The Arcane Arts of Fiscal Equalisation: some implications for remote Australia.

The Commonwealth Grants Commission has released its 2016 Update Report on GST relativities.

The NT Government published a media release reporting on the outcome for the Northern Territory. The headline commentary was as follows:

The Commonwealth Grants Commission (CGC) has recommended a reduction in the Northern Territory’s share of total Australian GST revenue from 5.7% in 2015-16 to 5.4% in 2016-17.

Treasurer David Tollner said the recommendations contained in the CGC’s Report on GST Revenue Sharing Relativities 2016, released today, will result in a significant decline in GST revenue from 2016-17 ongoing.

“For 2016-17 the decline is estimated at around $145 million, compared to the 2016-17 estimate at the time of the 2015-16 Mid-year Report” he said.

The release went on to contextualise the decision, pointing out it related to a slowing in NT population growth rates relative to other jurisdictions, and somewhat counter-intuitively given the slowing in population growth, above average growth in the NT’s capacity to collect payroll tax, driven by robust employment growth, which reduced its assessed requirement for GST revenue.

The CGC explained the recommendations like this:

The Northern Territory remains the State with the lowest fiscal capacity; however, its share of GST in 2016-17 has fallen from 5.7% to 5.4%. This is primarily due to a significant decline in the Territory’s share of national population growth which reduced its need to invest in new infrastructure. To a lesser extent, the fall was due to an improvement in its payroll tax capacity. While the Northern Territory’s increased fiscal capacity will see its GST share fall, its GST entitlement in 2016-17 will rise by $5 million, or 0.2%, due to growth in the pool.

It is worth making a couple of high level points about the implications for the NT of this decision.

The NT is consistently assessed as the jurisdiction with the lowest fiscal capacity and thus in proportionate or per capita terms, it receives the highest level of subsidy. According to the CGC, the NT’s fiscal capacity is ‘primarily due to its above average assessed expenses which arise from of its above average shares of a range of population groups, but in particular it has exceptionally high proportions of Indigenous people and people in remote areas. This is compounded by the greatest diseconomies of small scale in administration of all States’.

The NT Treasurer made no mention of the admittedly small growth of $5m in the funds available this year to the NT in his media release.

In terms of the financial extent of the changes for the NT, see Table 27 of the CGC report. The changes in relative population growth had an impact of $115m, the payroll tax growth was $25m. However, not far behind driving a reduction of $19m was a decline nationally in outer regional and remote community health service use and an increase in non-State sector service provision in the Northern Territory between 2011-12 and 2014-15 has reduced the Northern Territory’s assessed community health spending and thus its GST share. Interestingly, there was an increase of $15m arising from new child protection data which resulted in upward revisions to the measured share of substantiations attributed to remote Indigenous children. The NT’s revenue increase was due to its high proportion of remote Indigenous children. While these latter two changes virtually cancel each other out, they point to the ongoing impact of the Commonwealth’s Stronger Futures National Partnership and legislation in driving change on the ground which then flows through into broader fiscal relativities.

A further interesting issue in the CGC Report is at paragraphs 89-91 and Table 2-5. It reports on the treatment of Commonwealth Own Purpose Expenditure for Indigenous affairs (in essence, the Indigenous Advancement Strategy). It shows that of $64m in grants to state government instrumentalities, some $49m was included in the relativity assessment process, in effect reducing the revenue of the jurisdictions receiving that $49m (while not reducing the overall pool available to jurisdictions). It does open up the question of why the Commonwealth would fund state government instrumentalities under the IAS.

Paragraphs 92-97 dealt with the $1.08bn in payments to non-government entities for Indigenous advancement by the Commonwealth under the IAS. The Commission decided that it would not assess these grants as part of the relativity assessment process, though this was more because of data issues than a substantive conceptual reason.

The NT Treasurer’s media release included an interesting statement:

The reduction of the GST revenue has been slightly offset by the partial exclusion of Commonwealth payments under the National Partnership Agreement on Remote Indigenous Housing.

Paragraphs 98 – 134 of the Report include an extended assessment of the potential treatment of NPARIH payments. The issues involved are complex and can’t be adequately dealt with in this post. They go in part to the notion that the Grants Commission assesses relativities in relation to capacities of jurisdictions to meet their recurrent provision of services, and do not relate to capital expenditures of jurisdictions. I will return to NPARIH in a subsequent post.

It is worth noting however that the existence of longstanding and severe capital investment deficits in remote communities is a fundamental structural problem which the CGC and fiscal equalisation processes do not address.

Notwithstanding the salience of remote and indigenous issues in the fiscal equalisation process, it remains the case that it says nothing about how jurisdictions actually spend the funds which are recommended and paid from the pool of GST revenues. The internal allocation by states and territories of funds to remote communities and Indigenous populations remains largely determined by political processes which are quite separate to the arcane arts of fiscal equalisation.