Bills Digest no. 54 2008–09
COAG Reform Fund Bill 2008
WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced
and does not canvass subsequent amendments. This Digest does not have
any official legal status. Other sources should be consulted to determine
the subsequent official status of the Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
COAG
Reform Fund Bill 2008
Date introduced:
23 October 2008
House: House
of Representatives
Portfolio: Treasury
Commencement: 1
January 2009
Links:
The relevant
links to the Bill, Explanatory Memorandum and second reading speech
can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/. When Bills
have been passed they can be found at ComLaw, which is at http://www.comlaw.gov.au/.
To establish the COAG Reform Fund as a Special Account
to provide financial assistance grants to the states and territories.
Proposals for the reform of Commonwealth–state financial relations have
been much debated. The COAG Reform Fund Bill 2008 (the Bill) is a measure
in the government’s proposed reform of Commonwealth–state financial relations.
A feature of Australia’s federal system is that power over spending and
policy-making is being increasingly concentrated in the Commonwealth.
This follows from the fact that the states have relatively large spending
responsibilities but relatively few own-revenue sources whereas the Commonwealth
has substantial power to raise revenue but relatively few Constitutionally-assigned
spending responsibilities. The difference between the expenditure responsibilities
of each tier of government and the own-source revenues available to that
tier is called vertical fiscal imbalance. Australia is characterised by
a relatively high degree of vertical fiscal imbalance compared with other
federations. A consequence is that the states depend heavily on Commonwealth
grants for revenue.[1]
The Commonwealth provides financial assistance to the states and territories
in the forms of general revenue assistance—mainly GST revenue—and specific
purpose payments (SPPs). The distribution of GST revenue is governed by
the Intergovernmental Agreement on the Reform of Commonwealth-State
Financial Relations. This provides, among other things, that:
- the states and territories can spend the GST revenue as they wish
- revenue from the GST is to be distributed among the states and territories
based on horizontal fiscal equalisation principles, and
- the Commonwealth Grants Commission (CGC) is responsible for calculating
the relativities used to determine the distributions.[2]
The CGC defines the principle of horizontal fiscal equalisation as:
State governments should receive funding from the
pool of Goods and Services Tax revenue and health care grants such that,
if each made the same effort to raise revenue from its own sources and
operated at the same level of efficiency, each would have the same capacity
to provide services at the same standard.[3]
The principle thus seeks to ensure that each state has the financial
capacity to provide services at national average levels and at average
levels of efficiency. There is, however, no obligation on the states to
provide the services they are funded for.
The CGC, when calculating the relativities, takes into account the fact
that the states have different revenue–raising capacities and different
spending ‘needs’. For example, Western Australia has a strong capacity
to raise mining revenue compared with the other states, while Queensland
has a smaller need to spend on aged care than South Australia. These differences
are reflected in the amount of GST each state receives. A state with a
relatively high capacity to raise revenue, for example, has its GST entitlement
reduced, while a state with a relatively large need for a particular category
of expenditure has its share of the GST increased.[4]
The GST relativities the CGC calculated in its 2008 update resulted in
NSW, Victoria, Queensland and WA in effect redistributing resources to
Tasmania, the ACT and the NT.[5]
The government’s proposed reform of Commonwealth–state financial relations
relates mainly to specific purpose payments (SPPs). They are payments
the Commonwealth makes to the states and territories under section 96
of the Constitution. This section provides, in part:
… the Parliament may grant financial assistance to
any State on such terms and conditions as the Parliament thinks fit.
An example of an SPP is the grants to the states under the Australian
Health Care Agreements to assist with the provision of public hospital
services free of charge to eligible persons.
There has been considerable criticism of the use of SPPs. Some see SPPs
as undermining the federal system of government by allowing Commonwealth
involvement in areas beyond those stipulated in the Constitution. Other
criticisms include the use by the Commonwealth of SPPs for short-term
political purposes and to impose its priorities on the states.[6]
Problems associated with SPPs include a lack of accountability, duplication
of administration and blame shifting. Where functions are shared between
the Commonwealth and the states, another problem is cost-shifting whereby
one tier of government attempts to shift costs onto the other tier. The
states have also criticised the ‘conditionality’ attached to SPPs whereby
the Commonwealth requires the states to meet certain undertakings as a
condition of the states receiving grants. In particular, the states have
criticised so-called ‘input controls’ such as the states having to match
Commonwealth funding on a dollar-for-dollar basis.[7]
There have been numerous proposals for improving the operation of SPPs.
They include:
- clarification of the roles and responsibilities of each tier of government
so that duplication/overlapping of responsibility for service provision
is reduced
- where responsibility for programs is shared between the Commonwealth
and states, funds for related programs should be pooled rather than
being earmarked to specific programs, and
- the broadbanding of programs.
An example of broadbanding is that which Garnaut and Fitzgerald proposed:
The centrepiece of the proposed reform is a new cooperative
model for SPPs in the key merit areas of health and aged care, and education
and training. SPPs in these areas would be broad-banded into two national
programs in which the States have clear authority over service delivery,
without micromanagement and input controls. A third national program
would be established in indigenous community development.[8]
As discussed below, the government is proposing a form of broadbanding
similar to that proposed by Garnaut and Fitzgerald.
The Council of Australian Governments (COAG) is the peak inter-governmental
body in Australia.[9] On
26 March 2008, COAG agreed a new framework
for Commonwealth-state financial relations. The new framework will begin
on 1 January 2009 (reform of healthcare funding will begin on 1 July 2009).
A new intergovernmental agreement on Commonwealth-state financial arrangements
is to be finalised by the end of 2008.
Objectives of the new framework include:
- reduced administrative and compliance costs and cost-shifting
- increased accountability for service delivery, and
- greater flexibility for the states to allocate resources to the areas
they deem to be of greatest need and the means to deliver services.
Features of the new framework include:
- a rationalisation of SPPs but without a reduction in total Commonwealth
SPP funding for SPPs. The proposed rationalisation entails combining
related SPPs (for example, those dealing with health) into fewer new
national SPP agreements. Rationalisation will reduce the number of SPPs
from more than 90 to five or six national agreements for the delivery
of healthcare, affordable housing, early childhood development and schools,
vocational education and training, and disability services. The national
agreements will be ongoing but subject to periodic review
- the states will continue to receive—as general revenue assistance—payments
where there are no compelling national objectives, for example, compensation
for the revenue forgone following the commencement of the national
scheme for the regulation of companies and securities
- less emphasis on conditionality. Rather, each national SPP will be
supported by a mutually-agreed Statement of Objectives and Outcomes.
Each Statement will specify
- what the Commonwealth and the states expect to achieve from their
joint involvement, that is, the objectives and expected outcomes[10]
- the role of each jurisdiction, the responsibilities it will be
accountable for, and the outputs it will deliver, and
- indicators/measures of performance to assess whether or how well
a jurisdiction has achieved outcomes.
Another feature of the framework is the new National Partnership payments.
They fall into three categories:
- project payments: these will be made to support national objectives
and to help fund the delivery of specific projects, for example, road
and rail projects under AusLink
- facilitation payments: these payments may be used to help a state
to lift its standards of service delivery in areas identified as national
priorities, and
- reward payments: these will be an incentive to encourage the states
to undertake reforms. The intent is that payments will be structured
in such a way as to encourage the attainment of performance benchmarks.
Reward payments are similar to the previous National Competition Policy
payments made to the states to encourage them to adopt competition reform.
The COAG Reform
Council—an independent non-statutory body—will, among other things,
report on performance information against SPPs outcomes, and assess whether
predetermined performance benchmarks have been achieved under National
Partnership agreements.
The government claims that the new framework will provide greater funding
certainty for the states. The process for determining the level of funding
has been described as follows:
Importantly, the overall funding arrangements for
the new national SPPs and the reform‑based National Partnership
payments will be negotiated as one financial package by Treasurers,
through the Ministerial Council for Commonwealth‑State Financial
Relations, for endorsement by COAG. This will allow portfolio ministers
to focus on the policy aspects of delivering more effective and efficient
services. While the level of funding will have regard to the policy
objectives, the new framework places policy — not funding — front
and foremost … The initial overall funding package, including base funding
and appropriate growth factors for the new national SPPs, and funding
for the new incentive‑based National Partnership reform payments,
will be negotiated later in the year. Nevertheless, the Commonwealth
has provided a clear commitment that no State will be worse off overall
than they would be under the current arrangements and that National
Partnership reform payments will be in addition to existing payments.[11]
The COAG Reform Fund will be used to channel National Partnership payments
and investment funds (see below) to the states. How this will work has
been described as follows:
A new COAG Reform Fund will receive contributions
directly from the Commonwealth Budget as well as from three other funds
being set up by the Government for capital investment — the Building
Australia Fund; Education Investment Fund; and Health and Hospitals
Fund. The purpose of these funds, which are to be financed largely from
future budget surpluses, is to underpin future progress on investment
and reforms in these key sectors. Where the investments are to be undertaken
by the States, and the Commonwealth has agreed to fund these, the funding
will be provided through the COAG Reform Fund in the form of National
Partnership payments.
To ensure that total capital spending from the funds
is consistent with the Government's macroeconomic goals, the Australian
Loan Council will provide advice on whether the combined spending envelope
of both the Commonwealth and the States can be delivered in prevailing
economic conditions without putting at risk the Government's inflation
target. The Australian Loan Council will not approve or advise on individual
infrastructure projects.
Source: Budget Paper No. 3 2008-09, p. 18
The quote referred to three investment funds: the Building Australia
Fund, the Education Investment Fund, and the Health and Hospitals Fund.
(The Explanatory Memorandum and the Bill refer to these funds as ‘nation-building’
funds).
According to the government, the Building Australia Fund (BAF) will be
established:
… to help finance the current shortfall in critical
economic infrastructure in transport and communications such as road,
rail, ports and broadband, particularly where infrastructure requirements
in these areas are not provided by the State and Territory governments
or by the private sector.[12]
In terms of funding, the government proposed committing funds to the
BAF from three sources: Budget surpluses from 2007-08 and 2008-09, the
Communications Fund, and proceeds from Telstra 3. The government proposes
to close the Communications Fund and transfer its assets to the BAF. The
government also proposes to use the BAF to invest in a National Broadband
Network. Spending on this will depend partly on the government’s response
to the Glasson Review.[13]
In the 2008-09 Budget, the government announced that it would invest
$11 billion in the Education
Investment Fund (EIF) to finance skills, TAFE colleges and universities.
The following is from the Budget Speech:
Mr Speaker, the Education Investment Fund will finance
capital investment in higher education and vocational education and
training. It will receive an initial allocation of around $11 billion,
including $6 billion from the Higher Education Endowment Fund.
When the government announced the formation of the EIF, the government
proposed funding the remainder of $5 billion from the 2007-08 and 2008-09
Budget surpluses. The 2008-09 Budget transfers $304.0 million from the
Higher Education Endowment Fund in 2008-09.
In the 2008-09 Budget, the government also announced
that it will invest $10 billion in a new Health and Hospitals Fund (HHF)
to finance improvements to hospitals and the health care system. The following
is an extract from the 2008-09 Budget Speech:
Mr Speaker, the Health and Hospitals Fund will finance
health infrastructure. Key priorities include spending on hospitals,
medical technology equipment, and medical research facilities and projects.
The Fund will receive an initial allocation of $10 billion.
When the government announced the HHF, the intention was that the HHF
would draw its initial $10 billion from surpluses in the 2008-09 and 2009-10
Budgets. The HHF will replace the Howard Government's $351.7 million Health
and Medical Infrastructure Fund. The HHF is to be established by 1 January
2009. Full details are yet to emerge as to how projects will be assessed
for funding, other than as part of each year’s Budget process.
The Bill proposes to establish the COAG Reform Fund as a Special Account.
The Department of Finance and Deregulation defines
a Special Account as an appropriation mechanism that sets aside amounts
within the Consolidated Revenue Fund for expenditure for special purposes.
In short, a Special Account is an accounting device into which funds relating
to a specific activity are deposited and from which payments are made.
As noted, establishing the COAG Reform Fund envisages a role for the
Australian Loan Council in ensuring that total capital spending from the
investment funds is consistent with the government's macroeconomic goals.
The Australian Loan Council’s function is to coordinate borrowing by the
Commonwealth and state governments.[14]
At the time of the May 2008-09 Budget, a major concern was inflation.
But with the subsequent economic downturn, a greater concern is likely
to be to support economic activity.
With respect to Commonwealth–state financial relations, the Labor Party’s
national
platform for the 2007 election stated:
6. Many of Australia’s biggest policy challenges involve
the intersection of Commonwealth and State government responsibilities.
In government, reforming the Federation will be an important priority
for Labor. The cost shift and blame shift between governments costs
Australian taxpayers billions of dollars each year. There is too much
ambiguity about which level of government is responsible for a particular
government program. This often creates difficulties for Australians
who want to access the range of services shared by governments, in areas
such as health care, aged care, childcare, disability services, and
dental care. It is also often a significant problem for Australian businesses
in dealing with conflicting and costly regulatory environments between
Commonwealth, state and governments.
7. Accordingly, Labor will:
- review areas of overlap and duplication of responsibility between
the Commonwealth and State and Territory governments, with the aim of
eliminating inefficiencies and clarifying responsibilities;
- maintain a comprehensive system of horizontal fiscal equalisation
based upon the per capita relativity recommendations of the Commonwealth
Grants Commission;
- maintain a system of general purpose funding to local governments
which provides adequate funding for their needs;
- continue to support specific purpose payments to States and Territories
where these are appropriate to meet national objectives or ensure national
standards, and ensure that those payments are used for the purpose for
which they have been allocated; and
- ensure that State, Territory and local governments and their authorities
are able to maintain and steadily improve their economic and social
infrastructure.
8. Labor will also:
- seek to eliminate inappropriate duplication between Commonwealth,
State and Territory, and local government functions and activities;
- support arrangements to voluntarily harmonise revenue bases and tax
administration between the Commonwealth, States and Territories; and
- support arrangements to voluntarily integrate the administration of
Commonwealth and State and Territory taxes and charges, where this has
the potential to lead to economic benefits such as lower compliance
costs for business.[15]
In the 2008-09 Budget Speech, the Treasurer, the Hon. Wayne Swan MP,
announced:
Where funds are used to finance capital projects with
the States, they will be distributed to the States from the three new
funds I have just announced through a new Council of Australian Governments
(CoAG) Reform Fund.
The COAG Reform Fund will also distribute funding
provided in future budgets to the States for recurrent expenditure in
areas of COAG national reforms, through new National Partnership payments.
The Bill has been referred to the Senate Economics Committee for inquiry
and report by 10 November 2008. At present, there are no details of the
inquiry. The Nation-building Funds Bill (see below) will be referred to
the Committee when introduced so an extension of time is possible.
There are no financial implications. The Bill does not appropriate any
funds.
The Bill consists of three Parts. Part 1 contains preliminaries. Part
2 establishes the COAG Reform Fund and defines its purpose, while Part
3 deals with the terms and conditions of grants the Commonwealth makes
to the states and territories.
Part 2—COAG Reform Fund
Clause 5 Establishment of the COAG Reform Fund
Subclause 5(1) establishes the COAG Reform Fund.
Subclause 5(2) specifies that the COAG Reform Fund is a Special
Account. Note 2 to subclause 5(2) states that an amount
originating in the so-called nation-building funds—the Building Australia
Fund, the Education Investment Fund and the Health and Hospitals Fund—may
be transferred to the COAG Reform Fund. Note 2 also refers to the Nation‑building
Funds Act 2008 but the legislation for this has not yet been introduced
into parliament.
Clause 6 states that the purpose of the COAG Reform Fund is to
make financial assistance grants to the States and Territories.
Part 3—Terms and conditions of grants
Clause 7 deals with the terms and conditions of grants. Subclause
7(1) provides that it applies if an amount is to be debited from the
COAG Reform Fund for the purpose of making a grant to a State or Territory
[paragraph 7(1) (a)], and if the grant is not covered by any of several
provisions of the Nation‑building Funds Act 2008 [ paragraph
7(1) (b)]. But absent the legislation for the Nation-building
Funds Act 2008, the import of these provisions is unknown.
Subclause 7(2) deals with the proposed new intergovernmental agreement
on Commonwealth-state financial arrangements, which is to be finalised
by the end of 2008. Subclause 7(2) provides that the terms and
conditions under which financial assistance is granted are to be set out
in a written agreement between the Commonwealth and the State or Territory.
Subclause 7(3) provides that a Minister may enter into
an agreement under subclause 7 (2) on behalf of the Commonwealth.
Clause 8 Delegation by a Minister
is a clause found in other legislation whereby a Minister can delegate
powers to other parties. Subclause 8(1) provides that a
Minister may, by writing, delegate any or all of his or her powers under
section 7 to the Secretary of a Department [paragraph 8(1)(a)]
or to an SES employee, or acting SES employee, in a Department [paragraph
8(1)(b)]. Subclause 8(2) provides that in exercising powers
under a delegation, the delegate must comply with any directions of the
Minister concerned.
The proposed framework for Commonwealth–state financial relations promises
to go a long way in addressing many of the problems identified with existing
SPP arrangements including the lack of accountability, duplication of
administration, blame-shifting and cost-shifting. In particular, the proposed
clarification of the roles and responsibilities of each tier of government
should reduce many of these problems.
Implementing the framework, however, faces considerable challenges. One
is to set performance benchmarks, outcomes, and performance indicators
to assess whether objectives are being achieved. This is a formidable
challenge because:
… outcome/output measures of service delivery are
difficult to define, measure and enforce in a robust way.[16]
Several aspects of the new framework are unknown. One is exactly how
the COAG Reform Council will operate. As noted, the COAG Reform Council
will report on performance information against SPPs outcomes, and will
assess whether performance benchmarks have been achieved under National
Partnership agreements. The COAG Reform Council’s functions are thus similar
to the former system for national competition policy whereby the Commonwealth
made payments to the states in return for the states implementing competition
reform. In that case, an independent body—the National Competition Council—assessed
whether the states had undertaken agreed reforms. However, the scope of
the COAG Reform Council’s powers is unknown, for example, whether the
COAG Reform Council will be empowered to recommend the withholding of
National Partnership reward payments from a state if it fails to implement
reform—as was the case with the National Competition Council. Other major
unknowns are how the level of reward payments will be determined, and
how they will be allocated among the states.
The new framework leaves untouched reform of the existing arrangements
for vertical fiscal imbalance and horizontal fiscal equalisation. While
this is not the place to address these issues, a fuller reform of Commonwealth-state
financial relations would take them into account. The fact that vertical
fiscal imbalance and horizontal fiscal equalisation are not addressed
is, however, not surprising: successive governments of different political
persuasions have been unwilling to change them.
The financing of the three investment funds is under a cloud. A feature
of all three is that they are to be partly financed from Budget surpluses.
But with the downturn in the economy, the prospect for Budget surpluses
is unclear. The Mid-year
Economic and Fiscal Outlook 2008-09, which was released on 5 November
2008, projects reduced surpluses. Estimated payments to the states for
2008-09 to 2011-12 are in Attachment
D of the Mid-year Economic and Fiscal Outlook 2008-09.
Finally, while the government claims that the new framework will provide
greater funding certainty for the states, it is unlikely that the states
will stop complaining about the level of Commonwealth funding.
Richard Webb
6 November 2008
Bills Digest Service
Parliamentary Library
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