FEDERAL-STATE RELATIONS COMMITTEE
Inquiry into overlap and duplication of
roles and responsibilities
Minutes of evidence
Melbourne - 5 November 1997
Members
| Mr A. Andrianopoulos | Mr M. John |
| Mr G. B. Ashman | Ms L. J. Kosky |
| Ms L. T. Burke | Mr B. T. Pullen |
| Mr D. Dollis | Ms W. I. Smith |
| Mr K. S. Jasper |
Chairman: Mr M. John
Deputy Chairman: Mr B. T. Pullen
Staff
Executive Officer: Ms L. Topic
Office Manager: Ms N. Papal
Research Officer: Mr P. Emerton
Witness
Mr C R Rye, Chairman, Commonwealth Grants Commission (affirmed).
The Commonwealth Grants Commission is an independent statutory authority which operates under the Commonwealth Grants Commission Act 1973. Its role is to make recommendations to the commonwealth government about the distribution of untied grants to the states. Its terms of reference are provided by the commonwealth, after consultation between the commonwealth and the states. It gives me a great deal of pleasure to introduce Mr Rye.
Mr RYE - Thank you very much, Mr Chairman. I am always grateful for opportunities to make the work of the commission better known, and that is what I will concentrate on this afternoon. You have already explained what the commission is about in your introduction. I should emphasise that, although our main role is, as you said, to recommend to the commonwealth government how to distribute general revenue grants between the states, we have no role in determining the total of the grants. The methods we use are reviewed in full detail every five years or so, as determined by governments. We are now in the process of such a review, which will culminate in a major report by the commission in February 1999. In between reviews we update the grant shares annually, using the methods that were determined in the previous review.
Although the commission is a commonwealth body, it is perhaps better seen as part of Australia's federal structure. That is reflected in a number of things, including: the fact that commissioners are appointed or reappointed only with at least the broad approval of the states; the fact that the terms of reference for commission inquiries, although finally determined by the commonwealth, are negotiated in detail with the states - it is a process in which the commission has no role of its own; the fact that the commission conducts all its inquiries in full consultation with the states and gives each of them every reasonable opportunity to make its views known; and lastly, the fact that the commission's recommendations are considered at Premiers' conferences and, although generally accepted, are subject to negotiation between all nine governments there.
Someone has already pointed out that the commission is quite a long-lived body as these things go, having been established in 1933. I suppose the first question that occurs to people is, 'Why do we need a body like the Commonwealth Grants Commission?' Reference has already been made to the vertical fiscal imbalance in the Australian federation, which is possibly the largest among federal countries around the world. Of the total of $33.5 billion which will be distributed by the commonwealth to the states this year, more than half - about $19 billion - is being distributed on the basis of the commission's recommendations. The point on which our work hinges is the existence of horizontal fiscal imbalances between the states. These arise on both sides of state budgets.
On the revenue side, state capacities to raise revenue differ by about 40 per cent. For example, Tasmania, a state already referred to this afternoon, could raise only about 70 per cent of the national per capita average by applying average tax rates. At the other extreme, Western Australia, with its large mining industry, could raise about 10 per cent more than the average state. On the expenditure side, the differences are not quite so marked and the range is, overall, less than 20 per cent, with one outstanding exception - that is, the Northern Territory which, with its population of less than 200 000 distributed over one-sixth of the continent, requires nearly three times the average per capita expenditure to deliver services at standard levels.
The whole point of the commission's recommendations is to overcome these differences - to establish horizontal fiscal equalisation. The principle we use is as follows: we aim to give each state the capacity to provide the average standard of state-type public services, if it does so at an average level of operational efficiency and makes an average effort to raise revenue from its own resources. There are a few points to emphasise here. The main one is simply that equalisation means putting all states on the same financial footing - whether they take advantage of that or not is up to them - because we are equalising capacity, not performance. States may choose to perform or provide services at different levels - for example, by making higher-than-average efforts to raise revenue from their own resources, or by making lesser efforts to raise revenue by keeping tax rates low when they may be providing services at a lower level than those of other states.
An important word to emphasise is 'average'. We are equalising to what the states do on average - what they spend on different state services and what they raise from different state taxes and other revenue sources per capita. Our starting point in all our calculations is that Australian average. We are certainly not equalising to what anyone thinks states should be doing. In my full text I have given some more material on how the commission makes its calculations. Given the limitations on the time I have to speak, I will leave the more technical material to those members who are interested in reading it.
There are only two points I need to make based on that section of my fuller notes. The first is that the core of our work is the estimation of disabilities. A 'disability' is an influence beyond a government's control - and I emphasise those words - that requires it to spend more or less than governments on average to achieve the same objective or reduces or increases its relative capacity to raise revenue from the same effort. A simple example might suffice to illustrate the first of those points on the expenditure side. If a state has a higher proportion of its population of school age, it obviously needs to spend more per capita on education than another state with a lower proportion. That is an example of a very simple disability.
The second point is related to the first. The commission's methods are designed to be as policy neutral as possible, so that a state cannot, by changing its policies, hope to get a greater share of the grant.
It is also possible to make a case for equalisation in terms of personal equity. It is certainly true that the major tools for achieving that objective - tools like the personal income tax and the social security system - are in the commonwealth's hands, but I find it hard to see how personal equity can be achieved if people living in different parts of Australia cannot have access to a standard level of state government services without paying more in state taxes and charges.
There are limitations on the extent to which, in practice, we are able to achieve horizontal fiscal equalisation, and some of those arise from constraints in the terms of reference for our various inquiries. There are things set apart from the commission's work that it is not allowed to look at. Nevertheless, there is a strong thought at the state level that we go too far with fiscal equalisation in Australia. Most other countries, even those that are not federations, have equalisation systems for tiers of government below the national level, but it is hard to find a system which is as thorough or as comprehensive as the Australian system.
I have given an example or two in the paper. At the same time there is no shortage of interest internationally in introducing more comprehensive systems along Australian lines, and again I have given a couple of examples. A notable one is China, which has sent us several delegations and with which we have had a great deal of contact in the past couple of years. The Chinese seem to be taking our system as a model, but it will take a good many years before they build up to that level.
I think Neville Norman referred to a specific proposal to limit equalisation which has been on the table for some time and which would limit the processes to the smaller states that in per capita terms benefit the most. New South Wales, Victoria, Queensland, West Australia and the ACT would receive equal per capita grants. Such a scheme would be of considerable benefit to New South Wales and Victoria as the sponsoring states - not surprisingly - at the expense of Western Australia and Queensland, and it would be close to neutral for the ACT. Proposals such as that are matters for governments to decide on.
For the commission, the issues that seem likely to be most central to our 1999 review, which I referred to earlier, have mostly to do with the rapid and accelerating pace of change in public sector policies and practices. The sorts of things I have mind include national competition policy, micro-economic reform, privatisation and outsourcing, the changed role of the loan council, the cessation of general-purpose capital grants from the commonwealth to the states, and technological change and its effects on the way government services are delivered.
All these developments give rise to a number of questions. For example, what are the implications of each for disabilities? Does technological change, for example, advantage the more dispersed states in things such as communicating through computers and such like, or does it mean that more remote areas can have a better standard of service? We saw a number of examples of that in our recent travels around the states, notably in the education and health fields. As a commission we will have to make some kind of judgment about the balance between these things - and if it reduces costs it is very relevant to our assessments.
The second point to note in this rapid era of change is that the states are now financing much of their capital expenditure from recurrent revenues and that the loan council role in allocating borrowing entitlements no longer seems to exist. That raises the question of whether the commission should be attempting to assess capital requirements, which is something it has not done up to now and which in fact it has been precluded from doing, and, if so, how it should go about it. It is also notable that state accounts are changing rapidly to an accrual basis, and at some stage the implications of that will have to be considered. It will be in question because this change is taking place at different rates - and some states are well ahead of others. The question is how all states can be assessed on a comparable basis.
There are other questions. What should be done about the very large amounts accruing to some states through privatisation, and would it be right to regard privatisation and outsourcing as options equally available to all states? Certainly, there is a strong argument that that would not be the case. Finally, one question for the states rather than the Grants Commission is whether the present fairly rigid system - five years of review with fixed methods between reviews - is still appropriate or whether the pace of change is such that the equalisation method ought to be reviewed more frequently than that. A lot more could be said, but perhaps that will do to set the scene. I look forward to your questions with interest.
The CHAIRMAN - Thank you very much, Mr Rye, for your presentation and for making the trip from Canberra to speak to us today. We will ask questions at the expiration of the three presentations.
Witness withdrew.
5/11
Public Hearing