Chapter 2 The Framework
This chapter will provide details of the Intergovernmental Agreement on
Federal Financial Relations (IGA FFR) before discussing responses to the
overall reforms to federal financial relations. The significance of the reforms
are considered in the context of the changing dynamics of financial relations
between the Commonwealth and the states and territories. The benefits of the
IGA FFR are identified before looking at specific issues with national
funding agreements. Finally the chapter examines some of the suggestions the
Committee has received to improve the existing framework.
The Intergovernmental Agreement on Federal Financial Relations
The overall objective of the IGA FFR is the ‘improvement of the
well-being of all Australians’. This is to be achieved
n collaborative working
arrangements, including clearly defined roles and responsibilities and fair and
sustainable financial arrangements, to facilitate a focus by the Parties on
long term policy development and enhanced government service delivery;
n enhanced public
accountability through simpler, standardised and more transparent performance
reporting by all jurisdictions, with a focus on the achievement of outcomes,
efficient service delivery and timely public reporting;
administration and compliance overheads;
n stronger incentives
to implement economic and social reforms;
n the on-going
provision of Goods and Services Tax (GST) payments to the States and
Territories equivalent to the revenue received from the GST; and
n the equalisation of
fiscal capacities between States and Territories.
The IGA FFR consolidates and simplifies policy development and
service delivery arrangements between the Commonwealth and the states and
territories, providing the foundation for collaboration in these areas and
facilitating the implementation of economic and social reforms ‘in areas of
The principles underpinning the IGA FFR include flexibility for the
states and territories to deliver services, reducing Commonwealth prescription,
and a commitment to cooperative working arrangements. Accountability to the
Australian people for results and value for money are central to the new
The IGA FFR provides for three categories of funding transfer
between the Commonwealth and the states and territories:
n general revenue
assistance, including the on-going provision of GST payments, to be used by the
States for any purpose;
n National Specific
Purpose Payments (SPPs) to be spent in the key service delivery sectors; and
n National Partnership
payments to support the delivery of specified outputs or projects, to
facilitate reforms or to reward those jurisdictions that deliver on nationally
National Specific Purpose Payments (SPPs) and National Partnership (NP) payments
are facilitated under National Agreements (NA) and NPs respectively.
Goods and Services Tax and general revenue
The Commonwealth makes Goods and Services Tax (GST) payments to the
states and territories equivalent to the revenue received from the GST. This
revenue is untied and can be used by the states and territories for any
The amount of GST payable to the states and territories is determined by
the Commonwealth Treasurer. The Commonwealth Grants Commission makes
recommendations to the Treasurer on the distribution of the GST in accordance
with the principle of horizontal fiscal equalisation (HFE).
The amount of revenue from the GST to the states and territories in a
financial year is defined as:
n the sum of GST
collections, voluntary and notional payments made by government bodies, and
amounts withheld from any local government authority representing the amount of
unpaid voluntary or notional GST;
n the amounts paid or
applied under a provision of a Commonwealth law that requires the Commonwealth
to refund some or all of an amount of GST that has been paid.
The Commonwealth makes payments of other general revenue assistance to
the states and territories that can be used for any purpose, including:
n revenue sharing
arrangements other than GST–for example, offshore petroleum royalty revenues;
n compensation payments
for Commonwealth policy decisions; or
n payments for national
There is currently a review underway of the distribution of revenue from
the GST to the states and territories. This review was commissioned by the
Australian Government in March 2011. A Review Panel comprised of the Hon Nick
Greiner AC, the Hon John Brumby and Mr Bruce Carter will prepare an interim
report by February 2012 and a final report by September 2012.
Under the new framework six NAs have been developed to cover key areas
of national importance. These NAs are in the areas of health, education, skills
and workforce development, disability services, affordable housing and
NAs define the objectives, outcomes, outputs and performance indicators
and clarify the roles and responsibilities of the various levels of government
to facilitate the delivery of services across a particular sector.
National SPPs are provided under NAs to states and territories and
although the funds must be spent within a particular sector, states and
territories have ‘full budget flexibility to allocate funds within that
National Partnership agreements and payments
NP agreements ‘define the objectives, outputs and performance benchmarks
related to the delivery of specified projects, to facilitate reforms or to
reward those jurisdictions that deliver on national reforms or achieve service
NP payments are a central element of the new framework. There are three
types of NP payments:
project payments - which support the delivery of specified outputs or
facilitation payments - designed to drive reform in areas considered to
be a national priority; or
incentive payments - to reward those jurisdictions that deliver on
nationally significant reforms.
Currently there are 51 NPs in key areas such as health, education,
housing, Indigenous affairs, infrastructure, environment, and community
services. NPs are also used to address other areas of national priority such as
the national economy and local government and regional development.
Although evidence to the inquiry touched on national funding agreements
under both NAs and NPs, the focus tended to be on funding arrangements under
Governance and accountability
Council of Australian Governments
The Council of Australian Governments (COAG) is the peak
intergovernmental body in Australia. It is comprised of the Prime Minister,
State Premiers, Territory Chief Ministers and the President of the Australian
Local Government Association (ALGA).
COAG was established in 1992 and is supported by a Secretariat located
in the Department of the Prime Minister and Cabinet.
Its role is to initiate, develop, endorse and monitor the ‘implementation of
policy reforms that are of national significance and which require cooperative
action by Australian Governments’.
COAG meets at the Prime Minister’s discretion as needed and releases
communiqués detailing the outcomes of each meeting.
COAG negotiates and signs intergovernmental agreements after the various
jurisdictions have committed to implement decisions reached by COAG.
The IGA FFR was agreed to by COAG in November 2008 and came into effect on 1
Ministerial Council for Federal Financial Relations
The Ministerial Council for Federal Financial Relations has general
oversight of the IGA FFR on behalf of the COAG. The Council is made up of the
Treasurers of the Commonwealth, states and territories and is chaired by the
Treasurer of the Commonwealth.
COAG Reform Council
The COAG Reform Council (CRC) is an independent non-statutory body
established by COAG to drive its reform agenda. The CRC monitors, assesses and
publicly reports on the performance of the Commonwealth and states and territories
in achieving the outcomes and performance benchmarks specified in the six
National Agreements. The CRC provides reports to COAG which:
n publish the
performance data and provide a comparative analysis of the performance of
governments in meeting the agreement’s objectives, including highlighting
relevant contextual differences between jurisdictions;
n highlight examples of
good practice and performance so that, over time, innovative reforms or methods
of service delivery may be adopted by other jurisdictions (from second year of
n reflect the
contribution of both levels of government to achieving performance benchmarks
and to achieving continuous improvement against the outcomes, outputs and
performance indicators (from second year of reporting).
The Steering Committee for the Review of Government Service Provision,
which is supported by a Secretariat within the Productivity Commission (PC),
provides agreed performance information to the CRC to enable reporting on NAs.
Additionally, in March 2008, COAG requested that the PC report to COAG
on the impact and benefits of the reform agenda every two to three years. The PC’s
role is to assess:
n the economic impacts
and benefits of COAG reforms
n where practicable,
whether Australia's reform potential is being achieved and the opportunities
The focus of the Commission's reporting will be on the
realised and prospective effects of COAG reforms. It will complement COAG
Reform Council reporting on the implementation of reforms agreed to by COAG.
The first report is to be provided to COAG by 31 December 2011.
Perspectives on the overall reforms
Throughout the inquiry the Committee heard that there was general
support for the IGA FFR. However, while the underlying principles and
intent of the framework are seen as positives there have been problems
translating the theory into practice with regard to national funding
This section will examine the:
n significance of the
n changing dynamics of
federal financial relations;
n benefits of the IGA
n issues with national
The significance of the reforms
Throughout the inquiry the Committee heard that the IGA FFR has provided
significant reform to the financial relations system between the Commonwealth
and states and territories. The Tasmanian Government told the Committee that
the new framework was ‘an important evolution in federal financial relations’
and ‘represented a major step forward in Commonwealth-state financial
Likewise, the New South Wales Government in their written submission to
the inquiry, commented:
Overall, the changing dynamics of grants brought about by
COAG in 2008, through the IGA FFR, are considered a positive step in
Commonwealth-State relations due to the increased focus on outcomes and
increased public accountability.
The Victorian Government called the reform a ‘significant watershed in
Australian federalism’ explaining that the IGA FFR has:
…for the first time in Australia’s federal history–established
an ongoing policy and administrative framework for intergovernmental transfers.
Facilitating these transfers through a single piece of Commonwealth legislation
is a dramatic improvement in Commonwealth-level parliamentary accountability.
It also provides for a much more coherent and comprehensive approach to these
transfers, particularly the outcomes-based policy and reform objectives of the
This view was supported by other witnesses to the inquiry. The Commonwealth
Auditor‑General told the Committee that the IGA FFR ‘represents a
significant evolution in Commonwealth, state and territory arrangements’.
Academic witnesses also confirmed the importance of the framework particularly
as it places Commonwealth-state financial relations within a comprehensive
legislative framework. The Victorian Government’s
submission noted that a recent Organisation for Economic Co-operation and
Development (OECD) report recognised the contribution that the IGA FFR is
making to Australia’s economic performance and social welfare.
Evidence to the inquiry suggests that the IGA FFR addresses ongoing
historical issues within Australia’s underlying federal structure. The
Australian Constitution, which came into force on 1 January 1901,
divided power between the newly created Commonwealth Government and the state
governments. In terms of fiscal responsibility, this division of power allowed
the Commonwealth to collect excise and customs duties, retain a limited amount of
these funds for the Commonwealth’s own requirements and return the balance to
However, over time the initial arrangements have become increasingly
complex, producing a growing discrepancy between revenue collected and
expenditure. The Commonwealth collects
the bulk of the revenue and the states and territories are responsible for most
of the expenditure. The Productivity Commission reports that, in 2008–09, the
Commonwealth raised ‘two-thirds of all government revenue, but only undertook
half of all government expenditure’. This difference is
called vertical fiscal imbalance (VFI).
The states and territories acknowledge that VFI necessitates the
transfer of revenue between the Commonwealth and states and territories.
It is the resulting perceived distortion of the original intent of the
Australian federal system that the states and territories take issue with. The
Victorian Government submitted that:
[S]ince Federation, the potential for the Commonwealth’s
fiscal dominance to overwhelm the constitutional division of powers and the
policy and budget autonomy of States and Territories has been widely
According to the Victorian Government, the IGA FFR provides a solution
because it acknowledges and facilitates the role of the states and territories
in the federal system:
The IGA FFR does not simply ‘allow’ States and Territories to
determine their own priorities: more fundamentally, it recognises their primary
(and constitutional) responsibility for many of the service sectors covered by relevant
National Agreements and associated Special Purpose Payments.
The CRC explained that the IGA FFR has addressed this issue by removing
Commonwealth prescription and providing flexibility to the states and
territories by moving to an outcome focused reporting structure.
In order to attain this flexibility, the IGA FFR emphasises the need to clearly
define the roles and responsibilities of the various levels of government.
However, the Committee heard that to date the clarification of roles and
responsibilities in both NAs and NPs ‘has been inadequate’.
The NSW Government told the Committee that, despite the original intention
of the IGA FFR, roles and responsibilities are defined broadly and:
Across the NAs, a total of 63 responsibilities are defined as
“shared”, with just 45 listed as Commonwealth and 36 listed as State
Identifying the roles and responsibilities of the different levels of
government has been a perennial problem for Commonwealth-state financial
relations. Professor Brown from Griffith University drew the Committee’s
attention to the ‘historical confusion’ inherent in the Australian system.
He likened the problem to the difference between a layered cake and a marbled
It is the old idea–which to some extent is an idea which
informed the design of the Australian Constitution–that you can separate out
the roles and responsibilities of different levels of government quite clearly,
like a layered cake, but in reality what you get is all levels of government
getting involved in all sorts of things, even if one level of government has
different roles or different leadership roles, and you end up with a marbled
cake rather than a layered cake.
Professor Brown went on to explain that the lack of clear roles and responsibilities
is a symptom of the ‘inescapable’ tension between the centralised and
decentralised power of the Australian federation and ongoing efforts to
reconcile the two. He added that the
ambiguous position of local government within the federation and subsequently
within the Commonwealth-state financial relations framework caused further
Benefits of the new framework
The Committee heard that the underlying principles and intent of the IGA FFR
provided a solid foundation to improve financial relations between the
Commonwealth and the states and territories. Previous financial arrangements
between the Commonwealth and the states and territories were dominated by
Specific Purpose Payments (SPP), which are tied grants with an inputs focus
rather than an outcomes focus. An inputs focus enabled the Commonwealth to
exert control through imposing conditions on states and territories: it focused
attention on how objectives were achieved. In contrast, the IGA FFR facilitates
an outcomes focus, primarily concerned with what is being achieved.
The shift from an inputs focus to an outcomes focus was seen as a
positive step by witnesses. In both oral and written evidence to the Committee,
witnesses identified features within the IGA FFR that should improve the
n a less prescriptive
role for the Commonwealth;
n increased flexibility
for the states and territories; and
n the clarification of
the roles and responsibilities of the various levels of government.
All of these benefits are interlinked and cannot be separated. The less
prescriptive role for the Commonwealth in service delivery has allowed greater
flexibility to the states and territories. To enable this change the focus has
shifted from measuring inputs and outputs to measuring outcomes. In turn, this
shift has required clarification of the roles and responsibilities of the
various levels of government.
Referring to the significant change in the dynamic of Commonwealth-state
relations under the IGA FFR, the Victorian Government explained the benefits of
the new arrangements:
…an outcomes based framework that provides states and
territories with flexibility delivers better value for money than where funding
conditions are tightly prescribed by the Commonwealth.
The Victorian Government identified two reasons why better value for
money could be achieved through this increased flexibility:
Firstly, the state and territory governments can tailor
policies to their local conditions, which improves the responsiveness,
efficiency and effectiveness of policy. Secondly, the flexibility allows states
to innovate and find new and better ways of delivering services. This kind of
innovation cannot happen when inputs are tightly prescribed.
This point was reiterated by several witnesses. The Auditor-General told
the Committee that states and territories were in the best position to meet the
needs of their population, having the ‘on-the-ground experience’ that enables
them to best ‘deliver services in their own jurisdictions’.
He indicated that the move to an outcomes focus and flexibility is part of a
wider shift in public administration:
In many ways the new approach reflects national and
international developments in public sector management. By consolidating
payments, giving greater emphasis to expected outcomes and looking to enhance
accountability for performance, it is expected that the quality and
effectiveness of government services will be improved.
Issues with national funding agreements
While there was overall support for the IGA FFR witnesses also identified
a number of problems with national funding agreements, including:
n proliferation of
n implementation of
These issues are outlined
briefly in the following paragraphs but will be discussed in more detail in
Chapters 3 and 4.
Proliferation of agreements
The IGA FFR reduced the existing 92 specific purpose payments (SPPs) to
six NAs. The Committee heard that despite the reduction in SPPs and contrary to
the original intention of the IGA FFR, NPs and the more proscriptive payments
they provide, have grown to 51. Both the Tasmanian
Government and the NSW Government expressed disappointment at the subsequent
proliferation of funding agreements.
Specifically the NSW Government identified that the new arrangements no
longer cater for small, less complex projects without developing a full NP.
Previously these types of fund transfers could be completed with a ‘simple
exchange of letters’ between relevant parties. The NSW Government
maintained that the need for a NP in such circumstances contributes to the
proliferation of such agreements.
Associate Professor Anne Twomey told the Committee that the
proliferation of funding agreements under NPs had seriously jeopardised the new
reforms and left the way open for the problems with the previous system to
re-emerge. In their written
submission to the inquiry, the Business Council of Australia (BCA) summarised
the concerns over this proliferation expressed by many witnesses, singling out
the return of Commonwealth control of the system and the consequent loss of
state and territory flexibility.
Implementation of agreements
The Committee was told that the reassertion of Commonwealth control over
funding was evident in the Implementation Plans (IPs) developed for funding
agreements. Contradictory to the principles of the IGA FFR, witnesses
pointed out that the IPs were often prescriptive and focused on inputs rather
than outcomes. The NSW Government identified
the increased administrative burden created by the IPs.
The Tasmanian Government expressed concern over the ‘onerous reporting
requirements’ entailed in the IPs, a feature confirmed by the NSW Government.
With regard to reporting requirements, the Committee heard evidence that
there were two areas of concern: the reporting burden and the quality and
timeliness of data. The Northern Territory Legislature referred to ‘irrelevant
reporting mechanisms’ and the NSW Government
detailed the difficulties faced by states and territories in meeting the
reporting demands for NPs:
Most NPs (or associated Implementation Plans) require line
agencies to furnish milestone and/or progress reports to the relevant
Commonwealth line agency. These may or may not be linked to the release of
milestone/progress payments to the States. The frequency of reporting varies
among agreements from annual to monthly. There are also ad hoc requests by the
Commonwealth which can be difficult to accommodate, especially where the
information sought is detailed, not otherwise collated in the requested manner
and/or is sought at short notice. In some areas, there are also separate reporting
requirements on related issues to different bodies.
The quality and timeliness of data required to fulfil reporting
requirements was a recurring theme throughout the inquiry. There were
overarching issues with the limitations of the data available, not only to the
states and territories but to the CRC and the PC in their broader reporting
roles. Once again, the NSW Government’s written submission summed up the
difficulties, describing the problems, including:
…data that are poor quality, unreliable or infrequent; data
that are not comparable over time or between jurisdictions; and data that
cannot be sufficiently disaggregated by Indigenous or socio-economic status
Goods and Services Tax revenue
The IGA FFR also covers the provision of GST revenue to the states and
territories. Although the distribution of the GST revenue was not the focus of
this inquiry, the Committee heard evidence of a degree of dissatisfaction with
the GST arrangements. GST revenue is distributed according to the principles of
HFE. The Commonwealth Grants
Commission (CGC), which recommends levels of GST revenue paid to the
states and territories, defines HFE as:
State governments should receive funding from the pool of GST
revenue such that, after allowing for material factors affecting revenues and
expenditures, each would have the fiscal capacity to provide services and the
associated infrastructure at the same standard, if each made the same effort to
raise revenue from its own sources and operated at the same level of
In general, smaller states and territories support the current
arrangements for the GST redistribution and larger states and territories
express some reservations about the system. The Tasmanian Government ‘strongly
supports the existing principle and practice of HFE on the basis that it is
fair and equitable for all states’. Whereas the NSW
Government maintains that:
The consequences of Australia’s HFE are: large
cross-subsidies paid by the larger to the smaller States; a complex and data
intensive method of equalisation yet one which still relies on large measures
of judgement; and a method of equalisation which potentially has significant
adverse impacts on resource allocation in Australia.
With regard to this inquiry, the Committee was particularly concerned to
hear suggestions that the current distribution process may provide a disincentive
to productivity and reward poor administration. The NSW Government
Above average revenues may be partially equalised away and
this can reduce the incentive to improve efficiency. There is a disincentive
against expanding the revenue base, either through increasing activity in the
State or through undertaking additional expenditure to fund economic development,
as some of the increased revenue capacity will be equalised away through lower
The CGC was asked if GST distribution did affect efficiency and quality
of administration. The CGC denied that this was the case and maintained, that
on the contrary, ‘[m]icro service level efficiency is absolutely rewarded’.
The Committee also sought clarification regarding the affect that
payments under NAs and NPs have on the distribution of GST. The CGC told the
Committee that the majority of such payments did affect GST distribution but
that each payment was assessed individually before a decision was made:
You cannot say all of them will [affect the GST
distribution], because the Treasurer might tell us that one should not and the
commission might itself decide that a particular payment should not. The
presumption is that, because there is money available to the states to fund services,
it will affect the GST distribution. The bulk of them do.
Changes to improve the framework
The Committee received a number of suggestions to improve the perceived
inadequacies of the IGA FFR. The Victorian Government
re-iterated the importance of the framework and suggested that ‘a key national
priority should be to ensure that these reforms are properly implemented prior
to considering other far-ranging reform options’.
The Australian National Audit Office (ANAO) suggested that another area
needing attention was the interaction between the IGA FFR and the recently enhanced
framework for the administration of grant programs.
The ANAO explained that under the legislation the Commonwealth Grant Guidelines
(CGGs) do not apply to national funding agreements.
The ANAO is of the opinion that the exemption of these agreements from the CGGs
could lead to a number of inconsistencies, including:
n …complex administrative arrangements whereby
any grants awarded to state and territory governments may be subject to
governance arrangements that are different to those applying to grants awarded,
under the same program, to other types of applicants;
n …a funding agreement
might be signed with an intermediary in respect to a project actually being
delivered by a state government, rather than a National Partnership Agreement
being negotiated with the state; and
n …the time required to
negotiate a National Partnership Agreement with the various states and
territories, rather than signing a standardised funding agreement, can present
challenges to the achievement of intended outcomes.
The ANAO suggests that the interaction between the grants under the two
new frameworks should be re-examined in order to remove these inconsistencies
and improve governance arrangements.
The Committee is pleased with the strength of the consensus that the
underlying principles and intent of the IGA FFR are seen as addressing the previous
problems underpinning federal financial relations. The Committee notes the
general recognition, including international recognition, of the significance
of the IGA FFR reforms. The Committee agrees that the reforms were a
substantial milestone in federal financial relations, one which is based on
sound principles and provides a robust framework for the future.
However, the Committee is aware that the potential benefits of this
framework will only be fully realised if the principles and intention of the
IGA FFR are actually followed in practice. For example, the Committee is
particularly concerned with the proliferation of NPs and the potential for this
trend to distract from the reform process. A broader discussion of the disconnect
between the underlying intention of the IGA FFR and its current operation is explored
further in Chapter 3.
The Committee recognises the place of NPs within the overall IGA FFR.
However, the Committee supports a more strategic use of NPs to drive reform,
particularly as the principles of the IGA FFR promote a move away from tied
payments. The Committee believes that where NPs are operationally justified
reward payments should only be made when performance benchmarks have been
clearly achieved. Payments should be a genuine reward for effort, not a
default. The Committee recognises that there are times where reward payments have
not been made but wants to emphasise that payments must be earned not expected.
The Committee is particularly concerned with the continuing blurring of
the roles and responsibilities between the levels of government. The Committee
notes that the CRC has highlighted this issue in its recent report and
understands that at times ‘shared responsibilities are unavoidable’.
While the Committee recognises that governments will need to collaborate in
certain areas, the Committee shares the CRC’s concern that ‘shared
responsibilities lead to confusion about which level of government is
accountable’ in some cases. The Committee believes action
must be taken to immediately reduce, where appropriate, the number of responsibilities
defined as ‘shared’ in NAs and clarify existing ambiguities to promote
The Committee acknowledges that some states hold concerns expressed over
the redistribution of the GST, but notes that there is currently a review
underway which may address the issues raised.
The Committee shares the concerns of the Auditor-General regarding the
interaction between the IGA FFR and the enhanced framework for the
administration of grant programs. The Committee recommends that the Department
of Finance and Deregulation re-examine the interaction of the two frameworks
and take steps to address any inconsistencies.