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Tuesday, 26 November 1985
Page: 2249

Senator GRIMES (Minister for Community Services)(4.13) —I move:

That the Bill be now read a second time.

I seek leave to incorporate the second reading speech in Hansard.

Leave granted.

The speech read as follows-

This Bill seeks to give effect to the arrangements agreed to at the Premiers Conference held on 30 May 1985 for the provision of general purpose assistance to the States.

The Bill provides for payments to be made to the States in each of the three years 1985-86, 1986-87 and 1987-88 in the form of general revenue grants. Provision is also made for advance payments of assistance to be made in the first six months of 1988-89, pending the passage of legislation to implement such further arrangements as may apply for that year.

The purpose of these general revenue grants is to assist the States, by way of subventions to their budgets, in the financing of their recurrent outlays. The States are free to determine the purposes for which grants are spent in accordance with their own budgetary priorities.

The grants provided for in the Bill comprise the major component of Commonwealth assistance to the States. In 1985-86 it is estimated that some $11.3 billion would be provided to the States under the bill out of total net payments to the States of some $20.7 billion.

The Bill provides for the making of three types of general revenue grants to the States, financial assistance grants, health grants and special revenue assistance grants.

The financial assistance grants represent the major element of the general revenue grants and provide the main means for implementing the distribution of grants among the States recommended by the Commonwealth Grants Commission and agreed to at the May 1985 Premiers Conference.

They replace the tax sharing grants which were made under the States (Tax Sharing and Health Grants) Act 1981. The arrangements for making these grants expired on 30 June 1985. In deciding to introduce new arrangements the Government was concerned to provide a more certain basis for assisting the States, compared with the substantial year to year variations in grants under the sharing arrangements and their antecedents.

The Bill provides for a pre-determined real level of finincial assistance grants to be made to the States in each of the three years to which it applies.

In 1985-86, the States will receive the same real level of grants as in 1984-85, while in the two remaining years they will receive a real increase of 2 per cent on the grants paid in the previous year.

In proposing these real increases in grants to the States the Commonwealth took into account the circumstances facing the Australian economy and considered that against the background that the levels of government services provided by the States had increased significantly in recent years, it was appropriate to aim for a slower growth in public sector spending. Reflecting this, it was appropriate to envisage a somewhat slower real growth in general revenue grants than would have occurred under a continuation of tax sharing arrangements.

The price index to be used in calculating the real level of grants will be the all groups consumer price index for the six State capital cities, taking the movement in the index for the year to the March quarter of each financial year over the movement in the preceding year. This arrangement, which is traditional for payments of this type, allows the final amount of the grants to be determined during the year to which they relate.

The Bill provides for the total amount of financial assistance grants to be distributed among the States in each year in accordance with per capita relativities recommended by the Commonwealth Grants Commission. These relativities were determined by the Grants Commission following its examination of the fiscal capacities of the States over the three years 1981-82 to 1983-84 and represent the relative shares of the grants which the Commission considered would be most consistent with the principle of fiscal equalisation; that is they represent the relative share of assistance which the Commission considers would be required to enable each State provided that it makes a comparable revenue effort, to provide services to its residents at a standard not appreciably below the standards of the other States.

This is in contrast with the arrangements which applied over the past three years, when the operation of guarantee provisions in the tax sharing arrangements prevented the phased implementation of the relativities that had been agreed at the Premiers Conference in 1982.

The health grants provided for in the Bill represent a continuation of the identified health grants that were first introduced for most States in 1981-82 and for South Australia and Tasmania from 1 February, 1984. They are general revenue grants but were identified as replacing specific purpose grants previously paid to the States under hospotal cost sharing agreements and payments for community health and school dental programs.

The total amount of the health grants to the States will be provided under the Bill on the same basis as the financial assistance grants, with the same real amount being paid in 1985-86 as in 1984-85 and a 2 per cent real increase in each of the remaining two years.

The distribution of the grants among the States included in the Bill will preserve the same per capita distribution of grants as applied in 1984-85.

Taken alone, this distribution of health grants preserves and advantage which South Australia and Tasmania received from the operation of the former hospital cost sharing agreements with those States; however from 1985-86 that advantage is to be offset through the distribution of the financial assistance grants.

As a result of their 1975 hospital cost sharing agreements with the Commonwealth, which were for 10 years rather than the five-year agreements entered into by the other States at that time, South Australia and Tasmania continued to receive specific purpose assistance for hospital operating costs until 1 February, 1984 when, as part of the arrangements for the introduction of Medicare, they agreed to participate fully in the identified health grants. These States chose to continue to receive assistance under the hospital cost sharing agreements beyond 1981-82, when the other States moved to identified health grants as it placed them in an advantageous position relative to the other States. This was because their hospital cost sharing agreements were not subject ot the deductions that were made in the identified health grants to other States in 1981-82 and 1982-83 to reflect the increased revenue raising capacity assessed to be available to those States from hospital charges under the then new health insurance arrangements. The advantage was retained when the two States moved to identify health grants in February 1984.

This advantage has not previously been offset in the tax sharing grants as the Commonwealth Government accepted the view put by the two States at the June 1982 Premiers Conference that their entitlements under the hospital cost sharing agreements overrode fiscal equalisation principles.

The basis for these States advantageous shares of identified health grants ceased on 30 June 1985 and accordingly from 1985-86 this advantage will be offset in these States share of financial assistance grants as determined by the new per capita relativities.

The arrangements in this Bill therefore ensure that the combined financial assistance and health grants to South Australia and Tasmania will henceforth be comparable with those to the other States.

The special revenue assistance grants payable to South Australia and Tasmania provided for in the Bill represent a transitional arrangement which recognises that the share that each of those States will receive in aggregate of financial assistance and health grants in each of the three years commencing in 1985-86 will be considerably lower when compared with the share they received in 1984-85 of tax sharing and health grants.

To help smooth the adjustment process for these two States, the Commonwealth agreed at the May 1985 Premiers Conference to provide special revenue assistance grants to those States which in 1985-86 will represent two-thirds of the difference between the financial assistance grants actually payable to those States and the notional grant that would have been paid if the relative advantage of the two States derived from the health grants had been preserved. Half this amount will be paid in 1986-87. The effect of these grants will therefore be to phase out these States relative health grant advantage over three years.

In addition to the general revenue grants provided for in the Bill the Commonwealth agreed at the May 1985 Premiers Conference to the provision of two other payments of special revenue assistance in 1985-86 only. These were:

A payment of $10m to Queensland which is to be made in accordance with the Grants Commission's assessment in its 1 April 1985 report that Queensland's financial relativity was disturbed by the introduction of Medicare. It should be noted in this regard that as a result of the introduction of the new relativities in 1985-86 the relative cost to Queensland of its free public hospital system will be reflected in its share of financial assistance grants and, consequently, there will be no grounds for ongoing special assistance to Queensland in respect of Medicare compensation grants;

and a further payment to Tasmania estimated at $31.2m. This supplementary assistance is to be provided in recognition of the fact that Tasmania's financial assistance grant was to fall by more in relative terms than any other State as a result of the introduction of the new relativities, and to ensure that its total general revenue grants do not decline by more than 4 per cent in real terms in 1985-86.

Authority for these payments is being sought in Appropriation Bill (No. 2) 1985-86.

Under the memorandum of understanding in respect of financial arrangements between the Commonwealth and a self-governing Northern Territory, it is provided that general revenue grants should be payable to the Northern Territory on a similar basis to the States. Authority for payments to the Territory in 1985-86 analagous to those to be provided to the States under this Bill is also included in Appropriation Bill (No. 2) 1985-86.

The general revenue grants provided for in this Bill are the result of agreement between the Commonwealth and the States. The Bill provides the States with certainty in the real level of grants available to them for three years, and will provide for the distribution of the grants among the States consistent with the principle of fiscal equalisation. At the same time the level of grants is consistent with the Government's overall budgetary and economic objectives.

I commend the Bill to honourable senators.

Debate (on motion by Senator Sheil) adjourned.