The Federal Financial Relations Bill 2009 and the Federal Financial Relations (Consequential Amendments and Transitional
Provisions) Bill 2009
1.1
The Federal Financial Relations Bill 2009 appropriates funds to
provide financial assistance to the states, and implements the Government’s
reforms to modernise federal financial relations in accordance with the new
financial framework agreed by Council of Australian Governments (COAG) in the Intergovernmental
Agreement on Federal Financial Relations (2009).
1.2
The Federal Financial Relations (Consequential Amendments and
Transitional Arrangements) Bill 2009 provides for the relevant consequential
amendments arising from these measures, including the repeal or amendment of
inconsistent legislation.
Conduct of the inquiry
1.3
The bills were introduced into the House of Representatives on 12 February 2009. On the same day, on the recommendation of the Senate Selection of Bills
Committee, the Senate referred the provisions of the Bills to the Economics
Committee for inquiry and report by 3 March 2009.
1.4
The committee advertised the inquiry on its website. It also
wrote to a number of peak organisations inviting submissions. The committee
received one submission, from Professor Jonathan Pincus of the University of Adelaide.
The committee thanks Professor Pincus for his contribution to this inquiry. A
copy of Professor Pincus' submission is available on the committee's website at
https://www.aph.gov.au/senate/committee/economics_ctte/ffr_09/index.htm.
Intergovernmental Agreement (IGA)
1.5
On 29 November 2008 COAG 'agreed to a new architecture of
cooperative funding arrangements that will replace the inefficient, complex and
dysfunctional system of grants that has plagued areas of joint Commonwealth and
state involvement in the delivery of services for decades.'[1]
The terms of the new framework were set out in the Intergovernmental Agreement
on Federal Financial Relations which commenced on 1 January 2009.
1.6
The IGA recognises that 'the primacy of state and territory
responsibility in the delivery of services in these sectors is implicit in the
Constitution of the Commonwealth of Australia' but also 'that coordinated
action is necessary to address many of the economic and social challenges which
confront the Australian community.'[2]
1.7
The new IGA 'provides a robust foundation for collaboration on
policy development and service delivery, and facilitates the implementation of
economic and social reforms in areas of national importance.'[3]
In agreeing to this new framework, the Commonwealth committed to the provision
of ongoing financial support for the states’ service delivery efforts through:
- general revenue assistance to be used by the states for any
purpose;
- National Specific Purpose Payments (National SPPs) to be spent in
the key service delivery sectors; and
- National Partnership Payments (NPPs) to support the delivery of
specified outputs or projects, to facilitate reforms or to reward those jurisdictions
that deliver on nationally significant reforms.[4]
1.8
A series of schedules are set out in the IGA. These schedules establish
the performance standards that must be met by each responsible party to the
agreement and the reporting and administrative mechanisms that must be used to
achieve them. Five of the IGA schedules outline the terms of specific National
Agreements which will be the subject of National SPPs and are dealt with by the
Bills.
The bills
1.9
The bills provide for the Commonwealth to provide financial
assistance to the states in the form of general purpose financial assistance, NPPs
and National SPPs (to be paid in five key social service sectors). Existing
arrangements with the states and territories with regard to GST are also
preserved by the bills. Additionally, they allow for the Minister to make
advances of payments, determine the amount and timing of payments and make
adjustments for under‑ or over‑payment.
1.10
While the annual Appropriation Acts will not appropriate amounts
to be paid as NPPs and general purpose financial assistance, the maximum amount
that the Minister may credit to the COAG Reform Fund in a particular financial
year will be specified in an annual Appropriation Act related to that year.
1.11
The bills provide for a global limit in 2008-09 of
$8 billion for NPPs, and $4 billion for National SPPs. Future global
limits will be provided in annual Appropriation Acts.
1.12
The Federal Financial Relations Bill (Consequential Amendments
and Transitional Provisions) Bill 2009 provides for the appropriation under the
Health Care (Appropriation) Act 1998 to be increased by $500
million.
General Revenue Assistance
1.13
The IGA and related National Agreements set out the terms on
which general purpose financial assistance will be granted. Grants will generally
be distributed among the states in accordance with
the principle of horizontal fiscal equalisation[5]
(using a model recommended by the Commonwealth Grants Commission).[6]
1.14
The bills provide for a global limit in 2008-2009 of $500 million
for general purpose financial assistance. Future global limits will be provided
in annual Appropriation Acts.
GST
1.15
Under the terms of the IGA, the Commonwealth committed to the
provision of on going financial support for the states’ service delivery
efforts through the provision of GST payments to be used by the states for any
purpose.
1.16
The bills provide that the Commonwealth will make GST payments to
the states equivalent to the revenue received from the GST from 2009-10 and for
these payments to be distributed in accordance with the principle of horizontal
fiscal equalisation. These provisions are equivalent to the current GST payment
provisions in the A New Tax System (Commonwealth State Financial Relations)
Act 1999 and therefore the bills provide for the repeal of parts of that
act with effect from 1 July 2009, limiting it to the procedures for managing
the rate and base of the GST. As such, the bills also provide for the Act to be
renamed A New Tax System (Managing the Rate and Base of the GST) Act to
reflect better its abbreviated content.
National Specific Purpose Payments
1.17
Historically, the Commonwealth has attached conditions to some
specific assistance grants. These grants have become known as National SPPs.[7]
The conditions relate to how the payments and/or services are administered by
the relevant states and territories. In 2006–07, the Commonwealth spent almost
$29 billion or about 11 per cent of Commonwealth government expenditure on National
SPPs relating to a variety of important national policy objectives.[8]
1.18
In the new IGA, the Commonwealth committed to the provision of on
going financial support for the states’ service delivery efforts through a
rationalised system of National SPPs. The bills satisfy this commitment by
providing an appropriation for the Commonwealth to make an on going financial
contribution from 1 July 2009 to support the delivery of services in five key social
sectors (healthcare, schools, skills and workforce development, disability
services and affordable housing) which are addressed in certain National
Agreements.
1.19
The Federal Financial Relations Bill 2009 provides appropriations
for the Commonwealth to provide an additional $5.8 billion in National SPP
funding to the states over five years to improve services for all Australians.
National Partnership Payments
1.20
As part of the IGA, the Commonwealth has also agreed to pay the states
and territories NPPs. These payments may be made to the states as:
- project payments—where they support the delivery of new projects
of national importance, including new infrastructure projects;
- facilitation payments—where they may assist a state to lift its
standards of service delivery or give recognition to a state which agrees to
implement reforms; or
- reward payments—where states are rewarded for their progress in a
way that encourages the achievement of ambitious performance benchmarks.[9]
1.21
Some existing payments for specific purposes and election
commitments will also become NPPs where they support national objectives.[10]
Views raised by submitter
1.22
In his submission to the committee, Professor Jonathan Pincus highlighted
his views concerning the Commonwealth Grants Commission's treatment of NPPs,
particularly with regard to the Commission's objective of recommending that
pattern of grants which will equalise the fiscal capacity of the various states.
1.23
Professor Pincus' submission stated that:
If the Commission adheres to the grounds of their previous
decisions regarding ‘exclusion’ and ‘inclusion’, then the Grants Commission
must treat National Partnership Payments by ‘inclusion’. Say that a National
Partnership Payments goes to one state and not to another. Then, if the
Commission follows its precedents, established decades ago, the Commonwealth
Grants Commission will later redistribute the grant between the states so as to
equalise the fiscal capacities of the states, and will disregard or set aside
the differential rewards embodied in the National Partnership Payments
mechanism. So long as the Commonwealth Grants Commission treats NPPs by
‘inclusion’, then the Commission will negate the incentive effect that is being
sought by the Government.[11]
1.24
Professor Pincus argued that 'the National Partnership Payments
system is only now being legislated, and it seems a pity not to ensure that it
meets its stated goal, of providing performance-based incentives to the states.'[12]
Committee comment
1.25
The committee notes that the bills are effective in satisfying
the commitments made by the Commonwealth in the IGA. The committee considers
that the framework established by the legislation for the payment of performance-based
incentives to the states and territories through NPPs is effective. The
committee encourages the Commonwealth Grants Commission to consider the policy
intention of the legislation in framing the recommendations it makes to the
government.
Recommendation
1.26
The committee recommends that the Senate pass the bills.
Senator Annette
Hurley
Chair
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