Specific Purpose Payments

Section 96 of the Constitution empowers the Commonwealth to ‘grant financial assistance to any State on such terms and conditions as the Parliament thinks fit’. Under this section, the Commonwealth makes specific purpose payments (SPPs) to the states (and local governments); for example, for roads, public hospitals and schools. In most instances, the states must meet certain conditions to receive payments, which the states administer.

The use of SPPs means that some functions are shared between the Commonwealth and the states, most notably education and health. Many of the problems of Australia’s federal system—such as duplication of administration, cost shifting, and blame shifting—result from the Commonwealth’s use of SPPs. One estimate of the fiscal cost of such problems is $9 billion annually.

Numerous proposals have been put forward to reduce the problems associated with sharing of functions. They include clarification of the roles and responsibilities of each tier of government, pooling of funds, broadbanding of SPPs that are directed at broad outcomes (for example, health), focusing more on outcomes and less on inputs, and reduced conditionality. But, as noted in the companion brief on Commonwealth–state relations, the trend has been for the Commonwealth increasingly to intervene in areas traditionally occupied by the states, thus blurring roles and responsibilities. The need to clarify roles and responsibilities has been made more acute by the Council of Australian Governments’ endorsement, in February 2006, of the National Reform Agenda. The agenda encompasses human capital, competition and regulatory reform issues, and thus entails considerable joint responsibility of the Commonwealth and the states.

Many of the problems of the federal system could also be eased by restructuring Commonwealth–state financial relations. Currently, in addition to SPPs, the Commonwealth provides the revenue from the goods-and-services tax to the states. As a result, the states are heavily dependent on Commonwealth grants. Ideally, in a federation, each level of government should be responsible for raising the revenue it spends. In the Australian context, this would mean increasing the states’ power to raise revenue and reducing that of the Commonwealth. The Commonwealth collects around 80 per cent of taxation revenue, but is responsible for around 55 per cent of own-purpose spending, whereas the states collect about 16 per cent of taxation revenue, but account for around 40 per cent of own-purpose outlays. One option is for the states to impose an income-tax surcharge. This would probably require the Commonwealth to ‘make room’ for surcharges by reducing its income tax rates.

Documentation
Vassiliki Koutsogeoropoulou, ‘Fiscal relations across levels of government in Australia’, Economics Department Working Papers, no. 541, Organisation of Economic Co-operation and Development, Paris, 23 January 2007.