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Economics Legislation Committee
17/10/2012
Estimates
TREASURY PORTFOLIO
Commonwealth Grants Commission

Commonwealth Grants Commission

[22:46]

CHAIR: Welcome.

Senator WHISH-WILSON: I just have a very quick question on GST and potential division or redistribution, and calls from the Western Australia state treasurer for GST to be redistributed. I was just wondering whether you had any estimates on the impact on the state of Tasmania, if that were to occur; and if you had done work on that for other government agencies?

Mr Spasojevic : No.

Senator WHISH-WILSON: None at all?

Mr Spasojevic : None at all.

Senator Wong: We can probably provide you with that tomorrow, because I asked for the same information from Treasury when the Leader of the Opposition flagged his support for the idea of a per capita distribution. I am sure we can see if we can deal with it. I have some figures, but it is probably not appropriate—

Senator WHISH-WILSON: They are not sourced from the Commonwealth Grants Commission?

Senator Wong: They are Treasury.

Senator CORMANN: In recent times we have been talking about the impact of higher revenues for mining royalties on respective GST shares of respective states. Given that mining royalties related revenues are declining on the back of lower mineral prices and arguably lower volumes than anticipate—given recent industry developments—what will be the impact on relativities and GST-sharing arrangements; and how long will it take for these changes to work their way through the system?

Mr Spasojevic : The impact, if there are lower revenues raised, will be those states which have above average shares of mining royalties—their GST shares will eventually rise. That will take up to five years to work its way through the system.

Senator CORMANN: That was a very useful answer. If a state had a lower or higher than average payroll tax revenue, what would be the impact of that on relativities and GST-sharing arrangements?

Mr Spasojevic : Could I ask whether the higher or lower revenues are because they have a higher or lower tax rate or a higher or lower share of the payroll tax base?

Senator CORMANN: A higher or lower rate.

Mr Spasojevic : The rate itself will have no effect, because we do the calculations on the average rate of all the states.

Senator CORMANN: And if it is a lower or higher share?

Mr Spasojevic : If it has a higher or lower share then there will be a converse movement in their GST.

Senator CORMANN: Thank you. In your 2013 update you point to an error that has been in the estimates since 2006, of almost 300,000 in terms of population identification. The population for New South Wales, Victoria and Queensland decreased between 80,000 and 94,000 each and the population for Western Australia estimate increased by about 5,600. Can you just talk us through the implications of that for the way GST sharing arrangements have operated in the year since 2006?

Mr Spasojevic : That will have had an impact on the per capita shares—the basis on which the commission does its calculations—but it should not have had an impact on the shares themselves, other than the impact on investment through population growth. That differs for different states. This is an issue that the commission will be looking at in the current update, because these are the revisions that have come through because the ABS has revised population numbers on the back of the census. We are currently in consultation with the states on how these changes should flow through.

Senator CORMANN: Is it likely that there will be some rebalancing to essentially correct for the effects of all of this?

Mr Spasojevic : The revised population shares will be used in the next distribution of the GST.

Senator CORMANN: But not retrospectively.

Mr Spasojevic : There is no retrospective change.

Senator CORMANN: You do say the population levels are an integral part of your assessment process. Can you talk us through, just for the record, how population levels impact on your assessment process?

Mr Spasojevic : The basic distribution of the GST is done on population shares, so if the population shares change from one year to the next then the GST shares will change to follow that. That is the core basis on which the GST revenue is distributed.

Senator CORMANN: So, in simple terms, if your population share is underestimated you end up with less than you are entitled to and if it is overestimated you end up with too much?

Mr Spasojevic : I can understand that that would be a way of expressing it, yes.

Senator CORMANN: You talk about arguments for and against two options. So am I correct that one of these would incorporate the error?

Mr Spasojevic : Sorry, I didn't hear—

Senator CORMANN: You are talking about two options in terms of the way these revisions can happen.

Mr Spasojevic : There are two options for dealing with the new ABS population numbers—

Senator CORMANN: Yes, published population and backcast estimates from the 2011 census. Which option are you favouring?

Mr Spasojevic : None right now, because we are still in consultation with the states. The two options have been identified and we are currently talking to the states about which of those options would be best.

Senator CORMANN: Regional Infrastructure Fund payments impact of relativities: In your update you essentially make the point that Regional Infrastructure Fund spending should be taken into account in the relativities. If I get this right: when the Commonwealth says, 'We are going to give certain states more out of the Regional Infrastructure Fund in recognition that more mining tax is going to be raised out of those states,' what would happen as a result of that recommendation? Is it through the horizontal fiscal equalisation arrangements you would essentially claw back any advantage that individual states would have received in those circumstances?

Mr Spasojevic : That is correct.

Senator CORMANN: That would defeat the whole purpose of providing some recognition to states that are disproportionately contributing to the mining tax through a larger share of the Regional Infrastructure Fund.

Mr Spasojevic : The commission is asked to recommend a distribution which achieves the objective of horizontal fiscal equalisation that the Commonwealth and states agreed to as the desirable objective, and—

Senator CORMANN: So it gets handed up with one hand, in recognition of a particular context, and it gets taken back by the other.

Mr Spasojevic : Correct.

Senator CORMANN: Interesting. All right, thank you.

CHAIR: That was very interesting, Secretary.

Senator CAMERON: There has always been horizontal fiscal imbalance as part of the Federation—has there not?

Mr Spasojevic : As far back as the records would go that would be a correct statement to make, yes.

Senator CAMERON: In fact, some states have been described as mendicant states over the years—is that correct?

Mr Spasojevic : That has been language that has been used, but I do not believe by the commission.

Senator CAMERON: That is right, but I have heard that language. If you did use that language, Western Australia would have been a mendicant state for many, many decades—is that right?

Mr Spasojevic : Western Australia is a state that had a below average fiscal capacity for an extensive period of time.

Senator CAMERON: They were supported by other states for decades under the principle of horizontal fiscal equalisation.

Mr Spasojevic : Certainly supported by above-average grants from the Commonwealth.

Senator CAMERON: And the Commonwealth gets grants from other states—or the capacity to raise funds.

Mr Spasojevic : Not necessarily.

Senator CAMERON: Okay. I was interested in the issue Senator Cormann raised about the price of commodities. I have an RBA index of commodity prices—1987 to 2012. The commodity price varied around the $40 mark from 1988 to about 2004 and then started rising very quickly to 2008. It dipped in 2008 and then rose again in 2009 to an index of about $150. As I understand what Senator Cormann was saying, you have to take into account any fallback from that peak level. Horizontal fiscal equalisation does not work like that, does it?

Mr Spasojevic : As I understood the earlier question, changes in the price of commodities will be reflected in the royalty revenues that states collect eventually and it is only those observed actual royalty collections which interact into the formulas we use, not commodity prices per se.

CHAIR: Going back to the discussion with Senator Cormann about the clawing back of funds paid under regional infrastructure grants and the Commonwealth Grants Commission work, Senator Cormann was reading from a 'Staff discussion paper', August 2012. What is the status of that 'Staff discussion paper'?

Mr Spasojevic : I think that is the new issues 'Staff discussion paper'.

CHAIR: It is—'New issues for the 2013 update'.

Mr Spasojevic : That is a discussion paper that the staff of the commission prepare which is sent to the states as a consultative vehicle. The states then respond to the issues that we have raised and then those views are put to the commission when they make a final decision on how those issues should be resolved in determining the distribution of GST in the financial year 2013-14.

CHAIR: Is the commission a totally independent body or are its decisions subject to revision by government?

Mr Spasojevic : The commission is an independent body, but the Treasurer is the final decision maker and he can either accept or not accept the advice of the commission.

Senator CORMANN: On that exact point, in the context of your updates, the Treasurer does provide formal directions to the commission on a range of issues.

Mr Spasojevic : He provides terms and references.

CHAIR: On the 'New issues for the 2013 update', that is work you are pursuing pursuant to direction from the Treasurer?

Mr Spasojevic : We have not yet received terms of reference from the Treas urer for the update . That normally would not occur as early in the process. Staff are aware of technical questions which arise—for example, how should new Commonwealth payments be treated by the commission; so we go out to the states in advance.

CHAIR: That is right and that is the work you are doing in this paper. Once you have received advice from the states and have brought your thoughts together, you have a final position which you then put to the Treasurer and he may or may not accept it?

Mr Spasojevic : Correct.

CHAIR: Thank you, Secretary, and thank you to your officers for attending this evening. Thank you, Senator Wong, for your assistance today.

Committee adjourned at 22:59