Commonwealth Grants Commission

1. Commonwealth Grants Commission Capital assessments May 2011

2. Outline • Background • The capital assessments – • Treatment of capital grants for infrastructure

3. Some background

4. Commission’s task • Determine a distribution of the GST which equalises State fiscal capacities to provide services

5. It actually determines a GST distribution which, after allowing for material factors affecting revenues and expenditures, provides each State with the same capacity to provide services and associated infrastructure at the same standard, if each made the same effort to raise revenue and operated at the same level of efficiency

6. Operating statement • Revenue, including • PRT, Mining revenue, etc • Interest earnings and dividends • GST • Other Grants • Expenses including • Education, Health, Law and Order, etc • Depreciation • Net Operating Balance (NOB) = R – E • Net investment (NI) • Net lending = NOB - NI

7. The rearranged budget identity GST = Expenses plus: Net investmentplus: Net lendingless: State own-source revenueless: Revenue from SPPs

8. Two important concepts • Average budget – average State revenues and expenditures • Assessed budgets – the expenditures States would incur if they provided the average services and the revenues they would raise if they applied average revenue efforts

9. The Capital Assessments

10. Capital assessments include Assessments for infrastructure: • Net investment • Depreciation expenses Assessments for financial assets • Net lending • Net interest revenue and revenue from PTEs

11. Capital assessments have always been made • We used to equalise the capacity of States to pay debt charges on borrowings used to acquire real and financial assets • Now we give States the up front capacity to acquire assets needed to provide services and hold equal amounts of financial assets

12. Why did we change? • Simpler - the debt charges assessment was too complex • To reflect ‘what States do’ with the GST • GST funds investment and financial assets • To capture effects of population growth • To be more contemporary • Recognises investment needs and changes in net financial assets ‘up front’

13. Changes in methods

14. Assessment methods Net investment Depreciation Net lending Interest & dividend revenue

15. Investment assessment • Assumption - States need the average stock of infrastructure per capita, adjusted for its infrastructure disabilities, to deliver average per capita services • Assessed investment is the difference between the assets required to provide average services at the end of the year and those required at the start

16. Factors affecting Investment • Population growth • Capital stock (or quantity) disabilities • Measured as expense use disabilities, discounted by 12.5% and averaged over three years • Examine roads and other infrastructure separately • No disabilities applied to land • Cost disabilities • Measured using interstate wage differences and regional cost differences

17. Investment results

18. Depreciation • Assessed depreciation is a proportion of the assessed stock of infrastructure at end of each year

19. Net lending • Net lending each State requires to achieve the same NFW per capita is assessed NFW at year’s end less assessed NFW at year’s start • Assessed NFW is the State’s population share of the total NFW • This assessment is only influenced by population growth • Net lending needs are discounted by 25%

20. Net lending results • Impact on GST distribution, 2010 Review • Population growth

21. Net interest and PTE revenue • Since State NFW is equalised, each State could earn the average per capita revenue from these sources

22. Treatment of capital grants

23. Capital grants • SPPs and NPPs have a revenue and a spending effect on State budgets • The two effects are assessed separately • SPP and NPP revenues are all assessed the same way - States receiving above average per capita SPP and NPP revenue receive less GST • Spending effects are part of the relevant expenditure assessment and reflect the relevant drivers of service use and cost

24. A simple GST ‘Impact’ Aust Assessed GST Average State A Impact $ $ $ SPP expenses 100 130 30 SPP revenue 100 125 -25 GST impact for State A 5

25. Roads • Roads NPPs help fund construction of the national network • Road use and length disabilities affected half the spending on construction • Nationally determined needs also affected the other half of the spending – the interstate distribution of the NPP reflected the needs • All differences from the average revenue affected the GST

26. Rail • Most rail services are provided by PTEs and are not general government services • Support for PTE investment takes form of capital grants or equity injections which increase State equity in the PTE and NFW • Those transactions are captured in net lending assessment which equalises NFW • On revenue side, all differences from the average receipts are offset by GST distribution

27. ComparisonRoad Rail Revenue side effect is same in both cases. It offsets the difference from average revenue.Expenditure effects: • A general govt service • Capital grant creates non-financial asset • Equalising capacity to provide service means recognise population growth and service specific disabilities • A PTE service • Capital grant creates a financial asset • Equalising NFW, not PTE’s capacity to provide services, means only population growth is recognised

28. Questions?

29. GFS asset classification Assets Non-financial (real) assets Financial assets Produced assets Non-produced assets Intangible produced assets and valuables • Tangible produced assets • Dwellings • Other buildings • Other construction/infrastructure • Transport equipment • Computer equipment • Other equipment • Defence weapons platforms • Cultivated assets • Inventories • Tangible • non-produced assets • Land • Other Intangible non-produced assets • Cash and deposits • Investments, loans and placements • Accounts receivable • Advances outstanding • Equity in PTEs Net financial assets or Net financial worth Infrastructure

30. Operating statement – impact of real assets • Revenue, including • PRT, Mining revenue, etc • Interest earnings • Dividends • Grants • Expenses including • Education, Health, Law and Order, etc • Debt charges • Depreciation • Net Operating Balance (NOB) = R – E • Net investment (NI) • Net lending = NOB - NI

31. Operating statement – impact of financial assets • Revenue, including • PRT, Mining revenue, etc • Interest earnings • Dividends • Grants • Expenses including • Education, Health, Law and Order, etc • Debt charges • Depreciation • Net Operating Balance (NOB) = R – E • Net investment (NI) • Net lending = NOB - NI

32. Net lending assessment – 2008-09

33. Depreciation results • Impact on GST • Capital stock factor