The political narrative is that the ACT’s financial woes are blamed on the Commonwealth Government for not providing sufficient funding. That’s just not true, say JON STANHOPE & KHALID AHMED

Following the release of the 2023-24 Budget Review, local media commented that the ACT does not have total control of its fiscal destiny. 

We do not support this claim. It reflects a misunderstanding of the financial arrangements that underpin the Australian Federation. 

The ACT is no less in control of its fiscal destiny than any other jurisdiction in Australia. In fact, the ACT may have more and better control than others.

However, the comment reflects a common narrative in which the ACT’s financial woes are blamed on the Commonwealth Government for not providing sufficient funding. 

The narrative also incorporates a suggestion that because Chief Minister and Treasurer Andrew Barr was unable to forge a good working relationship with Prime Minister Scott Morrison that the ACT was denied its fair share of Commonwealth support. 

We have been subliminally reassured that following the defeat of the “Tories” and the change in government at the federal level that we will now receive our fair share of federal support. 

It would surely be a matter of deep concern to all Australians if any state or territory’s finances were dependent on partisan politics or personal relationships. 

Thankfully, the principles-based framework of Commonwealth-state financial relations, implemented by an independent Commonwealth Grants Commission, ensures that each state receives its fair share of national funds.

In the Australian Federation about 80 per cent of taxation revenue is raised at the federal level, while expenditure responsibilities for service delivery largely fall to the states. 

For example, in 2021-22 total taxation revenue raised at the Commonwealth level was $551 billion compared to $112 billion raised by the states. However, states’ expenses totalled $355.1 billion, leaving a significant fiscal gap, which was covered by transfers from the Commonwealth ($147.7 billion, ie 44 per cent of total state revenue) apart from other own-source revenue such as user charges.

GST payments comprise the largest component of Commonwealth transfers to the states, at about $73 billion. 

Transfers to states are distributed under the principle of Horizontal Fiscal Equalisation (HFE) by the Grants Commission. 

HFE provides each state with “equal” fiscal capacity to deliver services. Obviously, states have varying circumstances that lead to different needs for services, service delivery costs and revenue-raising capacities. 

The Commission’s assessments take those differences into account to provide fiscal capacity to each state to deliver an average level of services at an average level of efficiency with an average level of revenue raising. 

The average is derived with reference to “what states do”. For example, if the majority of states increase their expenditure on health, it would increase the average per capita expenditure on health, which would become the starting point for assessing need for health expenditure.

A state’s assessed need may be higher or lower than the Equal Per Capita (EPC) need subject to a range of factors. Taking the case of the ACT, its assessed expenses for health in 2021-22 were $3022 per capita, about 10 per cent lower than the EPC’s national average. This is due to the relatively younger population, relative to the national average, and service delivery in an urban environment. 

Similar assessments are made on the revenue capacity for each state. In the case of the ACT, the Commission assesses that it has a relatively lower-than-average revenue-raising capacity. 

This is to be expected as a significant part of the ACT’s economy comprises Commonwealth Government activity, which is exempt from taxation. 

In addition, the ACT does not have mining, manufacturing or agricultural bases. Therefore, the territory’s assessed revenue capacity ($4925 per capita) is about 23 per cent lower than the national average ($6408 per capita). The ACT is, therefore, compensated for its relatively lower revenue-raising capacity.

A relativity is then determined that prescribes how much above or below the EPC amount a jurisdiction is entitled to and hence the share of the GST revenue pool. 

The relativity is updated every year, taking into account any changes in circumstances, such as population share, size of the GST pool and socio-demographic factors.

Notably, the ACT has always received a higher-than-EPC share of the GST pool. Broadly, the ACT’s relatively lower service needs (due to a younger population in an urban setting) are offset by its diseconomies of scale, leading to its expenditure needs being assessed at around 96 per cent of the average, and its below-average revenue capacity being the main factor in it receiving a higher share.

Every state or territory is assigned an average fiscal capacity. What states do with that capacity is their decision. For example, a state that has a higher assessed need for health expenditure, may nevertheless direct the additional resources it receives to another purpose.

The ACT is not an outlier on fiscal capacity, and it would be denying the fundamental arrangements of the Federation to suggest otherwise. 

The averaging of fiscal capacity – all things considered – should at least, in principle, deliver similar outcomes on operating budgets over time. 

However, this is where the ACT is an outlier, having not posted a single budget surplus over the past 11 years.

Jon Stanhope is a former chief minister of the ACT and Dr Khalid Ahmed a former senior ACT Treasury official.