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1301.6 - Tasmanian Year Book, 2000  
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 13/09/2002   
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Feature Article - Tasmania's financial relationship with the Commonwealth since federation

With the coming of Federation on 1 January 1901 Tasmania became an original State of the Commonwealth. A number of developments since that time have affected the State’s ability to raise the money required for current  and capital purposes.

Since Federation, the Commonwealth Government has increasingly dominated State finances, mainly due to three events.

First, at Federation the control of customs and excise tax was transferred to the Commonwealth government. Second, under the Financial Agreement Act 1927, the Commonwealth became the borrowing agent for the States. Third, during World War Two the Commonwealth Government gained control of personal income tax and company tax, in order to fund the war effort. Whilst the Commonwealth is no longer the borrowing agent for the States (Tasmania created its own central borrowing authority in 1985) it still has a substantial degree of influence over State Government financial activity given that it controls the large tax revenue items including personal income tax, company tax, sales tax and excise duties. Accordingly, Tasmania relies heavily on Commonwealth specific and general purpose grants (58% of total General Government revenue in 1997-98) to fund public expenditure.

At the turn of the century, there was considerable controversy surrounding Tasmanian Government finances as a result of the transfer to a Federal system. The Tasmanian Treasurer noted that the State’s share of customs and excise duties and revenues from posts and telegraphs had fallen since these functions had been transferred to the Commonwealth. At this time all surpluses were distributed to the States on a per capita basis.

Some States (including Tasmania) complained about the methodology used to distribute these surpluses and this eventually led to the establishment of the Commonwealth Grants Commission (CGC) in 1933. The CGC is an independent statutory body operating under Commonwealth legislation, its main function being to make recommendations  to the Commonwealth Government on the share of revenues to be allocated to the States and Territories on the basis of horizontal fiscal equalisation (HFE).

HFE ensures that each State or Territory is able to function, by reasonable effort, at a standard not lower than the average standard of other States or Territories. It takes account of differences in the expenditure required by those States in the performance of their functions and in the capacity of those States to raise revenue. For example the cost of providing government services in the Northern Territory, is roughly three times the national average and the Northern Territory is given extra funds to make up the shortfall. Other issues which can affect a State’s ability to provide a reasonable service, and which are beyond its control, include:

  • the size of the school-aged population;
  • the size of the Aboriginal population or, the number of recently arrived migrants; and,
  • cross border considerations such as the cost to the NSW government of providing services to residents of the ACT and vice versa.

The operations of the CGC remained largely unchanged until the late 1970s when the Fraser Government asked the CGC to look at the relative positions of each of the States. These positions are now upgraded every 5 years with updates taking place in the intervening years.

The CGC presents its recommendations at the annual Premiers’ Conference and these can be the subject of further negotiation.
From 2001-02  Goods and Services Tax (GST) revenues will be distributed amongst  the States on a horizontal fiscal equalisation (HFE) basis and  the CGC will be responsible for making recommendations on how the HFE will be calculated.

Commissioners are now appointed with the broad approval of the States. Terms of reference are negotiated with the States and approved by the Commonwealth. Both the Commonwealth and the States are encouraged to present their views via their respective Treasuries.

The CGC also relies on the States, and the Commonwealth, to comply with the terms of the Uniform Presentation Agreement (UPA). The UPA was agreed to at the May 1991 Premiers’ Conference its primary objective being to ensure that a common ‘core’ of financial information is provided by Commonwealth, State and Territory governments in their budget papers. The resulting increased uniformity in the presentation of public sector financial information facilitates the analysis of this information on a consistent and comparable basis.

The Commonwealth Government acts independently of the CGC. For Tasmania the Freight Equalisation Scheme is a case in point. The scheme was introduced by the Federal Government on 1 July 1976, the intention being to make the door-to-door freight costs of eligible cargoes shipped from Tasmania to the mainland approximate the door-to-door cost of moving similar goods by road or rail over similar distances on the mainland.

A comparison of revenue and expenditure for the Tasmanian General Government Sector between 1901 and 1997-98 shows little change in the reliance on Commonwealth grants as the major source of revenue. There has however, been a changing emphasis in the allocation of expenditure, particularly in the areas of health and education.

In 1901 the redistribution of Commonwealth surpluses, to the States, accounted for 64% of Tasmania’s revenues (Commonwealth grants accounted for 58% in 1997-98), taxes accounted for 15% (32% in 1997-98) and other revenues accounted for 21% (10% in 1997-98).

Tasmania’s taxation mix has certainly changed since Federation.  In 1901 land tax accounted for almost half of all State General Government taxation revenue. In 1997-98 this had fallen to only 4%, while payroll tax, franchise taxes and motor vehicle taxes had become the major components of the State’s tax base.

Whilst personal income tax is no longer a State based tax it is interesting to note that it accounted for 52% of all Commonwealth government taxes in 1997-98.
In 1901, personal income tax accounted for 19% of Tasmania’s tax base.

Comparisons of State General Government expenditure can be problematic because of overlaps into local government and the Tasmanian Railways for the interest component (in 1901 a substantial component of the interest paid by General Government related to loans taken out on behalf of the Tasmanian Railways). Based on the comments of the Treasurer at the time, an estimate of the interest applicable to Railway loans can be made. For comparative purposes this amount has been treated as an imputed grant to the Tasmanian Railways  rather than interest paid.  This enables a comparison of the major areas of expenditure for both eras on an approximate basis.

In 1901 interest accounted for 28%(10% in 1997-98) of State General Government expenditure, law and order 10% (8% in 1997-98), roads and bridges 8% (7% in 1997-98), education 8% (27% in 1997-98) and health 5% (20% in 1997-98).

Although the proportion of expenditure on education has more than tripled since Federation it must be remembered that there was a totally different emphasis on education at the turn of the century. In 1902 the State’s major focus was on the provision of primary education. The only institutions to provide a secondary education were privately run and in 1902 there were less than 1000 students, aged 15 and over enrolled at privately run, grammar schools and colleges. Similarly, the University of Tasmania, in 1902, had a total enrolment of 70 students.

While the proportion of expenditure on health has quadrupled since Federation, this is more probably due to the increased cost of providing a more sophisticated health care system rather than the expense associated with the provision of low cost health care to all members of the community.

Some of the issues confronting Governments in the early 1900s were just as topical in 1901 as they are now.

The notion of public utilities operating on a commercial basis and being able to recover the bulk of their operating costs had certainly been given plenty of consideration at the turn of the century. In his 1902 Budget speech the Tasmanian Treasurer made the following observations about the capacity of the Railways Department to use its operating profits to pay the interest on loans taken out to build and maintain the State’s rail network. He said: ‘This small profit of 32,000 pounds on the working of our Railways in 1901 is only equal to 0.85% on the capital expenditure.... When we can only show a profit of considerably under 1% towards the payment of our interest bill, which is quite 3.5%; it is evidently time that some action was taken to make our railways more profitable.’

As well, the debate in 1901, as to which level of government should assume the responsibility for the funding of Government services was just as lively as it is today. The State Treasurer made the following comments on the financial relationship that existed between the various “local bodies” and the State.

‘I think the time is fast approaching - and our Federal relationship is going to hasten it - when the burden of liability for much of the public expenditure that has hitherto been borne by the State will have to be borne by local bodies in the districts especially benefited by the expenditure. It is absolutely certain that the State milch cow cannot continue to supply, as hitherto, the demands of financially thirsty communities and institutions in all parts of the island. For many of these the weaning time draws nigh. The weaning process may not be agreeable - it seldom is - but the result will be a relief to the State, and a useful lesson of local self-reliance to her children.’

MAJOR COMPONENTS OF TAX REVENUE

1901
1997-98

%
%

Land tax
46
4
Stamp duty
22
14
Personal income tax(a)
19
-
Probate duty
9
-
Company tax(a)
3
-
Payroll tax
-
23
Franchise taxes(b)
-
22
Motor vehicle taxes
-
10
Gambling taxes
-
10
Financial institutions’ taxes
-
7
Other
-
10
Total
100
100

(a) The Commonwealth Government managed personal income tax and company tax after World War II.
(b) Includes petroleum products, tobacco and liquor.

Source: Finance 1902, Government Finance Statistics, Tasmania (Cat. no. 5501.6)


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