and those of the other States decreased. This is the combined effect of revisions to past data and changes in circumstances.

2. This chapter summarises the main reasons for changes to the relativities of each State. It does so by identifying the notional total change in each State’s revenue from the GST and HCGs pool that would have occurred if the 2005 Update relativities had been used instead of the 2004 Review relativities to distribute the estimated 2004-05 GST and

HCGs pool of $42 718.7 million. A table for each State shows the revenue and expense categories and expense disabilities where changes in the assessments between the 2004 Review and the 2005 Update made the largest contributions to the State’s total notional change in revenue from the GST and HCGs pool. The changes in revenue from the

GST and HCGs pool shown in the tables are not additive — they contain double counting. For example, the effects of changes in wage levels are also included in the changes for particular expense categories.

Details of the contribution of individual functions and revenue sources to the changes in relativities between the 2004 Review and the 2005 Update are in the supporting information volume that accompanies this report.

38

Main changes fo r each State since the 2004 Review

3. New South Wales. The relative revenue raising capacity of New South Wales has grown faster than the Australian average in this update. But the effects of that on its revenue from the GST and HCGs pool were offset by an increase in its relative costs of providing services. The net effect is that its relativity has increased marginally. Its revenue

from the 2004-05 GST and HCGs pool would have risen by $12.0 million if that pool had been distributed using the 2005 Update relativities instead of the 2004 Review relativities. Table 6-1 summarises the main changes.

Table 6-1 MAJOR CHANGES FOR NEW SOUTH WALES

Category

Change in GST revenue share Reason for change

Insurance taxation

$m

-46.2 An increase in the proportion o f national premiums collected in New South Wales for 2002-03 and 2003-04 (partly caused by a change in the framework used by APRA to collect data from insurers) increased its relative revenue raising capacity.

Land revenue -36.8 New South Wales’ revenue raising capacity rose because its

81 per cent increase in the value o f commercial and industrial land between 1998-99 and 2003-04 was 17 percentage points above the national average increase.

Payroll taxation -18.1 The phased introduction o f a more reliable method o f

assessment has resulted in an above average increase in the per capita wages paid by medium and large employers between 1998-99 and 2003-04, which increased New South Wales' measured relative capacity.

Financial transactions taxes

-18 1 Data collected to allow the abolition o f BAD tax to be

reflected in the assessments indicated that New South Wales’ relative revenue raising capacity for other taxes on financial transactions (mainly stamp duties on mortgages and loan securities) was understated in the 2004 Review. The

understatement has been removed.

Stamp duty on conveyances

-13.5 The increased importance o f this tax in State budgets together with the above average per capita value o f conveyances transacted in New South Wales increased its relative revenue raising capacity.

Mining revenue + 13.3 A decrease in the importance o f coal production relative to

other minerals reduced the State’s relative capacity.

Gambling taxation + 12.8 Revisions by the ABS reduced the State's gross household

income per capita for 1999-2000 to 2002-03, which reduced its assessed relative revenue raising capacity.

Public safety user charges -19.0 An above average increase in premiums for lire and house­ owners insurance increased the State’s capacity to recover costs through user charges.

Inpatient services +31.0 Updated hospital use data and the improved regional

classification o f State populations indicate that New South Wales has an increased proportion o f its population in groups which use hospitals more intensively.

Wages input costs +81.7 An above average increase in underlying wage costs increased

the State’s relative costs o f providing all services.

S o u rc e : C G C 2 0 0 5 U p d a te a n a ly s is o f c h a n g e

39

Chapter 6

4. Victoria. Victoria’s increased relativity is due to a large fall in its relative revenue raising capacity and an increase in its relative costs of providing services. Its revenue from the 2004-05 GST and HCGs pool would have increased by $106.2 million if it had been distributed using the 2005 Update relativities instead of the 2004 Review ones. Table 6-2 summarises the main changes.

Table 6-2 MAJOR CHANGES FOR VICTORIA

Category

Change in GST revenue share Reason for change

Stamp duty on conveyances

$m

+43.8 The increased importance o f this tax in State budgets together with a below average increase in the per capita value o f conveyances transacted in Victoria between 1998-99 and 2003-04 reduced its relative capacity.

Payroll taxation +23.2 The phased introduction o f a more reliable method o f

assessment has resulted in a below average increase in the per capita wages paid by medium and large employers between 1998-99 and 2003-04. which reduced Victoria's relative capacity.

Insurance taxation + 17.4 A reduction in the proportion o f national premiums

collected in Victoria (partly caused by a change in the framework used by APRA to collect data from insurers) reduced Victoria's relative capaeity.

Administration ofjustice +31.5 Correction o f a misclassification in data for court use

reduced use rates for Indigenous people and increased the relative needs o f Victoria which has a below average proportion o f Indigenous people in its population.

Public safety + 15.2 Inclusion o f data provided by Victoria after the

2004 Review for its expenses on natural disaster relief in 2002-03 increased its relative costs o f providing services.

Government school education

+ 15.5 Victoria’s below average movement in enrolments towards non-government schools between 1998-99 and 2003-04 increased its relative costs o f providing services in government schools.

Debt charges + 10.5 Victoria’s assessed borrowing requirement under standard

policies has increased because, relative to the other States, the value o f capital SPPs considered to be available to fund it has declined. This increased Victoria’s relative costs.

Wages input costs -26.1 Below average increases in underlying wage levels in

Victoria reduced its relative costs o f providing services.

Source: CGC 2005 Update analysis of change.

40

Main changes for each State since the 2004 Review

5. Queensland. Queensland’s relativity has fallen in this update because its relative revenue raising capacity has risen (mainly in stamp duties on conveyances) and its costs of service provision have fallen (mainly because of below average increases in the underlying wage level between 1998-99 and 2003-04). Its revenue from the 2004-05 GST

and HCGs pool would have reduced by $93.7 million if it had been distributed using the 2005 Update relativities instead of the 2004 Review ones. Table 6-3 summarises the main changes.

Table 6-3 MAJOR CHANGES FOR QUEENSLAND

Category

Change in GST revenue share Reason for change

Stamp duty on conveyances

$m

-88.7 The increased importance o f this tax in State budgets together with an above average increase in the per capita value o f conveyances transacted in Queensland between 1998-99 and 2003-04 increased its relative capacity.

Stamp duty on motor vehicle registrations

-15.6 Revisions to Queensland's data on vehicle registrations for 2002-03 and an above average increase in its new vehicle sales between 1998-99 and 2003-04 increased its relative capacity to raise this duty

Mining revenue +22.1 A decrease in the importance o f coal production relative to

other minerals between 1998-99 and 2003-04 reduced Queensland’s relative revenue raising capacity.

Payroll taxation +21.0 The phased introduction o f a more reliable method o f

assessment has resulted in a below average increase in the per capita wages paid by medium and large employers between 1998-99 and 2003-04. which reduced

Queensland’s relative capacity.

Insurance taxation + 13.9 A reduction in the proportion o f national premiums

collected in Queensland (partly caused by a change in the framework used by A PR A to collect data from insurers) reduced Queensland's relative capacity.

Land revenue +9.1 Queensland’s relative capacity fell because its 57 per cent

increase in the value o f commercial and industrial land between 1998-99 and 2003-04 was 7 percentage points below the national average increase.

Administration ofjustice -13.4 Correction o f a misclassification in data for court use

reduced use rates for Indigenous people and reduced the positive needs o f Queensland, which has an above average proportion o f Indigenous people in its population.

Primary industry -9.9 A below average growth in the value o f production in the

primary industry sector in Queensland between 1998-99 and 2003-04 reduced the relative use o f services in the State and its relative costs.

Wages input costs -27.1 Below average increases in underlying wage levels in

Queensland reduced its relative costs o f providing services.

S o u rc e : C G C 2 0 0 5 U p d a te a n a ly s is o f c h a n g e .

41

Chapter 6

6. Western Australia. Western Australia’s relativity fell because of a fall in its relative costs of providing services, which was partly offset by a fall in its relative revenue raising capacity. Its revenue from the 2004-05 GST and HCGs pool would have reduced by $24.0 million if the pool had been distributed using the 2005 Update relativities instead of the 2004 Review ones. Table 6-4 summarises the main changes.

Table 6-4 MAJOR CHANGES FOR WESTERN AUSTRALIA

Category

Change in GST revenue share Reason for change

Mining revenue

$m

-30.3 Between 1998-99 and 2003-04 the State's revenue from offshore oil and gas more than doubled and there was an increase in the value o f metallic minerals relative to coal, which together increased its relative revenue raising capacity.

Payroll taxation -23.1 An above average increase in the per capita wages paid by

medium and large employers between 1998-99 and 2003-04 (partly due to the phased introduction o f a more reliable method o f assessment) increased its relative capacity.

Stamp duty on conveyances

+ 19.6 The increased importance o f this tax in State budgets together with the below average increase in the per capita value o f conveyances transacted in Western Australia between 1998-99 and 2003-04 reduced its relative capacity.

Land revenue + 17.3 Western Australia’s relative capacity fell because its 31 per cent

increase in the value o f commercial and industrial land between 1998-99 and 2003-04 was 33 per cent below the national average increase.

financial transaction taxes

+ 16.7 Data collected to allow the abolition o f BAD tax to be reflected in the assessments indicated that Western Australia’s capacity to raise other taxes on financial transactions was overstated in the 2004 Review. The overstatement has been removed.

Government school education

-16.1 The proportion o f its population that was o f school age and the proportion o f school enrolments at government schools fell more rapidly than the national average between 1998-99 and 2003-04, reducing its relative costs.

Inpatient services -14.7 Updated hospital use and cost data, and the improved regional

classification o f State populations, indicate that Western Australia has a reduced proportion o f its population in groups that use hospitals more intensively.

Debt charges -15.3 Western Australia’s assessed borrowing requirement under

standard policies has decreased because, relative to the other States, the value o f capital SPPs considered to be available to fund it has increased. This reduced its relative costs.

Superannuation -11.7 New data on nominal interest on unfunded liabilities has

brought the overall relative costs o f superannuation for all States closer together, reducing them for Western Australia, which has above average relative costs. Its relative

superannuation costs were also reduced by flow-on effects o f falls in the costs o f providing other services.

Mining, fuel and energy + 12.9 Revisions to the Australian average expenses on this service increased the relative costs o f Western Australia, because o f the very large size o f its mining industry.

Source: CGC 2005 Update analysis of change

42

Main changes for each State since the 2004 Review

7. South Australia. The decline in South Australia’s relativity is the result of a fall in its relative costs of providing services, which is largely offset by the fall in its relative revenue raising capacity. Its revenue from the 2004-05 GST and HCGs pool would have reduced by $3.2 million if the pool had been distributed using the 2005 Update relativities

instead of the 2004 Review ones. Table 6-5 summarises the main changes.

Table 6-5 MAJOR CHANGES FOR SOUTH AUSTRALIA

Category

Change in GST revenue share Reason for change

Stamp duty on conveyances

$m

+30.8 The increased importance o f this tax in State budgets together with the below average increase in the per capita value o f conveyances transacted in South Australia between 1998-99 and 2003-04 reduced its relative capacity.

Insurance taxation +5.0 A decrease in the national proportion o f premiums collected

in South Australia (partly caused by a change in the framework used by A PR A to collect data from insurers) reduced its relative revenue raising capacity

Superannuation -10.0 New data on nominal interest on unfunded liabilities has

brought the overall relative costs o f superannuation for all States closer together, reducing them for South Australia, which has above average relative costs. As well, reductions in the costs o f providing services in other categories had

flow-on effects, which reduced its relative superannuation costs. Their effect on its needs was further reduced by the fall in the importance o f this function in State budgets.

Inpatient services -6.1 Updated hospital use data and the improved regional

classification o f State populations indicate that South Australia has a reduced proportion o f its population in groups which use hospitals more intensively.

Government schools education

-5.0 The proportion o f its population that was o f school age and the proportion o f school enrolments at government schools fell more rapidly than the national average between 1998-99 and 2003-04, reducing its relative costs.

National parks and wildlife services

+5.8 South Australia's number o f visitors to national parks increased while those o f most other States remained stable or declined, which increased its relative costs.

Wages input costs -13.4 A below average increase in underlying wage costs in South

Australia reduced its relative costs o f providing services.

Source: CGC 2005 Update analysis of change.

43

Chapter 6

Table 6-6 MAJOR CHANGES FOR TASMANIA

8. Tasmania. The decline in Tasmania’s relativity is the result of a fall in its relative costs of providing services, which is partly offset by a fall in its relative revenue raising capacity. Its revenue from the 2004— 05 GST and HCGs pool would have reduced by $6.8 million if the pool had been distributed using the 2005 Update relativities instead of the 2004 Review ones. Table 6-6 summarises the main changes.

Change in GST

Category revenue share Reason for change

Stamp duty on

$m

+6.6 The increased importance o f this tax in State budgets

conveyances together with the below average per capita value o f

conveyances transacted in Tasmania between 1998-99 and 2003-04 reduced its relative capacity.

Insurance taxation +3.6 A decrease in the national proportion o f premiums

collected in Tasmania (partly caused by a change in the framework used by APRA to collect data from insurers) reduced its relative capacity.

Land revenue +2.6 Tasmania’s relative capacity fell because its value o f

commercial and industrial land increased little between 1998-99 and 2003-04, whereas the national average movement was an increase o f 64 per cent.

Superannuation -6.4 New data on nominal interest on unfunded liabilities has

brought the overall relative costs o f superannuation for all States closer together, reducing them for Tasmania, which has above average relative costs. As well, reductions in the costs o f providing services in other categories had flow-on effects, which reduced its relative superannuation costs. Their effect on its needs was further reduced by the fall in the importance o f this function in State budgets.

Inpatient services -5.7 Updated hospital use data and the improved regional

classification o f State populations indicate that Tasmania has a reduced proportion o f its population in groups that use hospitals more intensively.

Primary industry -2.0 A below average growth in the primary industry sector in

Tasmania between 1998-99 and 2003-04 reduced the relative use o f services in the State and its relative costs.

Administration o f justice -1.7 Correction o f a misclassification in data for court use

reduced use rates for Indigenous people and reduced the positive needs o f Tasmania, which has an above average proportion o f Indigenous people in its population.

Administrative scale -5.8 The reduced importance o f fixed costs in State budgets

reduced the effects o f Tasmania’s diseconomies o f small scale.

Wages input costs -3.2 Below average increases in underlying wage levels in

Tasmania reduced its relative costs o f providing services

Source: CGC 2005 Update analysis of change.

44

Main changes fa r each State since the 2004 Review

9. Australian Capital Territory. The increase in the ACT’s relativity is due to an increase in its costs of providing services, partly offset by a small increase in its revenue raising capacity. Its revenue from the 2004-05 GST and HCGs pool would have increased by $9.2 million if the pool had been distributed using the 2005 Update relativities instead of the 2004 Review ones. Much of that change arises from the inclusion in the assessments of

national capital allowances for:

(i) the higher salary costs incurred under its contract with the AFP ($6.3 million); and

(ii) the higher maintenance costs arising from the wider roads inherited from the Commonwealth at self-government ($3.1 million).

In the 2004 Review comparable allowances were assessed as special fiscal needs and were funded outside the GST revenue and HCGs pool.

10. Table 6-7 summarises the main changes.

Table 6-7 MAJOR CHANGES FOR THE AUSTRALIAN CAPITAL TERRITORY

Change in GST

Category revenue share Reason for change

Stamp duty on conveyances

$m

-4.4 The increased importance o f this tax in Slate budgets together with the above average increase in the per capita value o f conveyances transacted in the ACT between 1998-99 and 2003-04 increased its relative capacity.

Superannuation + 11.1 New data on nominal interest on unfunded liabilities has

brought the overall relative costs o f superannuation for all States closer together, increasing them for the ACT, which has below average relative costs. The increases in the costs o f providing services in other categories, such as police and roads, had flow-on effects to superannuation, which

increased the ACT’s relative costs o f superannuation. The fall in the importance o f this function in State budgets also increased the ACT’s relative costs.

Debt charges +4.1 The importance o f these expenses in State budgets fell

between 1998-99 and 2003-04 because o f the fall in the all-State level o f debt. This reduced the effects o f the ACT’s relative cost advantages in this area. In addition, its relative cost advantages have fallen.

General public services -4.3 A reduction in the importance o f the category reduced the

effects o f the ACT’s diseconomies o f scale in administrative tasks and reduced its needs.

Administrative scale -12.8 The reduced importance o f fixed costs in State budgets

reduced the effects o f the ACT’s diseconomies o f small scale.

Source: CGC 2005 Update analysis o f change.

45

Chapter 6

II. Northern Territory. The Northern Territory’s relativity is virtually unchanged because the effects of the fall in its revenue raising capacity were offset by a fall in its costs of providing services and an increase in its share of revenue from SPPs. Its revenue from the 2004-05 GST and HCGs pool would have increased by $0.3 million if the pool had been distributed using the 2005 Update relativities instead of the 2004 Review ones. Table 6-8 summarises the main changes.

Table 6-8 MAJOR CHANGES FOR THE NORTHERN TERRITORY

Change in GST

Category revenue share Reason for change

Stamp duty on conveyances

$m

+5.9 The increased importance o f this tax in State budgets together with the below average increase in the per capita value o f conveyances transacted in the Territory between 1998-99 and 2003-04 reduced its relative capacity.

Financial transaction taxes +2.5 Data collected to allow the abolition o f BAD tax to be

reflected in the assessments indicated that the Northern Territory’s revenue raising capacity for other taxes on financial transactions was overstated in the 2004 Review. The overstatement has been removed.

Administration o f justice -23.2 Correcting a misclassification in data for court use reduced use rates for Indigenous people and reduced the relative needs o f the Northern Territory which has an above average proportion o f Indigenous people in its population.

Inpatient services -7.6 Updated hospital use and cost data and the improved

regional classification o f State populations indicate that the Northern Territory has a reduced proportion o f its population in groups which use hospitals more intensively and which cost more to treat.

National parks and wildlife -5.5 The Northern Territory’s number o f visitors to national services parks declined while those for some other States remained

stable or rose, which reduced the Territory’s relative costs.

Services to Indigenous + 11.9 Services to Indigenous communities are increasing in

communities importance in State budgets and the Northern Territory has

an above average proportion o f Indigenous communities.

Housing +6.1 Revisions to housing expenses for 1999-2000 to 2002-03

and an 80 per cent increase in expenses between 1998-99 and 2003-04 increased the importance o f the function in State budgets. This increased the effects o f the Territory’s disabilities arising from its above-average proportion o f

Indigenous people, who are large users o f public housing.

Debt charges +4.7 The importance o f these expenses in State budgets tell

between 1998-99 and 2003-04 because o f the fall in the all­ State level o f debt. This reduced the effects o f the

Territory’s assessed cost advantages in this area.

Wages input costs -1 1.1 There was a below average increase in underlying wage

costs in the Northern Territory.

Administrative scale -13.3 The reduced importance o f fixed costs in State budgets

reduced the effects o f the Territory's diseconomies o f small scale.

Source: CGC 2005 Update analysis of change

46

ATTACHMENT A

ILLUSTRATIVE POOLS AND POPULATIONS AND HOW THE COMMISSION’S RELATIVITIES ARE USED

I. This attachment summarises the population and financial data we have used to illustrate possible State GST revenue and HCGs outcomes. It also uses the data for 2005-06 to show how the Australian Government Treasury uses Commission relativities to calculate these outcomes.

Projected populations and illustrative pools

2. Table A-l shows the projected State populations as at December 2004 and December 2005 prepared by the ABS. Table A-2 shows the combined pool of GST revenue and HCGs for 2004-05. The figures for State populations at December 2004 and the GST and HCGs pool are from the Mid-year Economic and Fiscal Outlook 2004-05 (MYEFO).

3. The December 2004 population and the 2004 05 GST and HCGs pool are used in the report to illustrate the potential effects of the 2005 Update relativities on State revenues, which are estimated as the difference between:

(i) what the States are estimated to receive in 2004-05 — estimated by applying the 2004 Review relativities to the 2004— 05 GST and HCGs pool and December 2004 populations; and

(ii) what the States would have received if the 2005 Update relativities had applied — estimated by applying the 2005 Update relativities to the 2004-05 GST and HCGs pool and December 2004 populations.

4. In the report, the Commission has also used the December 2005 population and the estimated 2005-06 total GST and HCGs pool from MYEFO to illustrate the 2005-06 financial outcomes for the States, if the 2005 Update relativities were applied. The estimated GST collections for 2005-06 are $37 160.0 million and the estimated HCGs are

$7902.0 million (a total estimated GST and HCGs pool of $45 062.0 million).

5. The Commission is aware that the pool and populations to which the relativities will apply in 2005-06 will differ from these estimates. The figures are used for illustrative purposes only.

47

Attachment A

Table A -l ESTIMATED RESIDENT POPULATIONS, DECEMBER 2004 AND 2005

31 December 2004 31 December 2005

Ό00 % Ό00 %

New South Wales 6 775 33.45 6 834 33.35

Victoria 5 004 24.71 5 056 24.68

Queensland 3 927 19.39 4 009 19.57

Western Australia 1 999 9.87 2 029 9.90

South Australia 1 539 7.60 1 545 7.54

Tasmania 485 2.40 490 2.39

Australian Capital Territory 324 1.60 325 1.59

Northern Territory 199 0.98 201 0.98

Australia 20 253 100.00 20 488 100.00

Sources: Data used in the M id-Year Economic a n d Fiscal Outlook 2003 04, December 2004, provided to the Commission by the Australian Treasury.

Table A-2 2004-05 GST AND HCGS POOL — ESTIMATED MYEFO DISTRIBUTION

NSW Vic Qld WA SA Tas ACT NT Aust

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

GST revenue provision 9 870.3 7 321.3 7 314.7 3 613.4 3 282.0 1 434.6 676.6 1 712.1 35 225.0

HCGs 2 535.9 1 820.3 1 432.2 735.6 629.2 163.3 95.2 82.0 7 493.7

GST and 1 ICGs pool 12 406.2 9 141.6 8 746.9 4 349.0 3 911.2 1 597.9 771.8 1 794.2 42 718.7

Source: Australian Treasury, from M id-year Economic a n d Fiscal Outlook, 2004 05, December 2004.

How the Australian Treasury uses the Commission's relativities

6. The per capita relativities the Commission calculates are used in sharing the GST revenue and HCGs pool among the States. The process is:

(i) weighted populations are calculated by applying the per capita relativities to ABS estimates of State populations as at 3 1 December;

(ii) each State’s share of the weighted population is calculated by dividing its weighted population by the Australian weighted population; and

(iii) each State receives a share of the GST revenue and HCGs pool equal to its share of the weighted population. 7

7. Table A-3 uses the MYEFO estimates of population for 31 December 2005 shown in Table A-l and the combined GST and HCGs pool for 2005-06 described in paragraph 4 to illustrate how the GST revenue provision for each State is calculated.

48

Illustrative pools and populations

8. Each State’s GST revenue provision is equal to its revenue from the GST and HCGs pool (derived using the Commission's relativities) less the actual HCGs it receives as part of their Health Care Agreements.

Table A-3 APPLYING THE COMMISSION’S RELATIVITIES, 2005^)6

NSW Vic Qld WA SA Tas ACT NT Aust

Projected populations1"1 (000) 6 834 5 056 4 009 2 029 1 545 490 325 201 20488

Per capita relativities< b> 0.86846 0.87552 1.04389 1.02500 1.20325 1.55299 1.14300 4.26682 1.00000

Weighted populationsul('000) 5 935 4 427 4 185 2 079 1 859 761 372 856 20 474

Share of weighted populationld,(%) 29.0 21.6 204 102 9.1 3.7 18 4.2 100.0

Distribution of GST and HCGs poollcl ($m) 13 062 0 9 743.3 92103 4 576 9 4 092 1 1 674.2 818 4 1 8848 45 062 0

Less HCGs (Sin) 2 665.7 1 9169 1 523.1 778.8 6594 1718 100.2 86.1 7 902.0

GST revenue provision ($m) 10 396.3 7 826.4 7 687.2 3 798.1 3 432.7 1 502.4 718.2 1 798.6 37 160.0

(a) Projected populations in thousands as at 31 December 2005, prepared by ABS (for MYEFO). (b) The per capita relativities for 2005-06 recommended in this report (c) The product of the first and second rows. (d) State weighted population as a percentage of total Australian weighted population. Although shown to one decimal

place, unrounded percentages are used in the calculation (e) The application of each State’s unrounded share of weighted populations to the GST and HCGs pool.

49

ATTACHMENT B

CALCULATION OF RELATIVITIES — GST RELATIVITIES

1. This attachment shows the calculation of the per capita GST relativities required by the terms of reference.

2. The tables show the calculation of the per capita GST revenue and HCGs required by each State to achieve equalisation1 (its standardised deficit per capita) for each year of the assessment period, 1999-2000 to 2003^)4, by two methods. An integral part of the process is an equalisation budget identity which shows the derivation of the Australian

average State budget result to which each State is equalised. This identity is shown in Table B -l.

Table B-l EQUALISATION BUDGET IDENTITY, 1999-2000 TO 2003-04

1 9 9 9 -2 0 0 0 2 0 0 0 -0 1 2 0 0 1 - 0 2 2 0 0 2 -0 3 2 0 0 3 -0 4

$pc $pc $pc $pe $pc

Australian average revenue 1 75 0 .8 4 1 797.32 1 9 2 8 .3 7 2 064.41 2 227.21

Australian average G ST and H C G s 1 59 5 .5 7 1 651.71 1 717.05 1 912.01 2 0 1 6 .0 9

Australian average included SPPs 3 2 2 .7 8 3 3 5 .5 4 3 6 4 .3 4 3 7 5 .2 2 374.11

Total revenue 3 6 6 9 .1 9 3 7 8 4 .5 7 4 0 0 9 .7 6 4 3 5 1 64 4 6 1 7 .4 0

Less: A ustralian average ex p en ses 4 0 6 5 .5 4 4 2 9 6 .0 8 4 557.15 4 74 9 .7 4 4 8 7 6 .3 6

A ustralian average budget result131 -3 9 6 .3 5 -511.51 -5 4 7 .3 9 -3 9 8 .1 0 -2 5 8 .9 6

(a) A negative sign indicates a deficit. Source: Commission analysis of State budgets.

3. Tables B-2, B^4, B-6, B-8 and B-10 show the calculations on the basis of a standardised budget identity in which the per capita GST revenue and HCGs required by each State is calculated by:

This is the amount of GST revenue and HCGs that would allow each State to achieve the Australian average Stale budget result if it provided an average standard of services, made the average effort to raise revenue, and operated at the average level of efficiency in providing services and collecting revenues

50

Calculation o f G ST relativities

(i) deriving its per capita total requirement for financial assistance, which is:

• the per capita expenses the State would incur if it provided the Australian average standard of services given its disabilities (its standardised expenses); plus

• the per capita Australian average State budget result (the total revenues included in the Commission’s assessments less the total expenses — hence a negative sign indicates a deficit); less

• the per capita revenues it would raise if it applied the average revenue raising policies to its revenue bases (its standardised revenues); and

(ii) subtracting from its per capita total requirement for financial assistance its per capita revenues from SPPs included in the Commission’s assessments.

4. Tables B-3, B-5, B-7, B-9 and B-l 1 provide an alternative presentation in which the per capita level of GST revenue and HCGs required by each State is the Australian average per capita amount paid during each year plus the State’s:

(i) per capita expense needs (the State’s standardised expenses per capita less the Australian average expenses per capita);

(ii) per capita revenue needs (the Australian average per capita revenue less the State’s standardised revenue per capita); and

(iii) per capita SPP needs (the Australian average SPPs per capita less the State’s actual SPPs per capita).

5. Under each presentation, a relativity is calculated for each State for each assessment year by expressing the State’s assessed per capita requirement for GST revenue and HCGs as a ratio of the Australian average per capita amount of GST and HCGs distributed among all the States.

6. Table B -l2 shows the five-year average per capita relativities, rounded to five decimal places. 7

7. A full description of the distribution model the Commission uses in deriving the relativities is in Attachment B of the supporting information volume that accompanies this report.

51

T a b le B -2 PER C A PIT A G ST R E L A T IV IT IE S, 1 9 9 9 -2000

Average State budget result

p l u s : Standardised expenses

l e s s : Standardised revenue

Total requirement for financial assistance

l e s s : SPPs treated by inclusion

GST and HCGs requirement

Per capita relativity*31

NSW Vic Qld WA SA

$ $ $ $ $

-396.35 -396.35 -396.35 -396.35 -396.35

3974.89 3741.08 4100.19 4463.84 4043.95

3578.54 3344.73 3703.84 4067.49 3647.60

1890.30 1699.98 1670.79 2013.58 1422.10

1688.24 1644.74 2033.05 2053.91 2225.50

315.79 287.44 329.84 316.42 343.47

1372.45 1357.30 1703.21 1737.49 1882.03

0.86016 0.85067 1.06746 1.08895 1.17953

T a b le B -3 PER C A PITA G ST R EL A T IV IT IE S, A L T E R N A T IV E P R E SE N T A T IO N , 1999-2000

NSW Vic Qld WA SA

— r - — Γ " : Γ " ------------- Γ™ $

Average GST and HCGs 1595.57 1595.57 1595.57 1595.57 1595.57

p l u s : Expense needs -90.66 -324.46 34.65 398.30 -21.59

p l u s : Revenue needs -139.46 50.86 80.05 -262.73 328.74

p l u s : SPP needs 6.99 35.34 -7.06 6.36 -20.69

GST and HCGs requirement 1372.45 1357.30 1703.21 1737.49 1882.03

Per capita relativity'” 0.86016 0.85067 1.06746 1.08895 1.17953

Tas

S

-396.35

4471.63

4075.27

1194.50

2880.77

416.80

2463.97

1.54426

Tas

S

1595.57

406.08

556.34

-94.02

2463.97

1.54426

ACT NT

$ $

-396.35 -396.35

4117.25 9601.75

3720.89 9205.40

1490.26 1603.62

2230.63 7601.78

374.02 874.65

1856.61 6727.13

1.16360 4.21613

ACT NT

s S

1595.57 1595.57

51.70 5536.21

260.58 147.22

-51.24 -551.87

1856.61 6727.13

1.16360 4.21613

(a) Per cap ita relativ ities are equal to each S tate's G S T an d H C G req u irem en ts divided by the A u stralian average o f $1595.57.

Table B-4 PER C A PIT A G S T R EL A T IV IT IE S. 2000-01

NSW V ic Qld WA SA

$ s S s $

Average State budget result -511.51 -511.51 -511.51 -511.51 -511.51

p l u s : Standardised expenses 4229.87 3946.06 4326.35 4656.84 4286.10

3718.36 3434.55 3814.85 4145.33 3774.59

le ss : Standardised revenue 1921.78 1725.36 1729.14 2163.57 1445.68

Total requirement for financial assistance 1796.58 1709.20 2085.71 1981.77 2328.92

le s s : SPPs treated by inclusion 330.74 291.10 358.55 327.65 358.95

GST and HCGs requirement 1465.84 1418.10 1727.15 1654.12 1969.96

Per capita relativity'8' 0.88747 0.85857 1.04568 1.00146 1.19268

Table B-5 PER C A P IT A G ST R E L A T IV IT IE S, A L T E R N A T IV E P R E SE N T A T IO N , 2000-01

Average GST and HCGs

p l u s : Expense needs

p l u s : Revenue needs

p l u s : SPP needs

GST and HCGs requirement

Per capita relativity18'

NSW V ic Qld WA SA

— F - ------------- $ — r - " T " T

1651.71 1651.71 1651.71 1651.71 1651.71

-66.21 -350.02 30.28 360.76 -9.98

-124.46 71.96 68.18 -366.25 351.64

4.80 44.44 -23.01 7.89 -23.41

1465.84 1418.10 1727.15 1654.12 1969.96

0.88747 0.85857 1.04568 1.00146 1.19268

Tas

$

-511.51

4740.15

4228.64

1193.41

3035.23

440.25

2594.98

1.57108

Tas

J

1651.71

444.07

603.91

-104.71

2594.98

1.57108

ACT NT

$ s

-511.51 -511.51

4247.90 10068.13

3736.40 9556.63

1527.83 1719.75

2208.57 7836.88

339.97 791.47

1868.59 7045.41

1.13131 4.26552

ACT NT

$

1651.71 1651.71

-48.17 5772.06

269.49 77.57

-4.43 4 5 5 .9 3

1868.59 7045.41

1.13131 4.26552

(a) Per cap ita relativ ities are equal to each S tate’s G S T and H C G req u irem en ts divided by the A ustralian averag e o f $1651.71.

Table B-6 PER CAPITA GST RELATIVITIES, 2001-02

Average State budget result

p l u s : Standardised expenses

l e s s : Standardised revenue

Total requirement for financial assistance

l e s s : SPPs treated by inclusion

GST and HCGs requirement

Per capita relativity131

NSW Vic Qld WA SA

$ s s $ $

-547.39 -547.39 -547.39 -547.39 -547.39

4493.50 4200.56 4607.00 4895.96 4520.36

3946.11 3653.17 4059.62 4348.57 3972.97

2115.39 1843.68 1840.16 2244.83 1493.62

1830.72 1809.49 2219.46 2103.75 2479.35

350.82 344.89 378.52 356.29 375.99

1479.90 1464.60 1840.93 1747.46 2103.36

0.86189 0.85297 1.07215 1.01771 1.22499

Table B-7 PER CAPITA GST RELATIVITIES, ALTERNATIVE PRESENTATION, 2001-02

NSW Vic Qld WA SA

$ $ $ $ $

Average GST and HCGs 1717.05 1717.05 1717.05 1717.05 1717.05

p l u s : Expense needs -63.65 -356.60 49.85 338.81 -36.79

p l u s : Revenue needs -187.02 84.69 88.21 -316.46 434.75

p l u s : SPP needs 13.52 19.45 -14.18 8.06 -11.64

GST and HCGs requirement 1479.90 1464.60 1840.93 1747.46 2103.36

Per capita relativity131 0.86189 0.85297 1.07215 1.01771 1.22499

Tas

S

-547.39

4918.78

4371.39

1265.72

3105.67

413.76

2691.91

1.56775

Tas

$

1717.05

361.63

662.65

-49.42

2691.91

1.56775

ACT NT

S $

-547.39 -547.39

4526.07 10650.69

3978.68 10103.30

1613.92 1745.71

2364.77 8357.59

371.49 886.50

1993.27 7471.09

1.16087 4.35113

ACT NT

S $

1717.05 1717.05

-31.08 6093.54

314.45 182.66

-7.15 -522.15

1993.27 7471.09

1.16087 4.35113

(a) P er cap ita relativ ities are e q u al to each S tate's G S T and H C G re q u irem en ts div id ed by the A ustralian averag e o f $ 1 717.05.

Table B-8 PER CAPITA GST RELATIVITIES. 2002-03

Average State budget result

p l u s : Standardised expenses

l e s s : Standardised revenue

Total requirement for financial assistance

l e s s : SPPs treated by inclusion

GST and HCGs requirement

Per capita relativity13*

NSW Vic Old WA SA

s s s $ $

-398.10 -398.10 -398.10 -398.10 -398.10

4681.07 4399.22 4782.61 5095.95 4690.39

4282.97 4001.12 4384.51 4697.85 4292.29

2275.56 1902.54 2025.53 2436.96 1593.23

2007.42 2098.58 2358.99 2260.89 2699.07

365.89 347.54 385.31 367.24 400.72

1641.53 1751.04 1973.68 1893.65 2298.35

0.85854 0.91581 1.03226 0.99040 1.20206

Table B-9 PER CAPITA GST RELATIVITIES, ALTERNATIVE PRESENTATION, 2002-03

NSW V ic Qld WA SA

$ $

Average GST and HCGs 1912.01 1912.01 1912.01 1912.01 1912.01

p l u s : Expense needs -68.67 -350.52 32.88 346.21 -59.34

p l u s : Revenue needs -211.15 161.87 38.88 -372.54 471.18

p l u s : SPP needs 9.33 27.68 -10.09 7.98 -25.50

GST and HCGs requirement 1641.53 1751.04 1973.68 1893.65 2298.35

Per capita relativity*3’ 0.85854 0.91581 1.03226 0.99040 1.20206

Tas

S

-398.10

5136.28

4738.18

1349.54

3388.64

432.23

2956.42

1.54624

Tas

S

1912.01

386.54

714.87

-57.00

2956.42

1.54624

ACT NT

$ $

-398.10 -398.10

4715.81 11273.94

4317.72 10875.84

1796.92 1824.33

2520.80 9051.51

348.23 969.05

2172.57 8082.46

1.13628 4.22722

ACT NT

s s

1912.01 1912.01

-33.92 6524.20

267.49 240.08

26.99 -593.83

2172.57 8082.46

1.13628 4.22722

(a) Per capita relativ ities are equal to each S tate's G S T and H C G req u irem en ts d iv id ed by the A ustralian averag e o f $1912.01.

Table B-10 PER CAPITA GST RELATIVITIES, 2003-04

Average State budget result

p l u s : Standardised expenses

l e s s : Standardised revenue

Total requirement for financial assistance

l e s s : SPPs treated by inclusion

GST and HCGs requirement

Per capita relativity*al

NSW V ic Qld WA SA

S $ $ ξ $

-258.96 -258.96 -258.96 -258.96 -258.96

4821.17 4471.08 4905.85 5265.48 4845.01

4562.21 4212.12 4646.89 5006.52 4586.05

2416.54 2068.31 2247.12 2574.04 1734.41

2145.67 2143.81 2399.78 2432.48 2851.64

383.14 330.21 379.81 363.01 398.06

1762.53 1813.60 2019.97 2069.47 2453.59

0.87423 0.89957 1.00193 1.02648 1.21701

Table B-ll PER CAPITA GST RELATIVITIES, ALTERNATIVE PRESENTATION, 2003-04

NSW V ic Qld WA SA

$ $

Average GST and HCGs 2016.09 2016.09 2016.09 2016.09 2016.09

p l u s : Expense needs -55.19 -405.28 29.49 389.12 -31.35

p l u s : Revenue needs -189.33 158.90 -19.91 -346.83 492.80

p l u s : SPP needs -9.03 43.90 -5.70 11.10 -23.95

GST and HCGs requirement 1762.53 1813.60 2019.97 2069.47 2453.59

Per capita relativity'3' 0.87423 0.89957 1.00193 1.02648 1.21701

Tas ACT NT

s s s

-258.96 -258.96 -258.96

5241.31 4818.01 11844.89

4982.35 4559.06 11585.93

1483.55 1970.99 1981.62

3498.80 2588.07 9604.31

402.85 324.18 987.35

3095.95 2263.89 8616.96

1.53563 1.12292 4.27410

Tas ACT NT

" T - T - $

2016.09 2016.09 2016.09

364.95 -58.35 6968.53

743.66 256.22 245.59

-28.74 49.93 -613.24

3095.95 2263.89 8616.96

1.53563 1.12292 4.27410

(a) P er capita relativ ities are e q u al to each S tate's G S T and H C G req u irem en ts d iv id e d by the A ustralian average o f $2016.09.

Table B-12 A S S E S S E D G ST R ELA TIV ITIES 1 9 9 9 -2 0 0 0 to 2 0 0 3 -0 4

A u stralia N S W V ic Q ld W A S A T a s A C T N T

Per capita r e la tiv itie s

1999-2000 1.00000 0.86016 0.85067 1.06746 1.08895 1.17953 1.54426

2000-01 1.00000 0.88747 0.85857 1.04568 1.00146 1.19268 1.57108

2001-02 1.00000 0.86189 0.85297 1.07215 1.01771 1.22499 1.56775

2002-03 1.00000 0.85854 0.91581 1.03226 0.99040 1.20206 1.54624

2003-04 1.00000 0.87423 0.89957 1.00193 1.02648 1.21701 1.53563

1.16360

1.13131

1.16087

1.13628

1.12292

4.21613

4.26552

4.35113

4.22722

4.27410

1.55299 .14300 4.26682

(a) Average of per capita relativity factors for 1999-2000 to 2003-04.

ATTACHMENT C

CALCULATION OF RELATIVITIES — FAG RELATIVITIES

1. This attachment shows the calculation of the per capita FAG relativities required by the terms of reference.

2. The tables show the calculation of the per capita notional financial assistance and HCGs required by each State to achieve equalisation1 for each year of the assessment period, 1999-2000 to 2003-04, by two methods. An integral part of the process is an equalisation budget identity that shows the derivation of the Australian average State budget

result to which each State is equalised. This identity is shown in Table C - l .

Table C -l EQUALISATION BUDGET IDENTITY, 1999-2000 TO 2003-04

1999-2000 2000-01 2001-02 2002-03 2003-04

$pc $pc $pc $pc $pc

Australian average revenue 2 282.47 2 345.68 2 501.07 2 642.94 2 812.75

Australian average FAG and HCGs 1 211 44 1 255.68 1 307.75 1 358.33 1 380.69

Australian average included SPPs 322.78 335.54 364.34 375.22 374.11

Total revenue 3 816.69 3 936.91 4 173.16 4 376.50 4 567.55

Less: Australian average expenses 3 968.46 4 188.86 4 429.73 4 640.51 4 777.06

Australian average budget result13* -151.76 -251.96 -256.56 -264.01 -209.52

(a) A negative sign indicates a deficit. Source: Commission analysis of State budgets.

3. Tables C-2, C— 4, C-6, C-8 and C-10 show the calculations on the basis of a standardised budget identity in which the per capita notional financial assistance grants required by each State is calculated by:

This is the amount of notional financial assistance and HCGs that would allow each State to achieve the Australian average State budget result if it provided an average standard of services, made the average effort to raise revenue, and operated at the average level of efficiency in providing services and collecting revenues These calculations are all based on the assumption that the Commonwealth-State financial arrangements that existed before the GST was introduced continued to apply.

58

Calculation o f FAG relativities

(i) deriving its per capita total requirement for financial assistance, which is:

• the per capita expenses the State would incur if it provided the Australian average standard of services given its disabilities (its standardised expenses); plus

• the per capita Australian average State budget result (the total revenues included in the Commission’s assessments less the total expenses -— hence a negative sign indicates a deficit); less

• the per capita revenues it would raise if it applied the average revenue raising policies to its revenue bases (its standardised revenues); and

(ii) subtracting its per capita revenues from SPPs included in the Commission’s assessments

4. Tables C— 3, C-5, C-7, C-9 and C -l I provide an alternative presentation, in which the per capita level of notional financial assistance and HCGs required by each State is the Australian average per capita amount paid during each year plus the State’s:

(i) per capita expense needs (the State’s standardised expenses per capita less the Australian average expenses per capita);

(ii) per capita revenue needs (the Australian average per capita revenue less the State’s standardised revenue per capita); and

(iii) per capita SPP needs (the Australian average SPPs per capita less the State’s actual SPPs per capita).

5. Under each presentation, a relativity is calculated for each State for each assessment year by expressing the State’s assessed per capita requirement for financial assistance and HCGs as a proportion of the Australian average per capita amount of financial assistance and HCGs distributed among all the States.

6. Table C -l 2 shows the five-year average per capita relativities, rounded to five decimal places. 7

7. A full description of the distribution model the Commission uses in deriving the relativities is in Attachment B of the supporting information volume that accompanies this report.

59

Table C-2 PER CAPITA FAG RELATIVITIES, 1999-2000

Average State budget result

p l u s : Standardised expenses

le s s : Standardised revenue

Total requirement for financial assistance

l e s s : SPPs treated by inclusion

FAG and HCGs requirement

Per capita relativity(dl

NSW V ic Qld WA SA

$ $ $ $ S

-151.76 -151.76 -151.76 -151.76 -151.76

3885.34 3637.24 4005.58 4349.36 3951.25

3733.58 3485.48 3853.81 4197.60 3799.49

2455.72 2220.53 2157.47 2572.01 1909.51

1277.85 1264.95 1696.34 1625.59 1889.98

315.79 287.44 329.84 316.42 343.47

962.07 977.50 1366.50 1309.17 1546.51

0.79415 0.80689 1.12799 1.08067 1.27659

Table C-3 PER CAPITA FAG RELATIVITIES, ALTERNATIVE PRESENTATION, 1999-2000

NSW Vic Qld WA SA

$ $ $ $ $

Average FAG and HCGs 1211.44 1211.44 1211.44 1211.44 1211.44

p l u s : Expense needs -83.12 -331.22 37.12 380.90 -17.21

p l u s : Revenue needs -173.25 61.94 125.00 -289.54 372.97

p l u s : SPP needs 6.99 35.34 -7.06 6.36 -20.69

FAG and HCGs requirement 962.07 977.50 1366.50 1309.17 1546.51

Per capita relativity'3* 0.79415 0.80689 1.12799 1.08067 1.27659

Tas

$

-151.76

4391.47

4239.70

1704.40

2535.31

416.80

2118.51

1.74875

Tas

$

1211.44

423.01

578.08

-94.02

2118.51

1.74875

ACT NT

$ $

-151.76 -151.76

3997.68 9501.57

3845.92 9349.81

2012.40 2252.46

1833.52 7097.35

374.02 874.65

1459.50 6222.70

1.20476 5.13660

ACT NT

$ S

1211.44 1211.44

29.22 5533.11

270.07 30.01

-51.24 -551.87

1459.50 6222.70

1.20476 5.13660

(a) P er cap ita relativ ities are calcu lated as each S tate's FA G an d H C G s required divided by the A ustralian average o f $ 1 2 11.44.

Table C-4 PER CAPITA FAG RELATIVITIES, 2000-01

Average State budget result

p l u s : Standardised expenses

l e s s : Standardised revenue

Total requirement for financial assistance

l e s s : SPPs treated by inclusion

FAG and HCGs requirement

Per capita relativity110

NSW Vic Qld WA SA

s s $ $ s

-251.96 -251.96 -251.96 -251.96 -251.96

4129.66 3842.19 4214.79 4542.84 4162.52

3877.70 3590.23 3962.83 4290.89 3910.56

2501.45 2259.92 2238.78 2741.01 1945.77

1376.25 1330.31 1724.05 1549.88 1964.79

330.74 291.10 358.55 327.65 358.95

1045.51 1039.21 1365.50 1222.23 1605.84

0.83262 0.82761 1.08745 0.97336 1.27886

Table C-5 PER CAPITA FAG RELATIVITIES, ALTERNATIVE PRESENTATION. 2000-01

NSW Vic Qld WA SA

S

Average FAG and HCGs 1255.68 1255.68 1255.68 1255.68 1255.68

p l u s : Expense needs -59.21 -346.67 25.92 353.98 -26.34

p l u s : Revenue needs -155.76 85.76 106.91 -395.32 399.92

p l u s : SPP needs 4.80 44.44 -23.01 7.89 -23.41

FAG and HCGs requirement 1045.51 1039.21 1365.50 1222.23 1605.84

Per capita relativity181 0.83262 0.82761 1.08745 0.97336 1.27886

Tas

S

-251.96

4620.90

4368.95

1728.13

2640.82

440.25

2200.57

1.75249

Tas

S

1255.68

432.04

617.56

-104.71

2200.57

1.75249

ACT NT

s s

-251.96 -251.96

4129.01 9965.21

3877.05 9713.25

2052.49 2433.60

1824.56 7279.65

339.97 791.47

1484.59 6488.19

1.18230 5.16707

ACT NT

s s

1255.68 1255.68

-59.86 5776.34

293.20 -87.91

-4.43 -455.93

1484.59 6488.19

1.18230 5.16707

(a) P er cap ita relativ ities are calcu lated as each S tate's FA G and H C G s required divided by the A ustralian averag e o f SI 255.68.

Table C-6 PER CAPITA FAG RELATIVITIES, 2001-02

Average State budget result

p l u s : Standardised expenses

l e s s : Standardised revenue

Total requirement for financial assistance

l e s s : SPPs treated by inclusion

FAG and HCGs requirement

Per capita relativityul

NSW Vic Qld WA SA

$ $ $ $ $

-256.56 -256.56 -256.56 -256.56 -256.56

4372.78 4077.52 4467.20 4759.24 4392.18

4116.21 3820.95 4210.64 4502.67 4135.62

2710.07 2391.26 2383.40 2856.91 2033.23

1406.15 1429.69 1827.24 1645.76 2102.39

350.82 344.89 378.52 356.29 375.99

1055.32 1084.80 1448.71 1289.47 1726.40

0.80698 0.82952 1.10779 0.98603 1.32013

Table C-7 PER CAPITA FAG RELATIVITIES, ALTERNATIVE PRESENTATION, 2001-02

NSW Vic Qld WA SA

$ $

Average FAG and HCGs 1307.75 1307.75 1307.75 1307.75 1307.75

p l u s : Expense needs -56.95 -352.21 37.47 329.51 -37.54

p l u s : Revenue needs -209.00 109.81 117.67 -355.84 467.84

p l u s : SPP needs 13.52 19.45 -14.18 8.06 -11.64

FAG and HCGs requirement 1055.32 1084.80 1448.71 1289.47 1726.40

Per capita relativity'8’ 0.80698 0.82952 1.10779 0.98603 1.32013

Tas

$

-256.56

4785.99

4529.42

1848.79

2680.63

413.76

2266.87

1.73341

Tas

$

1307.75

356.26

652.28

-49.42

2266.87

1.73341

ACT NT

s s

-256.56 -256.56

4394.37 10537.32

4137.80 10280.76

2218.47 2539.99

1919.34 7740.77

371.49 886.50

1547.85 6854.27

1.18360 5.24129

ACT NT

s s

1307.75 1307.75

-35.36 6107.60

282.61 -38.92

-7.15 -522.15

1547.85 6854.27

1.18360 5.24129

(a ) P er capita relativ ities are calcu la te d as each S tate's FAG an d H C G s required divided by the A ustralian averag e o f $ 1307.75.

Table C-8 PER CAPITA FAG RELATIVITIES, 2002-03

Average State budget result

p l u s : Standardised expenses

l e s s : Standardised revenue

Total requirement for financial assistance

l e s s : SPPs treated by inclusion

FAG and HCGs requirement

Per capita relativity131

NSW Vic Qld WA SA

s s $ $ s

-264.01 -264.01 -264.01 -264.01 -264.01

4579.65 4284.81 4669.71 4979.88 4583.25

4315.63 4020.80 4405.69 4715.86 4319.23

2877.32 2454.53 2569.89 3058.12 2143.02

1438.31 1566.27 1835.81 1657.75 2176.22

365.89 347.54 385.31 367.24 400.72

1072.42 1218.72 1450.50 1290.50 1775.50

0.78951 0.89722 1.06785 0.95006 1.30712

Table C-9 PER CAPITA FAG RELATIVITIES, ALTERNATIVE PRESENTATION. 2002-03

NSW Vic Qld WA SA

$ $ $

Average FAG and HCGs 1358.33 1358.33 1358.33 1358.33 1358.33

p l u s : Expense needs -60.87 -355.70 29.20 339.37 -57.27

p l u s : Revenue needs -234.38 188.41 73.06 -415.18 499.93

p l u s : SPP needs 9.33 27.68 -10.09 7.98 -25.50

FAG and HCGs requirement 1072.42 1218.72 1450.50 1290.50 1775.50

Per capita relativity13’ 0.78951 0.89722 1.06785 0.95006 1.30712

Tas

S

-264.01

5016.92

4752.91

1940.97

2811.94

432.23

2379.72

1.75194

Tas

$

1358.33

376.41

701.98

-57.00

2379.72

1.75194

ACT NT

$ $

-264.01 -264.01

4608.40 11172.44

4344.39 10908.43

2413.73 2635.31

1930.66 8273.12

348.23 969.05

1582.43 7304.06

1.16498 5.37722

ACT NT

5 3Γ

1358.33 1358.33

-32.11 6531.93

229.21 7.63

26.99 -593.83

1582.43 7304.06

1.16498 5.37722

(a) P er capita relativ ities are calcu lated as each State's FAG and H C G s req u ired divided by th e A ustralian averag e o f $ 1 3 58.33.

Table C-10 PER CAPITA FAG RELATIVITIES, 2003-04

Average State budget result

p l u s : Standardised expenses

l e s s : Standardised revenue

Total requirement for financial assistance

l e s s : SPPs treated by inclusion

FAG and HCGs requirement

Per capita relativity'31

NSW Vic Qld WA SA

I I $ $ $

-209.52 -209.52 -209.52 -209.52 -209.52

4725.98 4370.89 4805.20 5156.85 4744.29

4516.46 4161.37 4595.68 4947.33 4534.78

3026.75 2624.87 2795.50 3203.32 2294.30

1489.71 1536.50 1800.18 1744.01 2240.48

383.14 330.21 379.81 363.01 398.06

1106.57 1206.29 1420.38 1381.00 1842.42

0.80146 0.87369 1.02874 1.00023 1.33442

Table C-l 1 PER CAPITA FAG RELATIVITIES, ALTERNATIVE PRESENTATION, 2003-04

NSW Vic Qld WA SA

$

Average FAG and HCGs 1380.69 1380.69 1380.69 1380.69 1380.69

p l u s : Expense needs -51.09 -406.18 28.13 379.78 -32.77

p l u s : Revenue needs -214.00 187.89 17.26 -390.57 518.45

p l u s : SPP needs -9.03 43.90 -5.70 11.10 -23.95

FAG and HCGs requirement 1106.57 1206.29 1420.38 1381.00 1842.42

Per capita relativity18' 0.80146 0.87369 1.02874 1.00023 1.33442

Tas

S

-209.52

5141.40

4931.88

2085.53

2846.35

402.85

2443.50

1.76977

Tas

Ϊ

1380.69

364.33

727.22

-28.74

2443.50

1.76977

ACT NT

$ $

-209.52 -209.52

4727.23 11746.71

4517.71 11537.20

2605.62 2819.14

1912.08 8718.06

324.18 987.35

1587.91 7730.71

1.15008 5.59917

ACT NT

5 3Γ

1380.69 1380.69

-49.84 6969.65

207.13 -6.38

49.93 -613.24

1587.91 7730.71

1.15008 5.59917

(a ) P er capita relativ ities are calcu lated as each S tate's FA G an d H C G s required divided by the A u stralian average o f $ 1 3 80.69.

Table C-12 A S S E S S E D FAG R ELA TIV ITIES 1 9 9 9 -2 0 0 0 to 2 0 0 3 -0 4

A u stralia N S W V ic Q ld W A S A T a s A C T N T

Per cap ita rela tiv itie s

1999-2000 1.00000 0.79415 0.80689 1.12799 1.08067 1.27659 1.74875

2000-01 1.00000 0.83262 0.82761 1.08745 0.97336 1.27886 1.75249

2001-02 1.00000 0.80698 0.82952 1.10779 0.98603 1.32013 1.73341

2002-03 1.00000 0.78951 0.89722 1.06785 0.95006 1.30712 1.75194

2003-04 1.00000 0.80146 0.87369 1.02874 1.00023 1.33442 1.76977

1.20476 5.13660

1.18230 5.16707

1.18360 5.24129

1.16498 5.37722

1.15008 5.59917

A s s e s s e d rela tiv ity '3’ 0.80494 0.84699 1.08397 0.99807 1.30342 1.75127 1.17714 5.30427

(a) Average of per capita relativity factors for 1999-2000 to 2003-04.

ATTACHMENT D

CONTRIBUTION OF ASSESSMENTS TO THE DIFFERENCES FROM AN EQUAL PER CAPITA DISTRIBUTION

1. This attachment explains why the distribution of the pool of GST revenue and HCGs based on the relativities in this report (called the equalisation distribution) differs from an equal per capita (EPC) distribution.

2. The analysis is based on alternative distributions of the 2004^05 GST revenue and HCGs pool of $42 718.7 million shown in the Commonwealth of Australia’s Mid-year Economic and Fiscal Outlook 2004-05 and the ABS estimates of State populations at December 2004. The results are illustrative only.

3. Table D-l shows the aggregate differences between an equalisation distribution and an EPC distribution for each State. An EPC distribution means each State receives the same per capita amount of GST revenue and HCGs. Consequently, its share of the pool of GST revenue and HCGs is equal to its share of the Australian population. It

implies that there are no differences between States that affect their capacities to raise the average level of revenue or their relative costs of providing the average level of services.

Table D -l COMPARISON OF EQUALISATION AND EQUAL PER CAPITA DISTRIBUTIONS OF THE 2004-05 GST AND HCGS POOL

NSW Vic Q ld WA SA la s ACT NT Aust

$nt $m $m $m $m $m $nt $m $m

Equalisation distribution"1 12 418 1 9 247.8 8 653 2 4 325.0 3 908 0 1 591 1 781 0 1 794 5 42 718 7

EPC distribution 14 289 7 10 555.7 8 283 9 4 216.7 3 245 7 1 023 8 6829 4203 42 718 7

Difference -1 871.5 -1 307.9 369.3 108.3 6623 567.2 982 1 374.2 0.0

$pc $pc $pc $pc Spc Spc Spc Spc Spc

Equalisation distribution 1 833.00 1 847.90 2 203.28 2 163.40 2 539.64 3 277.81 2 412.45 9 005.73 2 109.25

EPC distribution 2 109.25 2 109.25 2 109.25 2 109.25 2 109.25 2 109.25 2 109.25 2 109.25 2 109 25

Difference - 276.25 -261.35 94.03 54.15 430.39 1 168.56 303.20 6 896.47 0.00

(a) Based on the application of the 2005 Update GST relativities to the GST revenue and HCGs pool for 2004-05 and ABS estimates of State populations as at December 2004.

6 6

Differences from an EPC distribution

4. Table D-2 dissects the total redistribution relative to an EPC distribution for each State as shown in Table D-l into the contribution of the:

(i) revenue assessments — reflecting the effects of above or below average capacity to raise revenue;

(ii) expense assessments — reflecting above or below average relative costs of providing the standard range and level of services; and .

(iii) SPP assessments — reflecting above or below average per capita revenue from SPPs paid by the Australian Government.

5. Table D-2 indicates that:

(i) New South Wales and Western Australia have above average capacity to raise revenue from their own sources and the other States have below average capacity;

(ii) New South Wales, Victoria, South Australia, and the ACT have below average costs of providing services and the other States have above average costs; and

(iii) New South Wales, Victoria, Queensland, and Western Australia receive below average per capita amounts of SPPs and the other States receive above average per capita amounts.

Table D-2 DIFFERENCE BETWEEN EQUALISATION AND EQUAL PER CAPITA DISTRIBUTIONS, DISSECTED BY CAUSE 6

D ifference in NSW Vic Q ld WA SA Tas A C T NT T otalu)

$m $nt $m $m $m $m $m $m $m

R evenue raising capacity -1 357.1 611.1 255.4 -790.3 755.6 3776 106.2 41.5 2 147.4

E xpense requirem ents - 594 5 -2 023 4 97.0 898.0 -38.9 226.0 - 1.9 1 437.8 2 658.7

SPPs 81.7 105.6 16 4 0.1 -54.9 -36.7 -6.2 - 106.0 203.8

Total d ifference from EPC -1 871 5 -1 3079 369 3 1083 662.3 567.2 982 1 374.2 3 179 4

(a) Total movement from EPC.

6. Table D-3 shows the contribution of each source of revenue to the total redistribution attributable to differences in State relative revenue raising capacity.

67

Attachment D

Table B -3 C O N T R IB U T IO N O F E A C H R E V E N U E C A T E G O R Y T O T H E R E D IS T R IB U T IO N

Contribution

Prop’n o f rev

% $ni $m $m $m $m $m $m $m $m

M ining revenue 5.4 4 8 1 .4 5 9 8 .4 - 3 0 7 .6 - 9 0 7 .8 86.1 50.5 4 0 .7 - 4 1 .6 1 2 5 7 .0

Stam p duty on

con veyan ces 19.1 - 8 6 2 .0 4 1 0 .3 - 9 7 .2 92.5 2 8 7 .8 120.5 4.2 4 3 .9 9 5 9 2

Payroll tax 2 5 .9 - 3 7 3 .7 - 3 2 7 .2 3 5 0 .8 - 0 .8 189.7 9 8 .0 50.3 12.9 701.8

Land revenue 6.4 - 4 3 6 .1 63.5 130.4 2 2 .8 139.1 59.9 13.0 7.3 4 3 6 1

M otor taxes"* 11.8 193.5 - 7 8 .3 - 50.0 -7 7 .1 - 8 .0 0.5 12.7 6.7 213.5

Insurance taxation 4.3 - 186.9 7.0 87.5 3 9 .8 17.5 18.5 9.3 7.4 186.9

Financial transaction

taxes 2 .9 - 115.0 - 4 9 .4 80.2 3 4 .6 26.3 17.4 0.2 5.7 164.4

G am bling taxation 9 .6 - 2 8 .6 - 2 7 .8 48.5 2.1 13.9 9.5 - 16.1 - 1.7 74.2

Stam p duties on

shares and

m arketable securities 0.3 - 2 9 .6 14.5 12 8 3 6 3.2 2 8 - 8 1 0 9 37.8

Other reven uesld> 14.3 0 .0 0 .0 0 .0 0 .0 0.0 0 .0 0 .0 0.0 0.0

Total 100.0 -1 357.1 611.1 2 5 5 .4 - 7 9 0 .3 7 5 5 .6 3 7 7 .6 106.2 41.5 2 147.4

(a) Revenue from each lax as a percentage of Stale own-source revenue for years 1999 2000 to 2003-04 (b) Total movement from EPC. (c) Includes vehicle registration fees and taxes and stamp duty on vehicle registrations and transfers.

(d) Includes contributions from government trading enterprises and other taxes.

7. The contribution of each tax to the redistribution relative to an EPC distribution differs between States. For example, stamp duty on conveyances has the largest effect for New South Wales, but mining revenue has the largest effect in Victoria and Western Australia.

8. Those redistributions reflect the size of each tax within State budgets' and the interstate differences in capacity to raise them.

9. Table D-4 provides the average revenue raising capacities assessed by the Commission for the major revenue sources in this update. Mining revenue represents about 5 per cent of standard own source revenue, but the interstate differences in the capacity to raise it are large. As a result, it is responsible for the largest redistribution of all categories.

This is measured using the Australian average per capita amount of revenue collected from each tax or charge

68

Differences from an EPC distribution

Table D-4 RELATIVE REVENUE RAISING CAPACITIES AVERAGE OF 1999-2000 TO 2003-04

N SW V ic Q ld W A SA T as A C T N T A ust

% % % % % % % % %

M ining revenue 4 4 ,0 4 .9 163.9 4 6 4 .9 55.7 17.3 0.0 2 6 9 .2 100.0

Stam p duty on

con veyan ces 129.6 81.6 103.8 89.7 58.1 43.1 9 6 .8 5 0 .6 100.0

Payroll tax 109.2 110.7 84.9 100.3 79.4 6 6 .3 74.1 8 9 2 100.0

Land revenue 143.1 91.5 77.5 9 2 .4 38 9 16 9 72.6 75.1 100 0

M otor taxes*31 89.6 105.8 104.8 114.2 102.0 9 9 .7 85.6 87.8 100.0

Insurance taxation 127.1 9 8 .6 77.7 80.2 88.6 6 2 .0 71.1 63 1 100.0

Financial transaction taxes 125.1 114 3 69.5 74.1 74.7 4 6 .4 98.7 5 6 .9 100.0

G am bling taxation 101.8 102.4 9 4 .4 9 9 .5 9 5 .9 9 1 .2 122.2 103.8 100.0

Stam p duties on shares and

m arketable securities 155.1 61.3 52.7 82.3 72.2 19.6 4 8 7 ,6 4 3 .0 100.0

(a) This includes vehicle registration fees and taxes and stamp duty on vehicle registrations and transfers.

10. Table D-5 provides details of some underlying indicators of economic activity that drive the relative revenue raising capacities assessed for the States’ major taxes.

11. Table D-6 shows the contribution of each major group of services to the total difference from an EPC distribution arising from differences in the relative costs of providing services. It also shows the importance of each function within State budgets, as measured by the proportion of total expenses incurred on the function. 1 2

12. The importance of each function to the difference from the EPC distribution differs between States. For example, Victoria's below average costs of providing education services (reflecting the below average proportion of its population enrolled in government schools) make the largest contribution to its aggregate below average costs of providing services. The community services group, which includes welfare services, housing services and services to Indigenous communities, makes the largest contribution to the Northern Territory’s above average costs of providing services. This is because Indigenous people

use those services more extensively than non-Indigenous people and the proportion of Indigenous people in the Northern Territory’s population is well above the national average.

69

Attachment D

Table D-5 INDICATORS OF STATE REVENUE BASES — AVERAGE 1999-2000 TO 2003-04

NSW Vic Qld WA SA Tas ACT NT Aust

Relative revenue raising capacity assessed by Commission13 1 4 1 5 1 6 ’ 1.094 0.951 0.901 1.229 0.853 0.682 0.855 0.810 1.000

GSP per capita relative to Australia’1 *’ 1.039 1,032 0.884 1.111 0.862 0.716 1.228 1.210 1.000

Per capita GSP $ 39 130 38 871 33 305 41 851 32 457 26 961 46 261 45 600 37 673

Per capita payrolls o f private sectofc) $ 12 556 12 745 9 996 11 312 9 499 7 224 9 429 9 246 11 546

Per capita sales o f residential real estate”1’ $ 8 309 5 665 7 232 5 294 4 285 3 811 8 105 3 479 6 682

Per capita value o f commercial/industrial land'61 $ 8 092 6 841 4 932 6 503 3 955 2 3 1 0 4511 7 4 1 8 6 504

Per capita value mining production"1 $ 963 126 3 350 9 156 1 155 1 133 0 8 874 2 092

Sources: (a) CGC, 2005 Update data (b) ABS, Australian National Accounts, State Accounts, 2003-04, Catalogue No 5220.0, Tables 4. (c) ABS Economic Indicators, June 2004, Catalogue No. 5676; and ABS Employed Wage and Salary Earners, June

2004, Catalogue No. 6248 (d) Real Estate Institute of Australia Australian Property Market Indicators, July 2004. (e) State data returns for the 2005 Update (f) State data returns for the 2005 Update and Australian Bureau of Agriculture and Resource and Economics.

13. Table D-7 provides the relative costs of providing services for each function.

14. Table D-8 provides an alternative dissection of the contribution of the expense assessments to the difference between an equalisation and an EPC distribution of the pool. It shows the contribution of the influences that cause differences between States in the relative per capita costs of providing services. Differences between States in the characteristics of their population, in the costs of inputs (mainly staff) used to provide

services and the ability to access economies of scale are the main causes of differences in relative costs of providing services.

15. Table I>-9 provides details of some underlying indicators of demographic characteristics and other indicators that drive the expense disabilities assessed by the Commission.

16. Table CM 10 shows the effects of above and below average per capita revenues from SPPs. Differences in per capita grants for Indigenous purposes and for housing had the largest effects.

70

Differences from an EPC distribution

T a b le D - 6 C O N T R IB U T IO N O F S E R V IC E S A N D S P P s T O T H E R E D IS T R IB U T IO N

Contribution

Prop’n o f exp en se'3* N SW V ic Q ld W A SA Tas A C T N T T otal(b)

% $m $m $m $m $m $tn $m $m $m

Education 22.7 -146 1 -516.0 264 9 184 1 -97.6 72.0 9 5 229.2 759.8

Health 2 1 .6 -78 2 - 3 1 3 7 43 6 4 0 3 97.5 39.2 -6 8 0 2 3 9 4 459.9

C om m unity services 9 .6 -170.6 -323 1 4 4 0 8 9 9 -22.9 21 7 -12.4 373 3 529.0

Law, order and public safety 7.0 -30.8 -220.6 -18 9 62.6 -79.9 5.2 42.5 2 4 0 0 350.3

Culture and recreation 2.3 - 1 4 -8 3 8 -83 1 45.6 -3.5 20.5 43.9 61 9 171.8

C on cession s, other paym ents and services to industry 6.5 -2 1 6 7 -211.6 21.4 2 3 6 4 112.1 29 1 -37.9 67.2 466.2

Transport10 8.2 178 6 -1 0 7 1 -118 4 139.2 -6 7 7 -47.3 -16.2 38.8 356.6

G eneral public services'*11 17.0 -120.4 -222.8 -73.6 87.0 28.9 83.0 39.9 178 0 416 8

Debt charges and depreciation 5.1 - 8 9 -24 7 17 0 12 9 -5.7 2.8 -3.3 10.0 4 2 6

Total SPPs na 81 7 105.6 16.4 0.1 -54.9 -36.7 -6.2 -106.0 203.8

Total ex p en ses and S P P s 100.0 -512 8 -1 9 1 7 8 113.4 898.1 -93.8 189.3 -8.1 1 331.8 2 532 5

(a) Expenses in the group as a percentage of total net State expenses for the years 1999- 2000 to 2003-04. (b) Total movement from EPC.

(c) Includes urban transit and roads. (d) Includes general public services, superannuation, and GST administration.

Table D-7 RELATIVE COSTS OF PROVIDING SERVICES — AVERAGE OF 1999-2000 TO 2003-04

Contribution N SW V ic Qld W A SA T as A C T NT A ust

% % % % % % % % %

Education 9 8 .3 91 5 105.6 107.6 9 4 8 112.2 102.4 194.8 100.0

Health 9 9 .0 94 6 100.9 101.7 105.5 107.0 81.8 2 0 4 .0 100.0

C om m unity services 9 5 .0 87.5 102.1 108.7 97.1 108.6 92.7 462.3 100.0

Law, order and public safety 9 8 .7 88 1 98 7 1 0 8 3 86 1 102.8 135 1 4 2 1 .9 100.0

Culture and recreation 9 9 .7 86.5 82.9 118.1 9 7 .9 133.4 2 0 7 .7 347.1 1 0 0 0

C o n cessio n s, other paym ents and serv ices to industry 90.8 88.1 101.3 133.4 122.1 116.9 6 6 .0 195.7 100.0

Transport*a| 107.4 9 0 .6 9 7 .6 114.0 86.6 79.5 84.6 171.7 100.0

G eneral p ub lic services(b* 98 0 95.1 9 7 9 104.7 102.0 118 7 113.6 197.9 100.0

Debt charges and depreciation 99.5 98.1 101.6 102.3 9 8 .6 102.6 9 6 .7 120.6 100.0

Total exp en ses 98.5 92.1 100.8 108.2 99.3 108.8 9 9 .5 2 3 6 .9 100.0

(a) Includes urban transit and roads lb) Includes general public services, superannuation, and GST administration

71

Attachment D

Table D -8 CONTRIBUTION OF EXPENSE DISABILITIES TO REDISTRIBUTION

Contribution NSW Vic Qld WA SA Tas ACT NT Total181

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

Indigenous inΠuences,b, -305.0 -674.1 243.9 195.4 -98.6 116 -27.3 654.1 1104.9

Other socio-demographic composition influenceslc> -389.5 -413.3 437.8 88.7 168.9 132.7 -1034 78.2 906.2

Wage levels 776.4 -40.4 -470.7 -116.4 -168.4 -64.5 29.8 54.1 860.3

Other input costsld) -9.4 -160.1 -89.9 56.1 4.1 24.9 -25.0 199.5 284.5

Scale o f service provision101 -405.6 -233.2 -97.9 58.9 90.3 171.0 160.6 255.8 736.8

Urban influences*0 179.8 122.9 -80.7 -63.7 -60.9 -55.2 -10.3 -31.7 302.6

Population dispersion181 -257.9 -319.4 137.0 216.9 -14.3 -40.7 -33.0 311.4 665.3

Economic environmentlh, -162.5 -76.9 3.3 178.4 10.3 19.0 -11.5 39.9 250.8

Physical environment,l) 71.0 -270.1 -91.8 222.2 7.3 0.1 -3.4 64.7 365.3

Expenses - others*·1 -91.8 41.2 106.1 61.5 22.5 27.1 21.6 -188.1 280.0

Total expenses -594.5 -2 023.4 97.0 898.0 -38.9 226.0 -1.9 1 437.8 2 658.7

Total effect o f SPPs 81.7 105.6 16.4 0.1 -54.9 -36.7 -6.2 -106.0 203.8

Total effect o f SPPs and expenses -512.8 -1 917.8 113.4 898.1 -93.8 189.3 -8.1 1 331.8 2 532.5

(a) Total movement from EPC. (b) Includes the effects of the use of services by Indigenous people and higher costs of servicing them, including the effects of land rights and native title legislation.

(c) Includes the effects of age, sex, cultural and linguistic diversity, income and the cross-border use of services. (d) Includes costs of office rent and electricity, interest rates, the isolation of some States from major sources of supply in south-east Australia; and accrued expenses and historical costs of superannuation. (e) Includes diseconomies of small scale in administration and m provision of services from many small centres.

(fi Includes effects of urban complexity', urban traffic management, and urban transit capital and pricing subsidies. (g) Includes the net effects of population dispersion and of geographic location on hospital costs and patient transport (h) Includes effects of structure and nature of State economies, road use, availability of private medical services, and

the ACT’s status as the national capital (i) Includes the effects of climate, natural hazards, conservation task, water availability, other aspects of the physical environment, and road and bridge length. (j) Includes some miscellaneous small factors and interactions between factors.

72

Differences from an EPC distribution

Table D-9 SELECTED INDICATORS RELEVANT TO THE USE AND COST PER UNIT OF STATE SERVICES

NSW Vic Old WA SA Tas ACT NT A ust

Population - State proportion o f Australia for 2003-04 % 33.55 24.73 19.22 9.84 7.66 2.40 1.62 1.00 100.00

Proportion o f population aged 65 years and o v e r 0 1.04 1.04 0.93 0.88 1.17 1.10 0.67 0.30 1.00

Indigenous people as proportion o f State resident population1" 0 0.87 0.25 1.47 1 47 0.72 1.56 0.52 12.18 1.00

Residents o f centres o f 50 000 or more as proportion o f population*"0 0.98 1.05 0.96 1.03 1.03 0.73 1.42 0.62 1.00

Residents o f remote areas as proportion o f State population*"0 0.55 0.05 1.56 2.70 1.08 0.23 0.00 15.56 1.00

Government school enrolments per 1000 o f population (ave 1999-2000 to 2003-04) 113.14 107.91 118 45 119.34 110.44 129.06 113.25 147.20 113.99

Proportion o f people with low income'"" 0.97 0.95 1.07 1.00 111 1.25 0.64 0 9 6 1.00

Average weekly earnings relative to Australia00 1.06 1.00 0.93 0.95 0.92 0.91 0.86 0.94 1.00

(a) Based on data from the 2001 Census The figures are calculated as the proportion of each State's population in the relevant group relative to the Australian proportion. (b) Based on private sector average weekly earnings as of August 2004. It is however not a good indicator of relative costs to States because it is affected by interstate differences in workforce characteristics. Source: ABS,

Average Weekly /Mi nings, August 2004, Catalogue No. 6302.0

Table D-10 CONTRIBUTION OF SPP REVENUES TO THE REDISTRIBUTION

Contribution NSW Vic Qld WA SA Tas ACT NT Total"0

$m $m $m $m $m $m $nt $m $m

Grants for Indigenous purposes 19.3 41.4 4.0 -10.9 -4 1 1.0 1.7 -52.4 67.4

Housing 28.7 33.4 -7.7 -7.3 -2.2 -3.0 -7.3 -34.5 62.1

Other SPPs 33.7 30.8 20.1 18.2 -4 8 6 -34.7 -0 6 -19.0 102.8

Total 81.7 105.6 16.4 0.1 -54.9 -36.7 -6.2 -106.0 203.8

(a) Total movement from EPC

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Attachment D

MAIN INFLUENCES ON THE PER CAPITA RELATIVITY FOR EACH STATE

17. This section outlines the main influences on the relativity for each State.

New South Wales

18. New South Wales is assessed to have an above average aggregate financial capacity to provide services. Its above average revenue raising capacity is reinforced by below average relative costs of providing services.

19. The assessment that New South Wales has above average revenue raising capacity reflects its relatively high per capita levels of economic activities that are subject to State taxes. These were generally above the Australian average for the five assessment years 1999-2000 to 2003-04, although in some cases the gap narrowed in 2003-04. In

particular, it has well above average per capita values of real estate sales and above average per capita values of land, payrolls of medium and large businesses, financial transactions and household disposable incomes.

20. The per capita costs of providing services in New South Wales are assessed to be below average. This reflects the ability to achieve greater than average economies of scale. It also reflects below average proportions of the population in groups who use services more extensively or who cost more to service, such as Indigenous people, people in

remote areas, students enrolled in government schools, people who have a low income. The below average per capita costs from those sources were partly offset by the above average level of wages and the influences of Sydney’s complex urban environment.

Victoria

21. Victoria is assessed to have an above average aggregate financial capacity to provide services. Its relative costs of providing services are below average. That effect is partly offset by a below average assessed capacity to raise revenue.

22. The assessment that Victoria’s revenue raising capacity is below average reflects the very low value of mining production, and the below average per capita values of commercial/industrial land and real estate sales. It does however have above average payrolls paid by medium and large businesses.

23. Victoria’s relative costs of providing nearly all services are assessed as being below average. This is because Victoria has:

(i) compared with the other States, the lowest proportion of Indigenous people in its population and a below average proportion of people with low income, which reduces the relative use and the average unit cost of many services;

(ii) the lowest proportion of its population enrolled at government schools, implying below average use of those schools;

74

Differences from an EPC distribution

(iii) an above average ability to achieve economies of scale in service delivery; and

(iv) a relatively compact area to service, with a low per capita road length and a low proportion of people living in remote areas.

24. Those effects were partly offset by above average costs arising from the complexities of providing some services in Melbourne and the above average proportions of the population aged 65 and over, and who have low English fluency.

Queensland

25. Queensland is assessed to have a below average relative financial capacity to provide services. Its aggregate relative capacity to raise revenue is below average (although it has increased in 2003-04) and its aggregate relative costs of providing services are above average.

26. Queensland has above average per capita production from its mining industry and above average per capita values of real estate sales. However, the effects of those revenue raising advantages are more than offset by its below average per capita values of payrolls paid by large businesses, commercial and industrial land, and activity in

financial markets.

27. In total, per capita costs of providing services in Queensland are assessed to be above average. This is primarily because the Queensland population contains above average proportions of people who use State services more extensively or who cost more than average to service. Among these groups are people who are enrolled in government

schools, people who are Indigenous, people who have low incomes, holders of pension or health care concession cards, and people who live in remote areas. Its above average per capita costs from those sources are partly offset by its low underlying wage levels and its ability to access some economies of scale.

Western Australia

28. Western Australia is assessed to have a below average aggregate financial capacity to provide services. Above average costs of providing services are largely offset by a high relative capacity to raise revenue.

29. Western Australia has the highest capacity to raise revenue of all States. It has a very large capacity to raise revenue front royalties on mining activity. It also has above average capacity to raise revenue from taxes on motor vehicles.

30. Western Australia’s aggregate costs of providing services are assessed to be above average because of:

(i) its dispersed population, leading to well above average per capita length of arterial roads and higher costs of communication, freight, and allowances for staff working in remote areas;

75

Attachment D

(ii) diseconomies of scale in service provision;

(iii) the above average proportions of its population who are Indigenous, enrolled in government schools, living in cities; and

(iv) the structure and nature of the Western Australian economy, including the effect of the large mining and primary industry sectors on the need for regulation and research.

South Australia

31. South Australia’s financial capacity to provide services is assessed to be below average. Its relative capacity to raise revenue is below average. That effect is partly offset by its below average costs of providing services.

32. South Australia’s revenue raising capacity is assessed to be below average mainly because of relatively low per capita values of real estate sales and commercial and industrial land, below average per capita value of payrolls paid by medium and large businesses, and below average levels of activity in financial markets.

33. The assessment that South Australia has below average costs of providing services reflects:

(i) below average wage levels;

(ii) below average proportions of the population who are Indigenous, young, and enrolled in government schools;

(iii) less extensive road network, which results in reduced repair and maintenance expenses; and

(iv) the comparatively small size of the major metropolitan area, especially in terms of urban transport requirements.

34. However, those effects are partly offset by the above average per capita costs stemming from: diseconomies of small scale; above average proportions of the population who are aged 65 and over, who have low incomes and who live in remote areas; and the relative scarcity and poor quality of water.

Tasmania

35. Tasmania’s financial capacity to provide services is assessed to be below average. Its revenue raising capacity is well below average and its costs of providing services are above average.

36. Tasmania has a below average capacity to raise revenue. Its share of virtually all activities subject to State taxes is well below average. This is particularly so for

76

Differences from an EPC distribution

taxes on sales of real estate, land holdings and the payrolls of large businesses, its mining production is also below average and declining.

37. The assessment that Tasmania has above average costs of providing services reflects diseconomies of small scale in service provision and above average proportions of the population in groups who use services more or who cost more to service. These include students enrolled in government schools, Indigenous people, people with low incomes, and

people who hold pension or health care concession cards.

Australian Capital Territory

38. The ACT is assessed to have a below average aggregate financial capacity to provide services. Its capacity to raise revenue is below average, and that effect is only partly offset by below average costs of providing services.

39. The ACT has below average levels of activity in most areas that are subject to State taxes, mainly because the Australian Government is not subject to State taxes. Also, the ACT has no mining industry and below average levels of motor vehicle registrations and sales, particularly for heavy vehicles.

40. The ACT’s costs of providing services are assessed to be below average because it has:

(i) low proportions of its population in groups that make extensive use of some State services or who cost more to service, including Indigenous people, people aged 65 or over, and people with low incomes; and

(ii) a compact geographical area, with no people living in remote areas, a low length of arterial roads per capita, and relatively low use of those roads by heavy vehicles.

4 1. Those effects are partly offset by diseconomies of small scale, above average underlying wage levels, the use of many services by residents of surrounding areas in New South Wales and Canberra's status as the national capital.

Northern Territory

42. The Northern Territory’s aggregate financial capacity to provide services is assessed to be below average, it has very high costs of providing services. It also has a below average revenue raising capacity.

43. The Northern Territory’s below average capacity to raise revenue reflects below average per capita values of real estate turnover, insurance premiums and payrolls paid by medium and large businesses. It does, however, have an above average value of production from its mining industry.

44. The Northern Territory has above average per capita costs of providing virtually all services. The most significant causes of above average costs are:

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Attachment D

(i) large diseconomies of scale in central administration and the need to provide a high proportion of services in small and dispersed communities;

(ii) the very high proportion of Indigenous people in the population, which increases the use and unit cost of many services;

(iii) well above average enrolments in government schools;

(iv) the dispersion of the small population over large remote areas, resulting in above average per capita length of arterial roads and higher communication, travel and staffing costs; and

(v) few private sector service providers relative to the demand, especially in health services and support for sport and cultural activities.

78

ACRONYMS

ABS Australian Bureau of Statistics

AFP Australian Federal Police

APRA Australian Prudential Regulation Authority

AVO Australian Valuation Office

BAD Bank Account Debits

CGC Commonwealth Grants Commission

EPC Equal per capita

FAG Financial Assistance Grant

GFS Government Finance Statistics

GMA Guaranteed minimum amount

GST Goods and Services Tax

HCG Flealth Care Grant

IGA Intergovernmental Agreement

MYEFO Mid-year Economic and Fiscal Outlook

SFN Special fiscal need

SPP Specific purpose payment

SRO State Revenue Offices

UPF Uniform Presentation Framework

79

INDEX

Page

Acronyms 79

Australian Capital Territory, special fiscal needs issues 14

Cost disabilities 6

EPC distribution, contribution of assessments to differences from 66

Equalisation budget 5, 9

Equalisation principle and the Commission’s approach 4

Expense assessment 5

FAG relativities, 2005-06 20

FAG relativities, calculation 58

Financial standards 5

Fiscal equalisation, definition 4

GST relativities, 2005-06 19

GST relativities, calculation 50

Illustrative pools and populations 47

Introduction 1

Northern Territory, depreciation and debt charges issues 16

Overview xi

Per capita relativities 7

Relativities for 2005— 06 19

Relativities, Australian Capital Territory, difference from EPC 66

Relativities, Australian Capital Territory, reasons for change 45

Relativities, change over time 23

Relativities, changes for each State since the 2004 Review 38

Relativities, changes in this update 25

Relativities, New South Wales, difference from EPC 66

Relativities, New South Wales, reasons for change 39

Relativities, Northern Territory, difference from EPC 66

Relativities, Northern Territory, reasons for change 46

80

Index

Relativities, Queensland, difference from EPC 66

Relativities, Queensland, reasons for change 41

Relativities, South Australia, difference from EPC 66

Relativities, South Australia, reasons for change 43

Relativities, Tasmania, difference from EPC 66

Relativities, Tasmania, reasons for change 44

Relativities, Victoria, difference from EPC 66

Relativities, Victoria, reasons for change 40

Relativities, Western Australia, difference from EPC 66

Relativities, Western Australia, reasons for change 42

Relativities, why they have changed 23

Revenue assessment 6

Terms of Reference v

Use disabilities 5

81