REVIEW OF FINAN4CIAL ASSISTANCE GRANTS
ARRANGEMENTS
MR. GORTON I shall read a statement which has
been prepared for me and which I believe is to be circulated.
The main purpose of this meeting is to further discuss the new
general revenue grants arrangements between the Commonwealth
and the States to apply from the beginning of 1970-71. These
arrangements embrace both the method of determining the annual
general revenue assistance to each State, and the forms of
such assistance, and they are therefore of very great
importance in determining the future pattern of Commonwealth-
State financial relationships.
Dealing with the particular question of general
revenue grants, at our meeting in February I expressed a
willingness on behalf of the Commonwealth Government to discuss
matters relating to the financial assistance grants and to look,
as you had suggested, at the base total and to look, as you also
suggested, at such aspects as the betterment factor. I also
expressed a willingness to discuss and seek to ameliorate one
of the problems of the States which has been frequently put
forward; that is, the difficulty which you have seen arising
as a result of some of the loan money which the States secure
being provided, in fact, from revenue gathered by the Commonwealth
rather than by money borrowed from lenders in the normal way.
In the intervening months we have had discussions between our
Treasury officials, that is of the Commonwealth and the various
States, and I think these discussions have been helpful to both
of us.
2.
Today it is my purpose and my responsibility on behalf of the
Commonwealth Government to put before you proposals for the ensuing five
years commencing on 1st July next. In offering assistance specifically
directed at helping the States to meet interest and sinking fund charges on
the State debt we have had in mind the concern which Premiers have
expressed at the annual growth of State debt and particularly at the rate this
debt has been growing in relation to the rate of growth of Commonwealth
debt. We have also taken into account our undertaking to bear in mind,
during our present review, the question of offsetting any additional financial
burden on the States which might arise from the Commonwealth's
decision in 1968 to remove the income tax rebate on Commonwealth loan
interest. In the Commonwealth's consideration of these proposals, we
have aimed at providing an average annual rate of increase in total
Commonwealth revenue assistance to the States substantially above the
increases that would have been produced if the present grants arrangements
continued unaltered. For example, if on the basis of past trends in
increases in average wages and population the present grants formula
would have resulted in the grants growing at an average of 9. 9% each year
over the next five years, we have calculated that the overall effect of the
Commonwealth's new proposals would be to increase that average rate of
growth to at least 12. 5% per year.
I turn now to outline in broad terms what we have in mind
for each of the four sections of the Commonwealth proposals. Later I
shall circulate proposals setting out their es6ential features. On the
question of taking over State debt and of interest-free capital grants, we
propose that the capital grant begin at $ 200m in 1970-71 this is the sum
of money which we propose to make available as a grant rather than, as
has happened in the past, as a loan and that it should thereafter increase
at the same rate as the total works and housing programmes. The States'
formal Loan Council borrowing programmes will be lower each year by
an amount equal to the capital grant, of course, and the payment of the
grant by the Commonwealth will be conditional on agreement being reached
on the size of the total borrowing programme. As the primary purpose of
the grant will be to relieve the burden of debt charges on non-revenue
producing capital expenditure, it will be designed to help finance expenditure
on capital works and services from which debt charges are not recouped,
such as schools, police buildings and the like. However, while we would
appreciate from you an informal assurance that the funds will be used in
this way that is, for non-recoupable purposes there will be no specific
or legal conditions attached to the expenditure of the grant.
As the grant will not form part of the States'
borrowing programmes, its distribution between the States
will not be a matter for legal determination by the Loan
Council. While it will therefore probably devolve on the
Commonwealth to accept final responsibility for determining
the distribution of the total grant each year between the
States, we are hoping that it will be possible to agree to
the distribution with you beforehand and in a co-operative
way. It is not possible to estimate precisely the
deb. t charges savings to the States that will result from this
proposal in the year each grant is made, although in future
years the saving will obviously be a full year's interest
and sinking fund. The savings in the first year will
depend on the timing of loan raisings during the year, and
the overall savings will depend, among other things, on the
size of the States' borrowing programmes in the future,
on trends in interest rates and so on. However, on the
basis of recent trends in increases in loan programmes and of
present interest rate patterns, we estimate that over the
years 1970-71 to 1974-75 the total debt charges savings to
the States from this annual grant will be of the order of
$ 148m, which is additional to some sall saving in 1970-71
which we have not included in the tables which will be
circulated subsequently. In other words, we are saying that
there will be a saving to the States from this in the first
year but it is difficult to estimate how much that saving will be.
It may only be as much as $ 1 million. We are therefore discounting
it, not counting it in as assistance-to the States, and saying that it
is in the second year of this programme that the States will receive
the full benefit of this $ 200 million, because they will not be
paying interest and sinking fund on $ 200 which they would
otherwise be paying interest and sinking fund on, and that will
be the basis of our calculations on this.
On the question of the taking over of existing State debt,
I understand that officers have agreed that for a number of reasons
it would be impracticable for State debt to be taken over by the
Commonwealth before June 1975 except in a notional sense. That
doesnot matter because it is proposed that from 1970-71 to 1974-
the Commonwealth will reimburse the States by way of section
96 grants for the interest and sinki g fund charges on a progressively
increasing amount of State debt. So that although the debts are
not actually taken over, the cost of the debts to the States is taken
over. Specifically, we propose that $ 200 million of State debt be
taken over, in the sense just explained at the beginning of each of the ,. ext
years so that by the commencement of 1974-75 the Commonwealth will
be meeting the debt charges on a full $ 1,000 of State debt. The
arrangements for the formal transfer of the debt from the States
to the Commonwealth in June 1975 will be a matter to be settled
later.
I understand that Commonwealth and State officials agreed an appropriate
parcel of $ 1,000m of State debt that is after going through the various debts
which were outstanding the officers agreed that a debt maturing at such and
such a date and at such and such an interest rate, and then another debt,
would make up the parcel which would be taken over. They agreed on a
parcel of $ 1,000m of State debt carrying an average interest rate of 5.
which is significantly higher than the average interest rate of around 5% on
all existing State debt. I do not propose to go through the precise
arrangements here, but the Commonwealth accepts the conclusions reached
by the committee of officials appointed to examine possible procedures and,
with the additional arrangements I have a! hi.. q .) utlined, we propose to
proceed along the lines recommended by the officials. The arrangements
are summarised in the document shall be circulating to you.
The grants, which will cover the average interest charges of
5% together with the annual sinking fund contributions of 25% on the debt
taken over, will be $ 11. 5m in 1970-71, $ 23m in 1971-72, $ 34. 5m in 1972-73
and so on, giving a total 5m available to the States over the next
five years. I point out that there has been some discussion as to the
method of taking ove; this $ 200m of debt. It had been suggested that
perhaps in the first year we would take over half of it, say, in September
and the other half in March, and only from those debts would we reimburse
the States for the interest and
sinking fund the Commonwealth had to pay. But after discussion, we
believe that when we as a Commonwealth said we would take over $ 200M of
State debts each year it would be accepted by the States that we would take
over that $ 200M at the beginning of the year and pay the interest and sinking
fund at that date for that year, and this is what we propose to do.
It is the Commonwealth's view that the distribution between the
States of the debt notionally taken over ( and hence the distribution of the grants
to meet the debt charges) shouldbe in proportion to total outstanding debt under
the Financial Agreement as at 30 June 1970.
As I have mentioned, the two proposals on debt should substantially
reduce the rate of growth of debt charges over the next 5 years. The actual
saving in debt charges as a result of the two debt proposals that means the
actual additional resources available to the States as a result of the two debt
proposals, is estimated as follows: $ 11.5 M in 1970-71, $ 37M in 1971-72,
$ 63. 3M in 1972-73, $ 90. 4M in 1973-74 and $ 118. 3M in 1974-75, giving a total
of $ 320. 5M over the quinquennium. This is the amount that these two
proposals will add to the resources of the States, subtract from the resources
of the Commonwealth and inject into the spending capacity of the economy.
In addition to this substantial assistance for debt charges, we propose a decided
improvement in both the amount and the rate of growth of the financial
assistance grants themselves. We suggest
that for 1970-71 the formula grants paid to each State will be determined
by applying the present formula to the formula grants paid to each State
in 1969-70, that is by applying the present betterment factor to the grants
received by each State in 1969-70, which I believe would add $ 100m to the
amount available to the States this year, with the continuing addition in
the case of Queensland of $ 2m to the 1969-70 base but, of course, not
including any special assistance approved last February or other adjustments
made since then. In addition, a further amount will be distributed between
the States in the same proportions as their new 1970-71 formula grants,
and this amount will then be included in the base for determining the formula
grants for 1971-72.
For purposes of determining the formula grants after 1970-71 we
are proposing to improve the grants formula by improving the betterment
factor from its present 1. 2% per annum to 1. 8% per annum, an increase of
in the size of this element of the grants formula.
Taken together we envisage these improvements, excluding the
debt assistance and grants in lieu of loan which I have already mentioned, on
the basis of present estimates of increases in average wages and population
will mean that the total financial assistance grants excluding the ones I
have mentioned should be some $ 384m higher in this forthcoming quinquennium
than they would have been under the existing formula.
We have given very careful consideration to the position of
Queensland and have come to the conclusion that in spite of the considerable
improvement that has been effected in its share of the grants over the last
years, the grants being received by that State are still too low relative to the
other States.
We therefore propose to continue the arrangements existing during
the present quinquennium of adding $ 2m each year to the base on
which Queensland's grant is calculated.
Other States have also requested an improvement in
their share of the grants, mainly based on arguments about per
capita relativities. We have not been sufficiently persuaded
by such comparisons and we are not prepared at the present time
to suggest any special action to adjust the shares of States
other than Queensland, except for what I shall now say about
Western Australia. An additional grant of $ 15.5m was paid to Western
Australia in 1968-69 and 1969-70 in lieu of the grant it
had previously been receiving on the recommendation of the
Commonwealth Grants Commission. When the State withdrew from
the Commonwealth Grants Commission in 1968, it was agreed
around this table that the sum of the State's 1969-70
financial assistance grant and the $ 15.5m would form the
base of consideration for purpcses of he present review.
Since 1968-69 Western Australia has been receiving increases
in its base grant and they have been escalated, but the
$ 15.5m has not been incorporated in the base grant and has
not been subject to escalation but has been merely paid from
the Commonwealth revenue in lieu of the Commonwealth payout
through the Grants Commission.
I am sure that it will be appreciated that there
could be no prior commitment by the Commonwealth to continue
to pay any particular amount to a State. We have noted that
since 1967-68 there appears to have been a significant
improvement in the relative capacity of Western Australia
to finance its Budget expenditure at a standard at least
comparable with that of other States. This means that, if
the State continued to receive its present share of the
revenue grants, including the special amount of $ 15.5m,
the situation would become increasingly unfair to the other
States and could result in a significant distortion in the
allocation of governmental funds between the States.
We are aware, of course, that the rapid rate of
population growth and economic development in Western
Australia has brought considerable problems, particularly
on the capital side, and we are therefore prepared to give
sympathetic consideration to that matter. The question
of any special increase in shares of the Loan Council
borrowing programmes is, of course, a matter for the Loan
Council to decide. I make it clear, however, that the
Commonwealth, subject to agreement on other matters,
will support in the Loan Council a special increase of
$ 3m in the State's 1970-71 borrowing programme for larger
authorities. It is not possible to estimate accurately the
effect that the proposals I have outlined will have on
the total revenue assistance provided to the States over the next 5 years.
The actual amounts and rates of increase in total revenue assistance
each year will depend, amongst other things, on the rate of increase in
average wages and in population. However, on the assumption that these
are much the same over the next 5 years as they have been over the 5 years
of the present grants arrangements, total revenue assistance will be
approximately $ 54m more in 1970-71 and over $ 700m more over the next
years, than if the present grants arrangements had continued unaltered.
These are, of course, very substantial additions indeed. Let me point
out that when one says $ 54m more one means $ 54m more than the $ loo100m
more that the existing formula will provide.
As is well known, the distribution of the financial assistance
grants is weighted in favour of the 4 less populous States in that their grants,
in per capita terms, are higher than those of New South Wales and Victoria.
In addition, Tasmania receives an annual special grant on the
recommendation of the Commonwealth Grants Commission while Western
Australia has recently been receiving an additional grant in lieu of the
special grant which it previously had.
The general principle underlying the distribution of the
general revenue grants is that each State should be enabled to provide
government service s of a standard broadly comparable with those of each
other State without imposing higher taxation or other charges. However,
12.
the principle is rather easier to state in general terms than it is to apply in
practice and there are many problems both of a practical and conceptual nature
which arise in attempting to determine the correct distribution of the grants.
While we believe that the present distribution of the grants is a fair one, we
do not believe that it is necessarily correct in precise terms. With the
grants being so large an element in the State's finances, we think that it is
of considerable importance that the distribution should come as close as
possible to achieving the general objective I have just stated.
But there are many difficulties in attempting to determine the
correct distribution. These difficulties, if anything, have become more
significant as a result of the very rapid changes recently occurring in the
finances of some States. We encountered some of these difficulties in the
course of the present arrangements when we examined the requests made to
us by individual States. I strongly feel that it would be desirable to have
independent investigation and advice on this question for the purposes of
the next review of the arrangements. I believe that if the Premiers
were disposed to accept this the best approach might be for the Commonwealth
Grants Commission to be given this task.
As the Piemiers know, the Commission has in the past been
responsible for recommending annual grants to the three less populous States,
but only Tasmania now
remains a claimant State. Whether it continues to do so or not will be a
matter for it to decide. But in any ': ase the Commission c-: uld be given the
task of recommending on the distribution of the grants between all the States,
not necessarily annually but mainly for the purposes of the regular reviews
of the revenue grants arrangements But the success of any scheme along
these lines would obviously depend on full co-operatihn bc-. given by the
States. I therefore ask the Premiers to consider that suggestion and at
a later stage to let us have their opinions.
We would also be prepared to consider the possibility of
giv: . g the Commission the task of examining the share of the grants
paid to a particular State between reviews of the grants arrangements.
For example. Western Australia may wish to put a case before the
Commission as to the appropriate. -ss of its proposed share ef the grants.
If we were to implement these proposals there would of co.,, rse, be a
number of matters to decide as to the way the Commission would work
and we would obviously have to give ' lose thought to them As I say,
I wuld welcome the views of the Premiers on this whole quLstion.
I think that the proposals cutlined constitute a significant contribution
towards an improvement in Commonwealth-State financial relationships. It
will be said, no doubt, that they will not solve all th-financial problems with
which the States are faced. We, for our part, well apprcci-'.-e the continuing
pressure on governments to improve the standard and rang.; f services
provided by governments. But we have got to have regard tc: the limitations
imp. sed L; the supply of real resotr es. In recent !-ears expenditure at
all levels of government has been in reasing at a signifian. n ly faster rate than
gross national product, a: cd ihe oYf oCtaolm monwealth reven.; e assistance proposed
should ensure the States of a source revenue that will grew significantly faster
than the gross national product, H. wever, progress si: n. cessarily be
achieved in stages and we must havc regard to the ne'ed t" provide scope for the
growth of the private sector of the economy. If we are to pr-' ide such a
substantial increase in revenue assistance and in res'-urces available to the
States it should be on the basis that there are no signifi: an' -hanges in the
financial relationships between the Commonwealth and th. ates during the
peri'd cf th-agreement. In parti-Llar. we would expect rh3. the States and
their authorities will continue to pay pay roll tax and that the distribution of tax
res.-'-Irces between the Commonweal.. h and the States will remain unchanged
W' are aware, of course that it has been one -f " he States' main
arguments that they should share in the natural growth of r venue on income tax
and while I do not accept that there should be any fixed rela-ionship between
inc-. me tax collections and the reve-nue grants any fixed relationship between the
growth of income tax revenue and the growth of revenue grants I would mention that
we -xpect the growth of revenue assistance under the prop-sals outlined to be close
to, if not in excess of the rate of grcwth in the total -f incc. me tax collections from
individuals and companies at the presently prescribed rates
Well, gentlemen, those are the matters which I s-: e as our having to
discuss: First, a taking over of $ 200m of State debt each , e: r at the beginning
of th year and the paying of interest and sinking fund on it, secondly, the provision
each year of $ 200m of grant which would otherwise haive been loan; thirdly, the
question of what additions should made to the bas-grants for 1970-71, and what new
betterment factor should be used to escalate this over the 5 Jears coming.
I hope that some tables on these matters have been circulated to the Premiers.
It is possible that the Premiers may wish now to examine them during an
adjournment. MR ASKIN Yes, that is the situation as far as I am concerned
and I think the other Premiers feel as I do. As you know we submitted
our case in writing last February and I still think that what we suggested then
is the best way to preserve the federal system. You put up alternative
proposals and they are quite involved. I would like to say quite a lot about
the adequacy of some of the amounts under the different sub-headings or
rather, as I see it, the lack of adequacy. However, I think that should wait
until we have had a talk amongst ourselves. Most Premiers would probably
want to have a talk with their advisers first and then we will get together as
a team to discuss what is involved and the implications of the proposals
you have just put. It may be some time before we are ready to meet again,
because there is quite a lot of meat in these various proposals. At this
stage I can only say that I hope we will be able to prevail upon you to do
a bit better than you have already set out, but to do that I know we must come
back with some cogent arguments. I am sure you will understand that I have
just made a few brief remarks and that I will want to speak at length on
the base grant, betterment factor and so on. I do not think that this is the
appropriate moment to do that and, subject to the concurrence of my
colleagues, I suggest we adjourn so that we may talk separately first and then
together.
SIR HENRY BOLTE Should we go into Loan
Council now? MR. GORTON It is up to the meeting. I thought
the Premiers might like to examine these proposals first
in Premiers Conference, come back and make a few more
comments on them before we go into Loan Council. The
Premiers will have to move out of this room to study the
proposals. MR. ASKIN I think Loan Council to some extent
depends on a study of the first proposals. I would like
to get these cleared up one way or the other. I recognise
the importance of Sir Henry's suggestion, but Loan Council
will depend closely on matters decided here. I think we
should try to dispose of these matters first. Would it
be possible for us to have a copy of your statement?
MR. GORTON I would hope so. This time it was
written out beforehand. It will get to you as soon as
possible. Mr. Bjelke-Petersen, do you agree?
MR. BJELKE-PETERSEN Yes. I think we ought
to get together ourselves first. This is fairly involved
Mr. Gorton. MR. GORTON That is what we will do, and I
will be at your command when you are ready. Could I just say
1i7.
that I understand what the Premier of New South Wales has
said about adequacy. However, on two of the matters that are
before us I thought there was virtually complete agreement. The
first of those is the taking over of $ 200M of State debt. I thought
the officers had agreed on that. I thought you would be pleased
that we had decided to take over the interest and sinking fund charges
as from the beginning of the year. I thought we had agreed on the
$ 200M a year grant, which otherwise would be a special loan.
I do not know how the Premiers feel, but I do not anticipate much
discussion on those two points.
MR ASKIN I think the main discussion will centre on
the first two items of the 5-point proposal you made last February
that is, the base grant and the improvement, which you said at the
time would be adequately improved, and the betterment factor.
MR GORTON That is what I thought, too.
MR ASKIN These will occupy most of our time.
SIR HENRY BOLTE Except that there could be a
formula used to decide how to apply these other proposals.
MR GORTON There will be discussion clearly
on whether the distribution should be as we have suggested
it is only a suggestion on the question of taking over State
debt and whether that will be distributed in proportion to the
total debt of the States.
SIR HENRY BOLTE Or would be in proportion
to the recoup percentage of the States?
MR GORTON That I am sure will be the subject of
discussion amongst the Premiers, but the total amount is
agreed. The payment of interest and sinking fund charges is
agreed. I shall listen with great interest to how various
Premiers think it should be distributed, but the total will be
the same. Then we shall adjourn now until the ringing of the
bells. The Conference adjourned