ISSUES IN PUBLIC FINANCE 1998-991998-99 Budget % % Northern Territory gross debt to GSP 35.4 33.1 The Territory is actively seeking to reduce the level of gross debt to below $2B by

ISSUES IN PUBLIC FINANCE

1998-99

Budget Paper No. 3

1

Chapter 1

NORTHERN TERRITORY FISCALSTRATEGY

The Northern Territory announced a singlequantitative fiscal target in 1993-94 and amore comprehensive set of targets in 1994-95.In the development of the 1998-99 Budget, thestrategy has been reviewed and updated. Thenew strategy is:

The Northern Territory Government iscommitted to the long term viability of theTerritory through. The Government’s corestrategies and fiscal targets are:

• current expenditure per capita will notincrease in real terms;

• infrastructure will be maintained at levelssufficient to meet the Territory’s economicand social needs;

• the Territory’s own source revenue effortwill be broadly comparable to the States;

• Territory debt as a proportion of economicoutput will decline over time;

• Territory debt servicing as a proportion ofsound financial management of theTerritory’s resources total Territory revenueand Commonwealth grants will be broadlycomparable to the States.

Provisos:

• in any given year, the percentage change inCommonwealth grants to the NorthernTerritory should not be significantlydifferent to the change for the States;

• the Territory should receive adequatediscretion in the application of funds topriorities determined by Territorians; and

• assessment against the targets shouldexclude the budgetary impact of major one-off events, such as natural disasters.

This chapter reviews performance against thetargets.

REVIEW OF THE STRATEGY

Fiscal strategies and targets must beconstantly kept under review. They need toprovide sound and realistic parametersagainst which the adequacy of fiscaldecisions can be assessed. At the same time,however, they need to be responsive to thefiscal and intergovernmental environmentas well as the physical environment, asevidenced by the effect on the NorthernTerritory’s budget of the Katherine regionfloods.

Fiscal strategies and targets are not rules thatcannot be broken. Blind observance, if itleads to a lack of response to an essentialrequirement, is as bad as flagrant disregardof the strategy.

Planning for the 1998-99 Budget indicatedthat in a number of areas reconsideration ofexisting policy would be appropriate. Therehas been considerable but unavoidablegrowth in demand in social services whichhas put additional stress on the recurrentand capital budget. There has also beenrecognition that the Territory’s growingstock of assets requires additional levels ofmaintenance and in particular, theadditional expenditure required from the

Issues in Public Finance

2

Katherine region floods has needed to beaccommodated.

Accordingly, a number of adjustments tooutlays have occurred in support of policyinitiatives and also to reclassify someexpenditure. The main changes are:

• significant increases in health,education, correctional services andpolice outlays in 1997-98 and 1998-99 asa result of demand pressures;

• an additional $28M of cash has beenallocated in 1998-99 and future years forrepairs and maintenance; and

• the project management costs associatedwith capital and minor new works havebeen transferred from recurrent tocapital.

Also of relevance is the one-off expenditurein 1997-98 and 1998-99 which totals $85M asa result of the Katherine region floods.

The strategy has also been updated so thatit is more contemporaneous. References to1992-93 have been removed, as with thepassage of time and change in interestrates, the reference is no longer ofsignificance. References to debt andinterest payments have been consolidatedinto two elements.

The following chapter comprehensivelyreviews fiscal performance against thestrategy and targets, discusses changes tothe strategy and any significant policychanges of relevance.

♦ Current expenditure per capita will notincrease in real terms.

This element of the strategy is unchanged.However, changes in current expenditureneed to be considered from year to year andover time.

Current expenditure growth can fluctuatefrom year to year for non-policy relatedreasons. A number of factors can cause thesefluctuations including:

• natural one-off disasters, such as theKatherine region floods;

• expenditure which is budgeted for oneyear but actually occurs in the followingyear;

• payment of tied Commonwealth grantsfluctuating between years and alsoaffecting the transfer from one year tothe next; and

• variations in the Commonwealthpayments the Territory receives for on-passing to other bodies, such as localgovernment councils, the university andnon-government agencies.

There can be greater demand for services, orthe cost of services can rise at a rate abovethe general inflation rate. For example, bothof these factors apply to health outlayswhere there has been a move to greater useof the public hospital system as a result ofreduced private health insurance and unitcosts are increasing faster than theConsumer Price Index.

Even if there are policy changes whichincrease current outlays in a particular year,the key issue in relating that to the strategyis what is happening over time. Obviously,the point can be reached where the timeframe for considering the achievement orotherwise of the strategy is meaningless, butthe fundamental purpose of the fiscal targetis to ensure the trend in outlays issustainable over time.

Figure 1.1 compares the growth in currentexpenditure on a year on year basis andaveraged over three years.

Northern Territory Fiscal Strategy

3

Figure 1.1

ELEMENT 1: CURRENT EXPENDITURE GROWTH

1997-98Estimate

1998-99Budget

% %

Year on Year

Current Expenditure Growth 8.5 -1.0

Current Expenditure Growth(excluding Katherine)

6.7 0.4

Combined Population and CPIgrowth

2.4 3.7

Average over 3 years

Current Expenditure Growth 6.4 4.4

Current Expenditure Growth(excluding Katherine)

5.8 4.3

Combined Population and CPIgrowth

4.6 3.4

In 1998-99, current expenditure is expectedto decrease by 1.0 %, well below theestimated combined rate of inflation andpopulation growth of 3.7%.

The estimate, for 1997-98 is 8.5% on a yearon year basis or 6.4% if averaged over time.Both are above target. However, if thecurrent expenditure relating to the Katherineregion floods is excluded, the currentexpenditure growth drops to 6.7% or 5.8% ifaveraged over three years.

Figure 1.2

GROWTH IN REAL PER CAPITA CURRENTEXPENDITURE

1992-93 TO 1997-98

Six State Average

-20

-15

-10

-5

0

5

10

Vic Tas NT SA NSW WA Qld

Source: Government Financial Estimates, ABS Cat. No.5501.0; andNorthern Territory Treasury.

While these are also both higher than thestrategy targets for 1997-98, the reduction inexpenditure in 1998-99 reinforces theimportance of considering this element overtime.

Thus, while the objective is for currentexpenditure to remain within the real percapita limit over time, year on yearfluctuations are to be expected.

While other jurisdictions do not haveidentical strategies in place, it is instructiveto compare growth in current expenditure inthe Territory with the outcomes for the otherStates. Figure 1.2 highlights that for theperiod from 1992-93 to 1997-98, theTerritory’s increase in current expenditurerelative to the other jurisdictions is close tothe average experience of the States.

Figure 1.3

ELEMENT 2: INFRASTRUCTURE

1997-98Estimate

1998-99Budget

$M $M

Gross Fixed CapitalExpenditure

292 239

Repairs and Maintenance 92 120

Total 384 358

♦ Infrastructure will be maintained at levelssufficient to meet the Territory’seconomic and social needs.

This element of the strategy has beenbroadened slightly to include themaintenance as well as the provision ofcapital assets. There are no quantitativetargets as capital expenditure is generally‘lumpy’, varying in accordance with majorprojects. The additional increase formaintenance can be seen in Figure 1.3 andlargely offsets the decline in capitalexpenditure. Figure 1.3 excludes the one-off additional maintenance expenditure

%


4

associated with the Katherine regionfloods.

The strategy has been met in 1997-98 and1998-99.

♦ The Territory’s own-source revenue effortwill be broadly comparable to the States.

Again, this element of the strategy has beenrevised to provide a band within which thetarget is to be measured. The previous targethad an upper limit but no lower limit. Thenew target is therefore somewhat lessprescriptive but more realistic with the sameessential commitment to making a State-likerevenue effort remaining. Figure 1.4 reflectsown-source revenue excluding andincluding revenue replacement payments toillustrate the effect that the High Court’sdecision on business franchise fees had onthe Territory’s capacity to raise revenuecompared with the States.

Figure 1.4

ELEMENT 3: OWN-SOURCE REVENUE

1997-98Estimate

1998-99Budget

$ per capita $ per capita

Excluding revenuereplacement payments

Total Territory Revenue 1 867 1 880

Six States Revenue 2 226 n.a.

Including revenuereplacement payments

Total Territory Revenue 2 329 2 420

Six States Revenue 2 449 n.a.

As discussed throughout this Budget Paper,revenue replacement payments result fromthe High Court’s decision in August 1997which invalidated State and Territorybusiness franchise fees. The Commonwealthagreed to extend its own excise andwholesale tax arrangements and to return to

States and Territories, revenue roughlyequivalent to that which had been lost.There is a difference of view as to whetherthese payments should be classified asCommonwealth grants or own-sourcerevenue and this is discussed elsewhere.

However, the effect of their removal fromown source revenue can be seen clearly inFigure 1.4 where the Territory’s actual percapita revenue declines significantly whenthe revenue replacement payments areexcluded, but is on par with the States whenthey are included as own-source revenue.The Territory has lost $462 per capita, morethan double the States in own-sourcerevenue.

The reason for this large difference is thatthe Territory’s revenue capacity in the threebusiness franchise fees was about 1.5 timesthat of the States, and the Territory’srevenue effort was also higher than theStates. Thus the extent of the Territory’sown-source revenue loss is significantlygreater than for the States.

A wide-ranging comparison of different taxrates and charges for the Territory and theStates is contained in Chapter 10 whichconfirms that, on the whole, Territorians aresubject to similar rates of taxes and chargesto their interstate counterparts.

The Commonwealth Grants Commissiondata does not cover all revenue sources butalso confirms that the Territory’s effort isbroadly comparable to the States.

♦ Debt as a proportion of economic outputwill continue to decline.

This strategy consolidates two of theprevious elements which stated “that theincrease in Territory debt in any year will beno higher than 5% of total expenditure” andthat “new borrowings will only beundertaken where there is sufficient return

Northern Territory Fiscal Strategy

5

to meet debt servicing costs”. The Territoryhas had no difficulty achieving the oldtargets since 1991-92 and it is appropriatethat a more contemporaneous target beadopted.

Figure 1.5

ELEMENT 4: DEBT

1997-98Estimate

1998-99Budget

% %

Northern Territory gross debt toGSP

35.4 33.1

The Territory is actively seeking to reducethe level of gross debt to below $2B by theend of 1997-98 and a further debt reductionprogram will commence in 1998-99. TheTerritory is within the new strategy, asshown in Figure 1.5.

♦ Debt servicing as a proportion of totalTerritory revenue and Commonwealthgrants will be broadly comparable to theStates.

This element is similar to the previousstrategy concerning interest payments as aproportion of total revenue.

Figure 1.6

ELEMENT 5: DEBT SERVICING

1997-98Estimate

1998-99Budget

Gross Interest Paid ($M) 184 178

Total Revenue andCommonwealth Grants ($M) 1 779 1 835

Ratio of Interest to Revenue andGrants 10.3% 9.7%

Six State Average (est) 10.6% n.a.

The Territory’s debt servicing costs continueto decline, as shown in Figure 1.6. Interestpayments in 1997-98 have declined $11Mfrom 1996-97 and a further $6.9M in 1998-99,

a result of the Territory Government’sdecision to significantly reduce gross debt.In 1997-98, the Territory’s debt servicingratio is slightly below the States.

However, the position of the States hasdeclined sharply over time. In 1995-96 thesix State debt servicing average was 14.3%which has declined over the two years to10.6%.

The decline in the States’ ratio reflects anumber of factors:

• the large asset sales in a number ofStates, especially Victoria, from whichthe proceeds have been used to retiredebt;

• the refinancing of existing debt at lowerinterest rates. Most States do not issuedebt for longer than ten years, whichmeans that debt is turned over relativelyfrequently and interest rates have beentrending down in recent years; and

• economies of scale available to thelarger States in more actively managingtheir debt.

In recent years there has also been anemerging trend for the larger States toencourage substantial private sectorinvolvement in areas that have traditionallybeen the preserve of State governments (forexample, electricity generation and roads).This practice essentially removes significantitems of economic infrastructure off States’budgets entirely. While this trend is likely tocontinue, the Territory has less opportunityto follow similar options due to therelatively small local economy. Hence theStates ratio of interest paid to total revenueis likely to be understated and adjustment tothe States data may be required to makemeaningful comparisons.

However, as with all elements of the fiscalstrategy, they are meant as a trigger for


6

further analysis should there be significantdeviations from the targets rather thansimply a mechanical calculation of whetheror not the targets have been achieved.

FISCAL STRATEGY PROVISOS

The core strategy and fiscal targets are alsosubject to the following three provisos.

♦ In any given year, the percentage changein Commonwealth grants to the NorthernTerritory should not be significantly lessfavourable to the change for the States.

This is unchanged from the previousstrategy.

Figure 1.7

PROVISO 1: COMMONWEALTH GRANTS

Change in Grants 1997-98Estimate

1998-99Budget

% %

With revenue replacementpayments:

Northern Territory 12.0 3.3

Six State Average (est) 15.9 n.a.

Without revenuereplacement payments:

Northern Territory 5.2 2.3

Six State Average (est) -0.7 n.a.

Growth in Commonwealth grants to theNorthern Territory and the States in 1997-98appears to be high because of the inclusionof revenue replacement payments. Whenthese payments are excluded, the change ingrants drops to 5.2% for the NorthernTerritory and –0.7% for the States. In 1998-99

the Territory will receive in increase ingrants of 3.3%. Commonwealth grantsinclude payments under the NaturalDisaster Relief Arrangements in respect ofthe Katherine floods.

♦ The Territory should receive adequatediscretion in the application of funds topriorities determined by Territorians.

Figure 1.8

PROVISO 2: SPECIFIC PURPOSE GRANTS TOTOTAL GRANTS

1997-98Estimate

1998-99Budget

% %

Ratio of Specific Purpose toTotal Grants 17.0 16.0

This is unchanged from the previousstrategy.

The ratio of specific purpose to generalpayments is expected to decline in 1998-99,not through a reclassification from specificto general purpose, but rather because of anabsolute decline in the amount of specificpurpose payments.

♦ Assessment against the targets shouldexclude the budgetary impact of majorone-off events, such as natural disasters.

This proviso is a new addition from lastyear. It has been included in the strategybecause of the significant effect theKatherine region floods had on the 1997-98figures and to a lesser extent the 1998-99Budget.

7

Chapter 2

FINANCIAL IMPLICATIONS OFSTATEHOOD

Since Self-Government, the financialarrangements of the Northern Territory havebeen modelled on those of the States.

The Territory now possesses largely the sameexpenditure responsibilities and revenue powersas the States and is treated as a State in itsfinancial relations with the Commonwealth.

Consequently Statehood will have virtually noimpact on the Territory’s existing financialarrangements.

There are, however, a limited number of areas ofresponsibility that may be transferred with agrant of Statehood. If this eventuates someadjustments will be required through the fiscalequalisation process. This will affect thecategories of revenue and expenditure but theeffect on overall financial capacity will beminimal.

HISTORY

Prior to Self-Government in 1978, theTerritory was administered by theCommonwealth which had assumed controlfrom South Australia in 1911.

The majority of government services wereperformed by the CommonwealthDepartment of the Northern Territory with afew exceptions, such as health andeducation, which were the responsibility ofthe respective Commonwealth agencies.

On 1 July 1978, most State-likeexpenditure responsibilities and revenueraising powers were transferred to theNorthern Territory Assembly. Health

transferred on 1 January 1979 andEducation and Electricity transferred on1 July 1979. A few powers, such as theownership of and control over uranium,were not transferred.

Self-Government required the establishmentof the Northern Territory Public Service toassume responsibility for the provision ofgovernment services. It was also necessaryto determine the funding arrangements forthe Territory including borrowing powersand the receipt of grants from theCommonwealth.

A Memorandum of Understanding set outthe financial arrangements that were to applybetween the Commonwealth and theTerritory. It stated that these arrangementswere to be modelled on those that appliedbetween the Commonwealth and the States,although there was to be a transitional period.

In the years after Self-Government, thisinvolved a set of parallel arrangements tothose of the States. However, since 1992 theTerritory has been fully integrated into theState arrangements.

DIFFERENCES BETWEEN THE STATESAND THE NORTHERN TERRITORY

The Territory is largely treated as a Statewith respect to its relations with theCommonwealth. This includes attendance atintergovernmental forums such as thePremiers’ Conference and the Council ofAustralian Governments, and fullmembership of the Loan Council.


8

The Territory also has the same borrowingpowers as the States and is assessed on thesame basis as the States in the distribution ofCommonwealth grants. These come in theform of untied grants, where States andTerritories have complete discretion as tohow they are spent, and tied grants whichhave conditions attached. A more detaileddiscussion of this matters can be found laterin the chapter.

Despite these similarities, the structure , butnot the basis, of the Territory finances is verydifferent from those of the States. This is dueto influences on the cost of service deliveryin the Territory which result in it receiving ahigher level of grants than the States on aper capita basis.

One of the most significant influences is thesmall population of the Territory. Thismeans that the Territory is less able to realisethe economies of scale in service deliverythat are available to larger States. The costsof many areas of public administration arealso fixed, regardless of population size,which results in a greater per capitaexpenditure burden in the Territory.

The isolation from southern centres and thedispersed nature of the Territory populationalso increases costs. In addition to freightand travel expenses there is a need toprovide services at a less than economicalsize in remote areas.

Another feature of the Territory is its socialcomposition which results in greaterdemand for government services than isexperienced in other jurisdictions.

The Commonwealth Grants Commission(CGC) assesses that it costs, on average, 2.7times more per capita to provide the sameservices in the Territory as in otherjurisdictions.

The effect of these cost influences can beseen in Figure 2.1 which shows per capitaexpenditures in the Territory and all Statesand Territories on selected purposes.

Figure 2.1

PER CAPITA COMPARISON OF EXPENDITURE

0

1 000

2 000

3 000

4 000

Health Education Public Orderand Safety

General PublicServices

Other

Northern Territory

Total States and Territories

Source: Government Financial Estimates, ABS Cat. No. 5501.0 andNorthern Territory Treasury.

On the revenue side the Territory is assessedas being able to raise slightly more per capitathan the average of the States. This is largelydue to a higher capacity to extract revenuefrom mining and petroleum, liquor andtobacco franchise fees, offset by lowercapacities in relation to stamp duties andfinancial transaction taxes.

The Territory’s assessed capacity relativeto the Australian average is likely to fallafter the High Court’s decision inAugust 1997 which effectively removedthe States and Territories’ ability to levyfranchise fees.

The Territory’s revenue capacity does notcover the additional costs in the Territory,hence the need for a higher level ofCommonwealth grants in order to providestandard government services. Figure 2.2shows the funding profile of the Territorycompared with that of the combined Statesand Territories.

Financial Implications of Statehood

9

Figure 2.2

COMPARISON OF REVENUE SOURCES

0%

20%

40%

60%

80%

100%

Northern Territory Total States andTerritories

Own-sourceRevenue

Tied Grants

Untied Grants

Source: Government Financial Estimates, ABS Cat. No. 5501.0, 1998Commonwealth Offer document and Northern Territory Treasury.

The level of untied Commonwealth grantsrepresents a much larger share of Territoryfunding at 56%, compared to 22% in theStates. However, tied grants representapproximately the same proportion oftotal funding in the Territory and in theStates Territories (16% and 19%respectively).

The smaller share of own-source revenueshown in Figure 2.2 is not a reflection ofthe Territory’s effort in collecting taxes. Asindicated above it is a result of the highcost of delivering government servicesand hence the need for a high level ofCommonwealth grants.

Figure 2.3

PER CAPITA COMPARISON OF REVENUE SOURCES

0

2 000

4 000

6 000

Own-sourceRevenue

Untied Grants Tied Grants

Northern Territory

Total States and Territories

Source: Government Financial Estimates, ABS Cat. No. 5501.0, 1998Commonwealth Offer document and Northern TerritoryTreasury.

Figure 2.3 shows that the Territory collectsapproximately the same own-sourcerevenue per capita as the Australianaverage. A comparison of Territory taxesand charges with the other States can befound in Chapter 10.

Over time as the Territory population growsand the economy broadens the costdisadvantages would be expected to decline.

The remainder of this chapter brieflyoutlines the present financial arrangementsof the Territory and the extent to which theywould be affected by Statehood.

COMMONWEALTH GRANTS

As described in Chapter 3, a feature of theAustralian federation is vertical fiscalimbalance caused by an inequality ofexpenditure responsibilities and revenuepowers between the levels of government.This results in the Commonwealth making alarge transfer of funds to the States andTerritories each year.

This transfer takes place in the form ofuntied grants of approximately $17B andtied grants of approximately $11B each year.

UNTIED GRANTS

The majority of untied grants are providedin the form of financial assistance grants.The size of the Pool of funds is agreed at thePremiers’ Conference (although theCommonwealth has the most influence onthis amount) and it is then distributed toeach jurisdiction according to relativitiesprepared by the CGC.

The principle used by the CGC thatunderlies this distribution is that alljurisdictions should be given the capacity toprovide an Australian average level ofservices on the assumption that eachjurisdiction imposes a similar level of taxes


10

and charges on their residents. This isknown as the principle of horizontal fiscalequalisation.

Without fiscal equalisation there would bedifferent classes of Australian citizensdepending on the jurisdiction where anindividual lived. Because of the higher costof providing services as outlined above, theNorthern Territory would have to levyhigher taxes or provide lower standards ofservice if there were no fiscal equalisation.

When the cost and revenue influences arecombined by the CGC to produce anestimate of the level of financial assistancegrants required to provide State-likeservices, the Territory is assessed asrequiring approximately five times the percapita grants received by the States. The nexthighest jurisdiction is Tasmania whichrequires about 1.5 times the average percapita share.

At the time of Territory Self-Government,similar arrangements to the present onesexisted to distribute untied funds to theStates. A grant was determined for theTerritory which was akin to those of theStates but separate from the State processes.

The Memorandum of Understanding alsoprovided for the Territory to receive thehigher of an additional grant of $20M or aspecial grant determined by the CGC.

The additional grant was to last for threeyears before being phased out over a furtherthree years. The special grant was modelledon the State arrangements which permittedthe States to make special claims forassistance over and above their usualentitlement.

The Territory applied for a special granteach year but for the first four years of Self-Government the additional grant wasgreater than the assessed special grant. In

1983-84 the Territory received the specialgrant but in 1984-85 the CGC assessmentwas that the Territory had been overfundedin previous years. The Commonwealth paidthe last additional grant of $5M but alsosought to recoup an amount of $12.6M forthe so-called overfunding.

Despite the Territory withdrawing furtherapplications for special grants, theCommonwealth instructed the CGC tocontinue with its reviews. This resulted in afurther $14.4M being recouped by theCommonwealth in 1987-88.

This recouping of funding by theCommonwealth failed to recognise the cyclicnature of State and Territory finances.Because the CGC processes involve a lag ofyears between the year under assessmentand when the assessment is done alljurisdictions are subject to significantpositive and negative assessments of theirfinancial requirements due to timing issuesalone. However, only in respect of theNorthern Territory has the Commonwealthdetermined to make negative adjustments toa current year’s grant for previous‘overfunding’.

The security that the Memorandum ofUnderstanding had provided had beenignored and was replaced by a generaldesire to move Territory funding to a moreState-like basis.

Consistent with this, the CGC was requiredto report on the effect of including theNorthern Territory in the States’ tax sharingpool in 1985. The CGC concluded that itwould not be appropriate for the Territory tobe included in the States’ tax sharingarrangements until such time as financialarrangements between the Territory and theCommonwealth were brought more intoline with those applying between theCommonwealth and the States.


11

At the 1985 Premiers’ Conference theCommonwealth expressed its preference forthe Northern Territory to be included in theStates arrangements from 1988-89 onwards,and instituted a series of changes whichwould assimilate the arrangements by thattime. In the meantime, the Territory’sgeneral revenue grant, was determined onthe same basis as, but separate from, theStates.

The major changes that occurred in thisperiod, some with only minimalconsultation with the Territory, were asfollows:

• some amounts for debt charges andhealth were absorbed into the generalrevenue grant and some amounts forroad maintenance and public workssupervision were transferred into thegeneral purpose capital payments;

• a final payment was made for accruedrecreation leave and furlough (longservice leave) entitlements of officerswho had transferred from theCommonwealth Public Service to theNorthern Territory Public Service.These had previously been funded bythe Commonwealth on an emergingcost basis;

• the Northern Territory Governmentand Public Authorities SuperannuationScheme was established in 1986. Newemployees of the Northern TerritoryPublic Service no longer joined theCommonwealth SuperannuationScheme and existing members wereencouraged to transfer. Even thoughthis move involved a shift of liabilitiesfrom the Commonwealth to theTerritory there was no compensationpaid; and

• fiscal restraint by the Commonwealthsaw large reductions in the level of

general capital-purpose assistance tothe Territory (a decline of 48.9% from1985-86 to 1988-89) and the States.

In 1988-89 the Territory was included in theState financial assistance grants pool.However, the level of funding determinedfor the Territory was significantly below thatwhich it had been receiving. It was agreedthat special revenue assistance would bepaid to the Territory to ease the transition tothe new lower levels of funding.

In 1989 a review of Northern Territory fiscaldisabilities was accepted by theCommonwealth and a supplementaryfinancial arrangement was instituted whichincluded the payment of special revenueassistance, a declining electricity subsidyand a write-off of some debt transferred atSelf-Government. After 1993 (the next majorCGC review) special revenue assistance wasprovided to a number of jurisdictions forvarious reasons. It was no longer the vehiclesolely for providing additional assistance tothe Northern Territory.

Accordingly, in the area of untied grantsthe Territory is now treated as a State withno special consideration of itsconstitutional status.

TIED GRANTS

The allocation of tied grants is inaccordance with the Commonwealth'snational policy objectives and isindependent of the constitutional status ofthe jurisdiction receiving the funding.Consequently, there would be no changein these arrangements upon the Territoryachieving Statehood.

REVENUE

Except for areas discussed under OtherMatters below, the Territory has had fullState taxing powers since Self-Government.


12

Accordingly, there is no reason why theTerritory’s policy on taxes and chargeswould be affected by Statehood.

TERRITORY BORROWINGS

The other major component of Territoryfunding is borrowings by the Territory inaccordance with Loan Councilarrangements. The Loan Council wasestablished in 1923 and has the role ofcoordinating public sector borrowingsunder voluntary arrangements.

At the time of Self-Government, theCommonwealth had a program ofborrowing on behalf of the States andproviding general purpose capital assistanceunder the Loan Council program.

The Territory was not included within thisprogram but had a separate program onsimilar terms. The Territory was not amember of Loan Council and only hadobserver status. In effect it was treated as aCommonwealth statutory authority suchas Qantas.

It increasingly became apparent in the1980s that this was an anomaloussituation, particularly having regard to theobligations of the Territory to perform allthe State type functions.

In 1992 a new financial agreement wasreached which admitted the NorthernTerritory and the Australian CapitalTerritory as members of Loan Council.This required legislation to be enacted inall Australian parliaments and wastherefore recognition by all governmentsthat the Territory should be placed onequal footing with the States.

The financial agreement also removed theCommonwealth’s power to borrow onbehalf of the States and abolished some

restrictions on the States’ ability to borrow intheir own name.

OTHER MATTERS

As mentioned previously, at the time of Self-Government not all State responsibilitiesand powers were transferred to theNorthern Territory. Whether and to whatextent the remaining powers andresponsibilities may be transferred to theTerritory with a grant of Statehood is yet tobe determined.

In 1995, a Commonwealth and NorthernTerritory taskforce on economic andfinancial implications of Statehood for theNorthern Territory identified four mattersthat may have a financial impact upon agrant of Statehood. A summary of thesematters follows.

As a general comment any benefits ordisadvantages that arise from differencesin constitutional status are likely to betaken into account by the CGC whendetermining a jurisdiction’s relativity.

Consequently, changes in the Territory’spowers or responsibilities will result in adifferent assessment of needs by the CGC.For example, transfer of a power thatincreases revenue capacity will reduce theassessed need for Commonwealth grants.Total funding would remain more or lessthe same but the balance between own-source revenue and Commonwealthgrants would change.

URANIUM MINING

Unlike in the States, the Commonwealthpresently retains ownership and controlover uranium resources in the Territory.Under this arrangement, theCommonwealth collects royalties onuranium mining and provides a grant inlieu of royalties to the Territory.


13

This grant is less than the amount theTerritory would raise if it were able to levyaverage royalty rates applied in the States orunder the Territory Mineral Royalty Act. Thefiscal equalisation processes recognise thislower capacity to raise revenue byattributing a capacity equal to the amountreceived as payment in lieu of uraniumroyalties.

If control was handed to the Territory whichresulted in greater revenue it would largelybe offset as the increased capacity would berecognised by the CGC and the level offinancial assistance from theCommonwealth would fall.

NATIONAL PARKS

The responsibility for national parks in theTerritory (Kakadu and Uluru) presentlyrests with the Commonwealth, unlike in theStates. A transfer of these parks withStatehood would require the Territory totake over the responsibility for the upkeep ofthe parks, but would also give it access tothe revenue generated by the parks. Oncurrent conditions this would represent anet cost to the Territory. However, thesecosts would be recognised by the CGC andbe at least partially offset by a change to thelevel of financial assistance.

ASHMORE AND CARTIER ISLANDTERRITORIES

The uninhabited territories of the Ashmoreand Cartier Islands were deemed to be partof the Northern Territory prior to 1978. OnSelf-Government, the Commonwealthassumed responsibility for these territoriesalthough its legislation provided for theapplication of most Northern Territory lawsto these territories.

If they were reincorporated into theTerritory upon Statehood, there would bea small increase in administration costs

but the Territory would also gain access torevenues flowing from the development ofmineral and energy resources in the area.

ABORIGINAL LAND RIGHTS(NORTHERN TERRITORY) ACT 1976

Under section 63 of the Aboriginal LandRights (Northern Territory) Act 1976, theCommonwealth is required to pay anamount into the Aboriginal Benefits Reserve(the Reserve). The amount paid is equivalentto the value of royalties received by theCommonwealth or Northern Territory inrespect of all mining undertaken onAboriginal land.

As the Commonwealth has retained controlof uranium, the bulk of the royalties that itreceives is paid into the Reserve. Foroperations where royalties are paid to theTerritory, an amount equivalent to theroyalties received by the Territory is paid bythe Commonwealth into the Reserve.

For 1998-99 payments into the Reserve areestimated to be $33.5M.

The funds in the Reserve are distributed tobenefit the Aboriginal people directlyaffected by mining operations, otherAboriginal groups in the Territory and tocover the administrative costs of theNorthern Territory Land Councils.

If the Act was patriated to the Territorywith Statehood, the arrangements bywhich the Commonwealth wouldcontinue to contribute to the Reservewould need to be reviewed to ensure thatthere was no adverse financial impact onthe Territory.

Two options are for the Commonwealth toestablish a new legislative basis for thepayments or for the Territory to make thepayments and be compensated through thefiscal equalisation process.


14

CONCLUSION

In conclusion, there is unlikely to be anysignificant budgetary effect of a grant ofStatehood to the Territory.

The Territory attends Premiers' Conferenceon an equal footing with the States, it is a fullmember of Loan Council, and its grants aredetermined on the same basis as the States.

Decisions on all existing taxes and chargesand expenditure responsibilities will beunaffected by Statehood.

While there are some areas where currentarrangements between the Commonwealthand the Northern Territory differ from thosebetween the Commonwealth and the States,the fiscal equalisation processes whichoperate in Australia mean there would belittle change to the Territory's overallfinancial position.

15

Chapter 3

RECENT FISCAL DEVELOPMENTS

Commonwealth financial assistance to theNorthern Territory has increased by 20.6% inreal terms over the period 1989-90 to 1997-98.This includes the revenue replacement paymentsmade by the Commonwealth as a result of theHigh Court decision on business franchise fees.However, the Territory population has risen by17% over this time resulting in only a slightincrease in real assistance per capita.

Over the period 1989-90 to 1997-98, Territoryown-source revenue has increased 6.8% and theStates own-source revenue has increased 8.6%.Commonwealth grants to the Territory haveincreased by 3% on a per capita basis and 19.4%per capita for the States. The increase to theStates is not a real increase in grants, but onlythe effect of on-passing revenue replacementpayments. In 1998-99, Commonwealth grantsper capita will be 2% higher for the Territorythan in 1989-90 and total revenue is expected toremain constant in real terms. This reflects aslight decrease in Territory own-source revenueoffset by an increase in Commonwealth grants.

The scope of the data in this chapter has notchanged substantially from last year even thoughthe Australian Bureau of Statistics (ABS) hasclassified all universities as multi-jurisdictional.There is some doubt about the accuracy of thedata and its comparability over time.Accordingly, the data in this chapter continues toinclude universities as part of State and Territoryexpenditure.

EXPENDITURE

Between 1989-90 and 1997-98, totalexpenditure by the Territory increased by18.2%, whereas total expenditure by the

States increased by 14.8%. As shown inFigure 3.1, Territory expenditure is expectedto decrease significantly in 1998-99 after highexpenditure in 1997-98, predominantlyresulting from reduced final consumptionand capital expenditure, and a drop ininterest payments.

Figure 3.1

TOTAL EXPENDITURE

0

1.5

1.6

1.7

1.8

1.9

2.0

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99e 0

60

65

70

75

80

85

90

95


Total expenditure by the public sector(shown in Figure 3.1) can be divided intotwo major categories: current expenditureand capital expenditure. Currentexpenditure includes all running costs ofgovernment programs, with the majorcomponent being personnel costs (Figure3.2). Capital expenditure encompassesoutlays for capital equipment and publicworks (Figure 3.3).

Over the period 1989-90 to 1997-98, currentexpenditure of the Territory public sectorincreased by 21.1%, whereas the currentexpenditure of the States increased by 14.7%.Current expenditure in the Territory is

Six States$(98-99)B

Northern Territory

Six States

NT$(98-99)B


16

expected to total $1.6B in 1998-99, which is asignificant decrease from 1997-98. Thisfollows substantial real increases during thetwo years since 1995-96 due to demandincreases in health, correctional services andin particular the impact of the Katherineregion floods in 1997-98.

Figure 3.2

CURRENT EXPENDITURE

0

1.3

1.4

1.5

1.6

1.7

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99e 0

55

60

65

70

75

80


Figure 3.3

CAPITAL EXPENDITURE

0

200

250

300

350

400

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-9898-99e0

10

12

14

16

18


Capital expenditure has borne the bulk ofbudgetary restraint over the period from1989-90 although there has beensignificant increases in some years.Territory capital expenditure hasincreased only 4.7% compared with a riseof 15.1% in the States. The modest growth

in Territory Government capitalexpenditure has been offset by strongCommonwealth and private sectorexpenditure. In 1998-99 there is anexpected 22.6% decrease in real capitalexpenditure after an abnormally largecapital works program in 1997-98.

REVENUE

Revenue received by the States andTerritories is comprised of two majorcomponents:

• own-source revenue which consists oftaxes, charges and royalties levied byeach jurisdiction; and

• grants from the Commonwealth.

Figure 3.4

TOTAL REVENUE

0

1.4

1.5

1.6

1.7

1.8

1.9

2.0

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99e 0

60

65

70

75

80

85


Due to the vertical fiscal imbalance whichexists between the two tiers of government,State and Territory own-source revenues aresupplemented by financial assistance grantsfrom the Commonwealth.

Between 1989-90 and 1997-98, total revenuefor the Northern Territory public sector roseby 17.7%, as shown in Figure 3.4. Over thesame period, the total revenue of the Statesrose by 18.3%. The variation is partlyexplained by the differential impact of

Northern Territory

Six States

Northern Territory

Six States

NT$(98-99)B

NT$(98-99)M

Six States$(98-99)B

Six States$(98-99)B

Northern Territory

Six States

NT$(98-99)B

Six States$(98-99)B

Recent Fiscal Developments

17

Commonwealth funding decisions, andpartly by the fact that the Territory has alimited base from which to raise revenue,despite continued economic and populationgrowth over the period.

TERRITORY REVENUE

Due to the High Court decision on businessfranchise fees which resulted in a loss ofapproximately one-third of the Territory’sown-source revenue, a rise of 6.8% only hasbeen recorded between 1989-90 and 1997-98(Figure 3.5). During the same period theStates raised their revenue collections byonly 8.6%. If the revenue replacementpayments were included as own-sourcerevenue, revenue growth over the period1989-90 to 1997-98 would be 34.5% for theTerritory and 21.6% for the States. Thiscomparison illustrates the extent to whichbusiness franchise fees have contributed togreater Territory own-source revenuegrowth compared with the States and therelative disadvantage of the Territory fromtheir loss.

Figure 3.5

OWN-SOURCE REVENUE

0

250

300

350

400

450

500

550

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99e 0

30

35

40

45

50

55

60

65

70


Figure 3.6 shows that over the past decadethe Territory’s revenue per capita hasapproached the level of the States up to1996-97 but has sharply decreased in 1997-98and 1998-99 due to the loss of business

franchise fee revenue. Territory own-sourcerevenue per capita is budgeted to decreaseby 4% in 1998-99, after an abnormally highvalue of stamp duty transactions in 1997-98.This highlights the influence of a smallrevenue base where single transactions orchanges in taxes can dramatically affect theper capita revenue raised, leading to greatervariability in receipts than experienced byother jurisdictions.

Figure 3.6

OWN-SOURCE REVENUE PER CAPITA

0

1 500

1 800

2 100

2 400

2 700

3 000

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-9898-99e


COMMONWEALTH GRANTS

During the mid to late 1980s the Territoryexperienced large reductions in the level ofassistance from the Commonwealth. Since1991-92 the amount of grants has increased,but at a lower rate than the States. Theoverall increase between 1989-90 and1997-98 was 20.6% for the Territorycompared with 30.9% for the States. Anincrease of 0.7% in the real level of assistanceis expected for the Territory in 1998-99.

At the 1996 Premiers’ Conference, it wasagreed that the States and Territories wouldcontribute $619M to the Commonwealth’sdeficit reduction program in 1996-97, $640Min 1997-98, and $300M in 1998-99. Tasmaniaand the Australian Capital Territorydeferred half of their contribution from1997-98 to 1998-99. The payment of fiscal

Northern Territory

Six States

Northern Territory

Six States

$(98-99)pc

NT$(98-99)M

Six States$(98-99)B


18

contributions in 1998-99 by all jurisdictionswas a matter of heated discussion prior tothe adjournment of the 1998 Premiers’Conference. The Commonwealth expectsthat the last tranche of the payment will bemade in 1998-99 although the situation withTasmania and the Australian CapitalTerritory is unclear. In 1998-99 theTerritory’s contribution will be $3M.

Figure 3.7

COMMONWEALTH GRANTS

0

1.1

1.2

1.3

1.4

1.5

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99e 0

25

30

35

40


Figure 3.8

COMMONWEALTH GRANTS PER CAPITA

0

7 250

7 500

7 750

8 000

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-9898-99e 0

1 600

1 750

1 900

2 050

2 200


To account for the changes in the populationof the Territory and the States, a comparisonof Commonwealth grants per capita isuseful (Figure 3.8). Over the period 1989-90to 1997-98, Commonwealth grants per capita

to the Territory have increased 3% in realterms, even with the revenue replacementpayments treated as a Commonwealthgrant. Over the same periodCommonwealth grants per capita to theStates increased by 19.4%.

The net effect of all these influences onexpenditure and revenue is shown in Figure3.9which also highlights the change in netdebt over the period.

The underlying trends shown in Figure 3.9are that expenditure and revenue are risingin real terms at a slow rate and there is littlechange in the annual increase in net debt.

Figure 3.9

NORTHERN TERRITORY BUDGET

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99e


GROSS AND NET DEBT

Debt is a necessary source of funding forgovernments. The Territory raises its debtthrough the Northern Territory TreasuryCorporation which issues inscribed stockand other debt securities to domestic andoffshore financial institutions and to theAustralian public.

A three year debt reduction policy toreduce gross debt to below $2B by the endof 1998-99 had commenced in 1996-97.This policy was adopted in light of the

Northern Territory

Six States

Six States

Northern Territory

NT$(98-99)B

NT$(98-99)pc

Six States$(98-99)B

Six States$(98-99)pc

Increase in Net Debt

Revenue

Expenditure

$(98-99)B


19

relatively high levels of cash balances andthe fact that interest earned on these cashbalances is less than the interest paid onthe borrowings.

However, a decision has been made to bringforward the reduction of gross debt so it willbe below $2B by the end of 1997-98. Afurther debt reduction program willcommence in 1998-99. It is planned to reducedebt levels by $10M in each of the first twoyears and $20M in 2000-01.

TERRITORY DEBT

At 30 June 1997, the Northern Territorypublic sector had a gross debt of $2 074M,offset by financial assets of $763M, leavingnet debt of $1 311M. Borrowings, advancesand cash balances are the key components ofnet debt.

It is expected that, at 30 June 1998,Northern Territory gross debt will havedeclined to $1 999M, offset by financialassets of $542M, leaving a net debt of$1 457M.

By 30 June 1999, Territory gross debt isexpected to be $1 989M, offset by financialassets of $520M, leaving net debt at$1 469M.

This Government debt data is tabulatedin Figure 3.10.

Figure 3.10

NORTHERN TERRITORY GOVERNMENT DEBT

GrossDebt

FinancialAssets

Net Debt

$M $M $M

As at 30 June 1997Consolidated Total 2 074 763 1 311



Source: Public Sector Financial Assets and Liabilities, ABS Cat. No.5513.0; and Northern Territory Treasury.

Figure 3.11 shows the trend over time ofTerritory gross and net debt. It shows thegrowth associated with major projects suchas the construction of Channel Island powerstation, the State Square project, Ayers RockResort, the provision of infrastructure at EastArm Port and the decision to reduce grossdebt from 1996-97 onwards.

Figure 3.11

NORTHERN TERRITORY GROSS ANDNET DEBT AS AT 30 JUNE

0.0

0.5

1.0

2.5

2.0

3.5

1987 1989 1991 1993 1995 1997 1999

$B

Gross Debt

Net Debt

Yulara

Channel Island State Square

East Arm Port

Source: Public Sector Financial Assets and Liabilities, ABS Cat. No.5513.0; and Northern Territory Treasury.

INTERSTATE COMPARISONS

The 1998-99 financial year will result in achange in the Territory’s gross and net debtposition relative to the States. Thecomparisons below are based on publisheddata. Comparisons for 1998-99 are notpossible, as data for the six State averagewas unavailable at time of printing.

Composition of ComparativeBudget Structure

The composition of public sector budgetsvaries from State to State. As shown inFigure 3.12, the structure of the NorthernTerritory budget is not dramaticallydifferent from that of the average of theStates except for the ratio of Commonwealthgrants to own-source revenue, where theTerritory has a much higher reliance onCommonwealth revenue, due to itsexpenditure disability.


20

Figure 3.12

COMPARATIVE BUDGET STRUCTURES

Northern Territory Six StateAverage

1997-98 1998-99 1997-98

% % %

Total Expenditure 100.0 100.0 100.0

Current Expenditure 84.1 86.7 81.9Capital Expenditure 15.9 13.3 18.1

Less

Total Revenue 92.4 99.3 94.5

Territory Revenue 18.4 19.6 51.0Commonwealth

Grants74.0 79.7 43.5

Equals

Total Financing 7.6 0.7 5.5

Increase in Debt -3.6 -0.5 1.5Decrease in Financial

Assets11.2 1.2 -1.0

Use of Provisions - - 5.0

Source: Government Financial Estimates, Australia, ABS Cat. No.5501.0;and Northern Territory Treasury.

Comparison of Net Debt toTotal Revenue

There is considerable diversity amongjurisdictions in the ratio of net debt to totalrevenue. As at 30 June 1997, these ratiosranged from –27.3% in Queensland, up to138.2% in Tasmania. The Northern Territory,at 76.2%, was above the weighted averagefor the States (61.0%). At 30 June 1998, theTerritory’s ratio is expected to increase to83.3%.

There is considerable movement in the netdebt position of some States as aconsequence of active debt reductionpolicies. At 30 June 1995, Victoria’s net debtas a proportion of total revenue was 189%,the highest of all jurisdictions, but at30 June 1996 this had fallen dramatically to116%. The figure for 30 June 1997 is loweragain at 71%. This change alone had asignificant effect on the six State weighted

average which has decreased from 103.1% at30 June 1995 to 76.7% at 30 June 1996 and61% at 30 June 1997.

In 1995 the Territory was slightly below thesix State weighted average whereas in 1997,it had moved to being above average, eventhough the ratio of net debt to revenue wasdecreasing. This demonstrates the influenceof a large State like Victoria on interstatecomparisons, and the difficulty that ariseswhen considering interstate comparisons inisolation.

Figure 3.13

NET DEBT AS A PROPORTION OFTOTAL REVENUE 30 JUNE 1997

-40

-20

0

20

40

60

80

100

120

140

160

Qld Vic NSW NT WA SA Tas

Six State Average

%

Source: Government Financial Estimates, Australia, ABS Cat. No. 5501.0;Public Sector Financial Assets and Liabilities, ABS Cat. No.5513.0; and Northern Territory Treasury.

Comparison of Interest asProportion of Total Revenue

A similar picture emerges when interest as aproportion of total revenue is compared. In1995-96 the Territory ratio of interest to totalrevenue was 12.7%, well below the six Stateweighted average of 14.3%. By 1997-98, theTerritory ratio had fallen to 10.6%, the sameas the average of the States. The reduction inthe States is due to the combined influencesof a significant decrease in Victoria’s interestpayments and the increasing use of off-Budget financing techniques by the largerjurisdictions. It further highlights thedifficulties in making interstate comparisons.

Six State Weighted Average


21

The Territory’s interest payments have beendeclining over recent years due to thecombined influences of low levels of newborrowings, and the refinancing of maturingdebt at lower rates of interest. In 1998-99, theTerritory’s interest payments are estimatedto be $178M, down from $184M in 1997-98implying a debt servicing ratio of 10%.

Figure 3.14

GROSS INTEREST PAYMENTS TOTOTAL REVENUE 1997-98

0

5

10

15

20

25

Qld NSW Vic NT WA SA Tas

%

Source: Government Financial Estimates, ABS Cat. No. 5501.0; andNorthern Territory Treasury.

OUTLAYS BY GOVERNMENT PURPOSE

Figure 3.15 shows the breakdown of outlaysinto selected Government PurposeClassifications (GPC) as estimated by theABS for 1997-98. The Other categoryincludes general public services (which isthe major component), social security andwelfare, other economic affairs and otherpurposes. The transport and industrycategory includes the fuel and energy,agriculture, forestry, fishing and hunting,mining, manufacturing and constructionand transport and communicationsclassifications.

The GPC figures show that the proportion ofTerritory outlays in the main functionalcategories is comparable with that of theStates in most areas. The Territory spends alarger proportion of its budget in the areas

of recreation and culture, housing andcommunity amenities, public order andsafety, and other.

Figure 3.15

OUTLAYS BY PURPOSE AS A PROPORTION OFTOTAL OUTLAYS – 1997-98

0 5 10 15 20 25 30

Other

Education

Health

Transport and Industry

Public Order andSafety

Housing andCommunity Amenities

Recreation and Culture

%

Northern Territory

Six States

Source: Government Financial Estimates, ABS Cat. No.5501.0.

The differences between the Territory andthe States can be explained partly byexamining the Commonwealth GrantsCommission assessments. TheCommission has identified a number offactors which significantly affect costs.While most of these factors, such as socialcomposition, apply across mostgovernment functions and influence thelevel of total outlays, the scale factorsignificantly affects those areas wherethere is a high component of policy andhead office functions as reflected in theOther category of Figure 3.15. The effect ofthe scale factor is sufficient to alter theproportions of expenditure between themain functional components whencompared with the States distribution.

In the large service delivery areas of healthand education, Territory outlays per capitaare higher than for the States. Education,where the services provided are roughlycomparable to the States, the proportion oftotal outlays spent on this function isslightly lower than the States.

Six State Weighted Average


22

Within the health category, however, thesituation is different because in key areas,the services provided in the Territory are notcomparable with the States. The almostcomplete absence of any private medicalservices outside of the two main centres inthe Territory, and the relative health statusof the population in those areas, requiressignificant additional Territory expenditurein this category. However, even theseadditional resource requirements are notsufficient to offset completely the aboveaverage proportion of outlays allocated tothe Other category.

Figure 3.16, Figure 3.17, Figure 3.18 andFigure 3.19 show outlays in real terms forselected categories over the years 1989-90 to1997-98, and indicate that:

• the Territory’s and States’ spendingon education has increased by 62.1%and 27.6% respectively. The Territoryincrease is consistent with theincrease in student numbers over theperiod;

Figure 3.16

EDUCATION

0

100

200

300

400

500

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-980

4

8

12

16

20

24

28

32


• health spending in the Territory hasincreased 70.3% over the period dueto increased demand and expanded

services to Aboriginal people,whereas health expenditure by theStates has risen only 29.7% over thesame period;

Figure 3.17

HEALTH

0

180

220

260

300

340

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 0

10

12

14

16

18

20


• Territory spending on public orderand safety has increased 40.7%compared with 30.7% by the States;and

Figure 3.18

PUBLIC ORDER AND SAFETY

0

120

140

160

180

200

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 0.0

4.5

5.0

5.5

6.0

6.5

7.0


• spending on transport and industryhas fallen 17.8% in the Territory andincreased 18.4% in the States (theStates’ average in this area has beenaffected by the sale of public utilitiesby some states).

NT$(98-99)M

Northern Territory

Six States

Six States$(98-99)B

Northern Territory

Six States

NT$(98-99)M

Six States$(98-99)B

Six States$(98-99)B

Northern Territory

Six States

NT$(98-99)M


23

Figure 3.19

TRANSPORT AND INDUSTRY

0

100

200

300

400

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 0

5

10

15


Note: The sharp decline in 1995-96 outlays for the six states reflectsasset sales, predominantly by Victoria’s sales which were in theorder of $10B.

Six States$(98-99)B

NT$(98-99)M

Six States

Northern Territory


24

APPENDIX

ANOMALIES IN THE DATA

The information in this chapter is sourcedfrom the ABS Government FinancialEstimates publication, released annually inNovember.

However, the Territory has somereservations over the accuracy of the data inrespect of the new multi-jurisdictional sectorand the treatment of a significant source ofrevenue.

Up until the latest publication, universitydata was included as part of States andTerritories outlays. However, in 1997 theABS reclassified universities to a new multi-jurisdictional sector. The latest ABSpublication excludes university data from1992-93 from individual State, Territory andLocal Governments data.

As a result, in the 1997 ABS publication,adjustments have been made to States andTerritories expenditure by:

• a reduction in total State and Territoryexpenditure by moving universitiesinto the multi-jurisdictional sector;and

• a reduction in Commonwealth grantsto States and Territories for grants touniversities.

By comparing the 1997 and 1996 publicationit is possible to identify the adjustments dueto the changed treatment of universities.

Figure 3.20 details the changes toexpenditure and Commonwealth grantsfrom the transfer of the university data tothe multi-jurisdictional sector.

Figure 3.20

ADJUSTMENTS TO STATE ANDTERRITORY DATA

ExpenditureCommonwealth

Grants

NT Six States NT Six States

$M $M $M $M

1992-93 -20.0 -2 705 -27.8 -1 733

1993-94 -38.7 -3 505 -32.0 -3 504

1994-95 -51.7 -3 880 -31.1 -3 807

1995-96 -52.5 -3 324 -32.8 -4 102

1996-97 -49.0 -5 917 -34.5 -3 808

Source: Government Financial Estimates 1996--97 and 1997-98, ABSCat. No 5501.0,

The reduction in State expenditure from1992-93 to 1996-97 varies from $2.7B toalmost $6B. It does not seem plausible thatexpenditure for the States university sectorwould almost double in five years as thepublication seems to suggest.

Similarly, the movement between years isquestionable. The States expenditure in1995-96 fell from $3.9B to $3.3B. However, inthe same year, the adjustment for grants touniversities fell $4.1B. If these adjustmentsare accepted as accurate, then it appears thatin 1995–96, $800M more was received foruniversities in Commonwealth grants thanwas recorded as the expenditure onuniversities.

In 1992-93, the difference in Commonwealthgrants between the two publications differby $1.7B but for the following years, thisincreases from $3.5B to $4.1B which seems tosuggest further anomalies in the data. TheTerritory has been attempting to validatethese adjustments from other sourcesalthough more work is required.


25

The ABS data for the Territory in respect ofuniversities contains errors in the treatmentof transactions and backcasting. Currentgrants made to Northern TerritoryUniversity from the Northern TerritoryEducation and Training Authority had notbeen backcast beyond 1996-97. The ABS hasbeen advised of the revision required forfuture publications.

The apparent inaccuracies in the ABSpublication warrant closer attention and theTerritory encourages the ABS to reconsiderthe way in which university data is backcast.

The other anomaly in the data is thetreatment by the ABS of the Commonwealthrevenue replacement payments which havebeen established following the High Courtdecision to render State and Territorybusiness franchise fees invalid.

Even though States and Territories no longerhave the power to levy this tax and theCommonwealth has extended its excise andwholesales tax arrangements to recover thelost revenue, the ABS has decided to treatthese payments from the Commonwealth asState and Territory own-source revenue.

In the Territory’s view, the ABS datapublished in 1997 is flawed as a result ofthese anomalies. Accordingly, the followinganalysis is based on adjusted data whichdoes not remove university expenditure intothe multi-jurisdictional sector and whereCommonwealth revenue replacementpayments are not treated as State andTerritory own-source revenue. The scope is

Uniform Presentation Framework asoutlined in Chapter 10.

DEFINITIONS AND ASSUMPTIONS

Figures for the Territory 1997-98 Budgetoutcome and 1998-99 estimates are takenfrom latest available data under the UniformPresentation Framework.

All data are expressed in 1998-99 dollars,calculated using the gross non-farmprice deflator from the ABS for years upto 1996-97 and a derived deflator usingthe parameters in the National FiscalOutlook 1998 for 1997 and 1998. All datafor 1997-98 and 1998-99 are estimates.

Other adjustments have been made to theABS format to conform to the Territory'spreferred presentation, as outlined inChapter 10. Policy lending has been treatedas financing transactions, rather than as partof capital expenditure. (However, , Figure3.17 and Figure 3.18 showing GovernmentPurpose Classifications are based on theusual ABS concept of outlays.)

For similar reasons, discussion ofCommonwealth assistance in this chapterdealt with Commonwealth grants only. Thisis because the remaining component of netCommonwealth payments and net advancesreceived, are included as part of the totalfinancing requirement of the Territory.Movements in the level of net advances areintegral to the assessment of changes in debtfor each jurisdiction.

27

Chapter 4

NATIONAL TAX ISSUES

During 1997 two tax issues emerged which hadsignificant implications for the Territory.

The first of these was the High Court decisionwhich found that New South Wales tobaccofranchise fees were invalid under section 90 of theAustralian Constitution. This decision cast doubton the validity of all franchise fees levied by theStates and Territories.

In order to maintain State and Territoryrevenues, the Commonwealth used its legislationto apply a State surcharge to the affectedproducts, returning the revenue raised to theStates and Territories.

The second issue concerned national tax reform.The States and Territories had initiated a processto review their own taxation arrangements witha view to improving the efficiency and operationof these taxes. In late 1997, the Prime Ministerclearly placed national tax reform on theCommonwealth Government’s agenda.

The Commonwealth announcement provided theopportunity for a comprehensive review oftaxation arrangements at both levels ofgovernment, and specifically recognised the needto accommodate improved Commonwealth-Statefinancial relations within that reform process.

THE HIGH COURT DECISION

On 5 August 1997, the High Court foundthat New South Wales tobacco franchise feeswere invalid under section 90 of theAustralian Constitution. While the decisiononly concerned New South Wales tobaccofranchise fees, it created significant doubt asto the constitutional validity of businessfranchise fees on tobacco, fuel and liquor forall States and Territories. Consequently, theStates and Territories determined that they

should cease collecting all business franchisefees.

As a result of this decision, States andTerritories faced an annual revenue shortfallin excess of $5B ($102M for the NorthernTerritory, including the liquor levy). Therewas also the possibility that refund claimsfor fees paid in the past could be madeagainst the States and Territories as a resultof the decision.

In order to protect the financial position of theStates and Territories, the Commonwealth andStates and Territories, agreed to implement asafety net package utilising theCommonwealth’s tax powers to collectrevenue previously raised by the States andTerritories and introducing Commonwealthwindfall gains tax legislation to protect theStates and Territories from refund claims forpreviously paid business franchise fees.

Under the safety net arrangements, theCommonwealth increased the rates of excise(for petroleum and tobacco) and wholesalesales tax (for liquor) sufficiently to raise theequivalent amount of revenue previouslyraised by the States and Territories businessfranchise fees. The additional revenuecollected by the Commonwealth is returnedto the States and Territories as revenuereplacement payments, and distributedbetween the States and Territories based onthe Commonwealth Grants Commission’srelativities for each product.

At the time of negotiating the safety netarrangements, all jurisdictions agreed that theeffectiveness and ongoing appropriateness ofthe arrangements would be reviewed withinsix months.


28

States and Territories have, or will, repealthe relevant sections of their businessfranchise fee Acts, with effect from the datesat which the increases in Commonwealthexcise and wholesale sales tax wereimposed, on each of the affected products.Steps are currently being taken to repeal therelevant sections of the Northern Territory’sBusiness Franchise Act.

HOW THE SAFETY NET WORKS

Commonwealth tax rates on liquor, tobaccoand petroleum, the same products aspreviously covered by business franchisefees, have been increased with effect from 6August 1997 (Figure 4.1).

Figure 4.1

COMMONWEALTH TAX RATES

Product Tax base Surcharge

Petroleum Excise/ customs 8.1 cents per litre

Tobacco Excise/ customs $2.65/kg plus 50.32%of final wholesale price(a)

Liquor Wholesale sales tax 15% age points

(a) Apart from this ‘hybrid’ measure, companies may instead elect to payexcise and customs duty at the rate of $147.90/kg (where there are lessthan 1 200 cigarettes per kg) or $265.73/kg (where there are more than1 200 cigarettes per kg).

The Commonwealth only retains sufficientrevenue from the safety net to meet itsadministrative costs. All remaining revenueis returned to the States and Territories.

As the Constitution requires theCommonwealth to apply its taxes uniformlyacross Australia, the increases in excise andsales tax had to be the same in each State orTerritory despite the fact that varying rateshad applied between jurisdictions under thebusiness franchise fee regime. Oneconsequence of this limitation was that insome jurisdictions the uniform increaseswere higher than particular franchise feesthey were replacing. This was necessary toavoid a loss of revenue for the jurisdictionwith the highest rate of tax.

In order to minimise as far as possible anyprice effects of the changed arrangement,the States and Territories undertook toreturn any excess revenues (above thatwhich would have previously been raised)to taxpayers.

Under this arrangement, priority was givento ensuring that petroleum, users (includingoff-road diesel users who previouslyqualified for rebates or exemptions frompetroleum franchise fees) were notdisadvantaged as a result of implementingthe safety net. A consequence of this hasbeen that for tobacco and, to a lesser extentliquor, some minor price increases havebeen unavoidable in some jurisdictions.

The Australian Competition and ConsumerCommission will monitor the situation toensure that no unwarranted price effectsoccur.

A windfall gains tax of 100% has beenintroduced by the Commonwealth, toprotect State and Territory budgets againstrefund claims on past business franchise feepayments. This legislation seeks to ensurethat the windfall gains tax does not give riseto double taxation.

Excise and customs rates are generallyvaried twice each year to account formovement in the Consumer Price Index(CPI). These variations usually occur eachFebruary and August. The CPI movementwill also apply to the State surchargecomponent of the excise and customs rateson petroleum and tobacco.

HOW THE ARRANGEMENTS WORKIN THE NORTHERN TERRITORY

The Territory Government returns excessrevenues collected by providing subsidieson petroleum products, and some liquorproducts. Subsidy arrangements have beenestablished that involve the least possibleinconvenience to Territory consumers.

National Tax Issues

29

Petroleum Products

Under the former business franchise feeregime, a fee of 7 cents per litre applied inthe Territory on petroleum productspurchased for retail sale in the Territory.Given that the State surcharge componentwas 8.1 cents per litre, subsidyarrangements have been implemented toprovide a general subsidy of 1.1 cents perlitre to wholesalers selling petroleumproducts in the Territory. In addition,consumers of off-road diesel continue to beeligible for a further direct subsidy of 2 centsper litre to mirror the former off-road dieselrebate.

As the subsidy arrangements effectivelyremove any impact from the highersurcharge, there is no reason why petrolprices to the majority of consumers shouldhave been affected by the changed taxationarrangements.

Liquor

The increase in the Commonwealth sales taxrate on alcoholic beverages was notsufficient to replace the loss of the Territorylicence fee and the liquor levy. For thisreason, no subsidies are provided in respectof full strength liquor products. However,full strength liquor prices in the Territoryshould have fallen as a result of the loweroverall tax rate applying to these products.

The impact of the new arrangements variedbetween products depending on the level ofthe previous tax rate. For example, thechanged tax arrangements should havereduced full strength beer prices by 5%,whereas cask wine prices should have fallenby more than 20%.

Subsidies are provided by the TerritoryGovernment to licensed wholesalers tocontinue the previous low tax status of low

strength alcohol so that low alcohol prices

remain materially unaffected and below theprice of full strength products.

In addition to the above generalarrangements, further subsidies have beenprovided by the Territory Government toroadside inns and clubs on full strength andlow strength alcohol products to restore, asfar as feasible, the advantageous positionthey enjoyed due to their eligibility forconcessional fee rates under the businessfranchise fee regime. The special subsidywill be restricted to roadside inns, which arenot connected to mains power.

While the new tax rates do not recoversufficient revenue to replace the Territory’sliquor levy, the States have agreed tocompensate the Territory for most of theshortfall. This meant that the alcohol-relatedprograms previously funded via the liquorlevy, such as the Living with Alcoholprogram, are able to be maintained.

Tobacco

Following consultation with the tobaccoindustry, a surcharge was applied at a levelwhich did not require subsidies to bereturned to the industry by the States andTerritories. Fundamentally this was possiblebecause the franchise fee rate previouslyapplying to tobacco was generally uniformamongst the States and Territories.

However, there were differences betweenthe base used to calculate business franchisefees (the value of the product) and the baseused by the Commonwealth in applyingexcise (the weight of product). Followingindustry representations concerning theimpact this change may have had ondifferent manufacturers, it was agreed inSeptember 1997 to modify the surchargearrangements to enable a hybrid system(part weight based, part value based) to beadopted.

As a consequence of the levels at which thereplacement tax rates for the differentproducts were set, the surcharge on tobacco


30

is designed to raise additional revenues tofund shortfalls faced by some jurisdictionson petroleum or liquor. The additionalrevenues equate to an increase ofapproximately 5% in the overall tax take (orabout 2 to 3% increase in prices).

SIX MONTH REVIEW

At the time of negotiating the safety netarrangements, all jurisdictions agreed thatthe effectiveness and ongoingappropriateness of the new arrangementswould be reviewed within six months.While the review is yet to be finalised andrecommendations considered bygovernments, there are two observationsthat can be made:

• based on collections to date, it appearsthat the safety net surcharge rates forpetroleum, tobacco and liquor are set atappropriate levels to meet estimatedongoing revenue requirements(although some uncertainty remainsbecause of seasonal patterns); and

• all States and Territories will suffersignificant revenue shortfalls in 1997-98due to the transition from the businessfranchise fee regime to the newarrangements.

REVENUE SHORTFALL IN 1997-98

All jurisdictions (including the NorthernTerritory) are expected to suffer a revenueshortfall in 1997-98 associated with thechanged tax arrangements. The Territory’sestimated shortfall for 1997-98 is $10M. Thisshortfall can be primarily attributed to:

• an initial tax-free period in the transitionfrom the business franchise fee regimeto the safety net arrangements. Duringthis period franchise fees were imposedat the industry level but never remittedto governments. The losses in thisperiod were also exacerbated by greater

than normal stock clearances by tobaccocompanies; and

• the Territory receiving an inadequateshare of fuel revenues under the safetynet arrangements. The safety netrevenues collected by theCommonwealth are distributed inaccordance with set shares of revenuecapacity determined by theCommonwealth Grants Commission,but the fuel subsidy schemes enteredinto by each jurisdiction providesubsidies to the petrol companies basedon the actual sales within eachjurisdiction.

Unfortunately, the notional salesascribed to the Territory by these setshares have been less than the actualsales by the fuel companies. This hasoccurred because some sales in theTerritory were not previously capturedby the Grants Commission. In addition,the Territory had an above averageeffective tax rate for petroleum productsprior to 5 August 1997. However, theGrants Commission relativities used todistribute the revenue now collected bythe Commonwealth are based on anaverage tax rate across jurisdictions.

The net result of both these effects hasbeen that the Territory has not receivedrevenue, or has received less revenuethan it would have previously collected,for all fuel sales made in the Territory.While the Territory has received lessrevenue, it has had to provide subsidiesbased on the level of actual sales, thuscompounding this effect.

As part of the Six Month Review, theTerritory is seeking a revision to thedistribution arrangements so that thedistribution of fuel revenues accords more

closely with the actual economic activity in

National Tax Issues

31

each jurisdiction (which was the basis for theformer business franchise fee regime).

LOSS OF POLICY FLEXIBILITY

Under the new taxation arrangements,States and Territories rely on aCommonwealth tax base for the source ofthe replacement revenues. As aconsequence of this change, the policycontrol and flexibility for such matters asthe breadth of the tax base (includingconcessions and exemptions) the tax rate,the timing of collections andadministration of the tax (includingcompliance activity) rest with theCommonwealth. For example, to changethe rate of the State surcharge nowrequires the unanimous agreement of allthe States and Territories, as well asCommonwealth agreement and legislativeaction. Under the previous businessfranchise fee regime, that policy controland flexibility rested with each State andTerritory.

The major avenue for policy flexibility forStates and Territories now rests with thedesign and administration of the subsidyschemes. In this regard, States andTerritories can set the subsidy rate, theconditions for eligibility and the paymentterms.

NATIONAL TAX REFORM

At the March 1997 Leaders’ Forum meeting,State and Territory Leaders noted theirconcern regarding the national tax system,but acknowledged that their ability toundertake tax reform alone was limited bythe inequitable allocation of tax powersbetween the Commonwealth and the States.Despite this limitation, and in the absence ofnational tax reform, Leaders resolved toreview those taxes under their control,particularly financial taxes, in order toimprove the efficiency and operation ofthose taxes where ever possible.

In August 1997, the Prime Minister made itclear that national taxation reform was onthe national agenda when he announced theestablishment of a task force to advise ontaxation reform options that satisfied thefollowing criteria:

• there should be no increase in theoverall tax burden;

• any new taxation system should involvemajor reductions in personal income taxwith special regard for the taxationtreatment of families;

• consideration should be given to abroad based, indirect tax to replacesome or all of the existing indirect taxes;

• there should be appropriatecompensation for those deserving ofspecial consideration; and

• reform of Commonwealth-Statefinancial relations must be addressed.

The Federal Treasurer announced theestablishment of a Backbench Taskforce toconsider tax reform on 23 October 1997.State and Territory leaders considered taxreform in more detail at a Leaders Forummeeting on 31 October 1997. This wasfollowed by a Special Premiers’ Conferenceon tax reform on 6 November 1997.

At the Leaders’ Forum meeting, the Statesand Territories agreed a number ofprinciples to guide tax reform, including:

• there must be no increase in the overalltax burden;

• a new tax system must incorporate areduction in personal income tax, torestore the incentives to work, save andinvest;

• the tax burden on exports and businessinputs must be reduced to boostinvestment, jobs and our internationalcompetitiveness;


32

• the States and Territories must haveaccess to broad-based growth taxes toreplace undesirable, ineffective,narrowly based taxes;

• the Commonwealth-State financialrelationship must be reformed to reducevertical fiscal imbalance and replace tiedgrants with untied funding; and

• that there be long term certainty andconsistency in the taxation system.

These principles are consistent with thoseannounced by the Prime Minister butreflect the additional concerns of theStates and Territories regardingmeaningful reductions in vertical fiscalimbalance and the associated requirementfor access to a replacement tax basecapable of providing certainty and growthinto the future (discussed in more detaillater in this chapter).

More recently there has been considerabledebate in the media presenting differentviews on the possible nature of tax reformand the range of options available.

For the States and Territories, there aretwo broad issues concerning national taxreform. The first concerns theappropriateness of our existing taxationarrangements, both at the Federal andState level. The second relates to thefinancial relationship between theCommonwealth and the States.

While the first of these has gained muchattention in the media and elsewhere,particularly the possible introduction of abroad based consumption tax, the secondis of no less importance if a reformed taxsystem is to deliver to the people theservices they require.

TAX CRITERIA

There are two key criteria that can beused to assess the worth of particular

taxes. One is efficiency; the other isequity.

An efficient tax is one that delivers thedesired level of revenue at least cost togovernment and tax payers and(importantly) without introducing artificialdistortions into the economic decisions ofconsumers and investors.

An equitable tax is one that recognises thecapacity of individuals to pay whiletreating people in similar circumstancesequally.

Some taxes may not score highly againstthese two core criteria but nevertheless behighly desirable from the community’spoint of view. For example, punitive taxeson tobacco and alcohol would generallynot be highly equitable (since they arelevied at high rates regardless of theconsumer’s capacity to pay). However,the community as a whole may see thesetaxes as desirable due to the attendantsocial costs of consumption.

Despite these exceptions, efficiency andequity are useful criteria against which toassess individual taxes and the tax systemas a whole.

TAX OPTIONS

Australia has a heavy reliance on incometax, with high marginal tax rates andgrowing numbers of taxpayers falling intohigher marginal tax brackets. This creates adisincentive to work harder and increaseearnings. The income tax system is alsocomplex for both the Government toadminister and for taxpayer compliance.Much of this complexity results from thevery nature of the system itself and theheavy reliance placed on income tax to raiserevenue, both of which encourage(nationally) unproductive avoidance effort.

While income tax is fairly progressive (thosewho can pay more do pay more) andtherefore a reasonably equitable tax, it is notparticularly efficient due to the complex

National Tax Issues

33

nature of the tax and the high costsassociated with administration andcompliance.

More importantly, as only income is taxed, itdiscriminates against saving and in favourof consumption (since returns on saving aretaxed but consumption is not). The low levelof domestic savings has been identified inmany studies as a particular concern for thenation. The consequence of a reduced poolof national savings is that greater reliance isplaced on overseas financing (the savings offoreigners) to fund much investment inAustralia.

While there will always be debate aboutwhether this outcome is a critical economicissue, there is intuitive logic in the notionthat reduced exposure to foreign economicinfluences should enhance nationaleconomic stability.

The most obvious step forward to addressmany of these shortcomings (and the onegaining most attention) would be theintroduction of a broad based consumptiontax.

A broad based consumption tax would ratevery highly on efficiency grounds.Consumption taxes have relatively lowadministration costs (since they are difficultto avoid) and very low compliance costs.

On equity grounds the picture is less clear.To some extent the equity of a consumptiontax would depend on what goods andservices were excluded from the base. In thisvein there has been much said about themerits of excluding food, health andeducation from the base. However, there is aclear trade-off in that the more items whichare excluded from the base, the higher theconsumption tax rate would have to be toraise the same amount of revenue.

This trade-off was specifically recognised inthe submission from the Australian FoodCouncil to the Federal GovernmentMembers’ Taskforce on Taxation. In its

submission the Food Council noted thatremoving food from a consumption tax basewould have a positive effect on the price offood products but this would be offset to asignificant degree by the higher rate thatwould have to be applied to remainingitems. Thus, while such a move wouldappear on the face of it to advantage lowincome groups particularly, the reality waslikely to be that this advantage wasrelatively small. At the same time, excludingsome goods or services would significantlyincrease the administrative costs and hencereduce the overall efficiency of the system.

Moreover, the tax system is not necessarilythe best means to address social inequities.While it would be hoped that a tax systemwould have strong equity characteristics, itis not necessary that the tax system addressother social problems. At best an equitabletax system will not add to underlying socialinequities. As identified by the PrimeMinister, the tax reform process will alsoneed to consider ‘appropriate compensation,for those deserving of special consideration’.However, these issues are probably bestaddressed through the social welfare system(that is what it is designed for after all)rather than by tinkering with the tax system.

Introducing a broad based consumption taxwould provide the means to reduce thereliance on income tax and more fairly sharethe tax burden between income andconsumption. As savings are not taxedunder a consumption tax, this move wouldalso create a greater incentive to save. Sinceservices are captured under a consumptiontax, the tax burden would also be moreevenly distributed between the goodsproducing sectors of the economy, whichare subject to wholesale sales tax, and therapidly growing services sector, which islargely outside the wholesale sales tax net.

There are other equally significant benefitsthat would come with the introduction of abroad based consumption tax. While theincome tax system has some positive


34

features, the same cannot be said for mostindirect taxes. There are numerousinefficient indirect taxes at both theCommonwealth and State level that distortthe everyday decisions of consumers andinvestors, and hinder the performance ofindustries, particularly export industries.

Indirect taxes are generally levied on narrowbases, at different rates on individualproducts, or a combination of both.

The problem that this creates is a problem ofchoice and decision making. Ideally, the taxregime should not influence decisions thatare made. The economic outcomes in aworld without taxes and the outcomes withtaxes would be exactly the same.

While no tax system is likely to achieve thisperfect outcome, indirect taxes applied atboth the Commonwealth and State levelcreate significant distortions in the economicdecision making process. Indirect taxes(such as wholesale sales tax and financialtransaction taxes) that are levied on narrowbases will influence decisions on the use ofthose items taxed, relative to those itemsthat are untaxed. Taxes levied at differentrates on certain products will influence theuse of those products which are lightlytaxed relative to those more highly taxed.

As a consequence, resources are likely to bemisallocated across the economy in responseto the distorted price signals beingtransmitted to consumers and investors.These effects will be felt differently byindividuals and businesses within thecommunity depending on their exposure tothese various taxes.

At the Commonwealth level, wholesale salestax is applied to a narrow range of goodsand at different rates within that range. Forthe average consumer there is no way ofknowing what amount of tax (if any) isincluded in the purchase price of the goodsthey buy. There are eight rates of wholesalesales tax (0%, 12%, 22%, 26%, 32%, 37%, 41%and 45%) and there is no apparent

consistency in the way these are applied. Forexample, milk is not taxed but flavouredmilk is, confectionery is taxed but caviar isnot, and there are numerous otherexamples.

Introduction of a broad based consumptiontax provides the opportunity to dispose ofsome of our least efficient indirect taxes (likewholesale sales tax) and raise the requiredrevenue instead through a more efficientbroadly based tax levied at a uniform rate.

In fact, given the stated objective of no netincrease in the overall tax burden, it isunavoidable that some existing taxes mustbe reduced or removed if a consumption taxis to be introduced.

However, tax reform should not be confinedto the Commonwealth tax arena. The Statesand Territories administer some of the mostinefficient taxes. If tax reform is to produce abetter national tax system it is essential thatthe least efficient State and Territory taxes beoffered up in favour of a more efficient totaltax regime.

In the State and Territory area, financialtaxes on bank transactions and motorvehicle stamp duties are primary candidatesfor replacement through a broad basedconsumption tax. Both are levied onextremely narrow bases and have no regardfor the capacity to pay.

Moreover, financial taxes are applied to atax base that, in this age of moderncommunication, is potentially highly mobile.The banking system is a global system. It isno longer necessary for customers to be ableto walk down to the local bank branch inorder to access banking facilities.Increasingly all banking facilities can beaccessed from the home via the phone or theInternet, and it doesn’t matter whether thebank is in the next town, another state orcountry.

Transaction based taxes like the FinancialInstitutions Duty (FID) and Debits tax will

National Tax Issues

35

not provide a stable revenue source intothe future.

As discussed at the start of this chapter, theHigh Court decision invalidating NewSouth Wales tobacco franchise fees forced allStates and Territories to cease collectingbusiness franchise fees due to theconstitutional doubt created by thatdecision. In response the States, Territoriesand the Commonwealth have instituted acomplicated replacement tax arrangement.While this has effectively protected theStates and Territories revenue, thereplacement arrangements are less thandesirable. National tax reform provides theopportunity to do away with thesecomplicated arrangements in favour of amore efficient taxing regime.

There has also been much speculation as towhether pay-roll tax should also beabolished or replaced. Unfortunatelypay-roll tax is a much maligned tax. Ingeneral this stems more from the way it islevied than any inherent shortcomings in thetax itself.

While pay-roll tax is often characterisedas a tax on employment, it is in reality nomore a tax on employment than incometax. Both raise the costs of employinglabour and to the extent that if there is achoice between employing capital orlabour, pay-roll tax will favour theemployment of capital. However, otheraspects of the tax regime are designed totax capital investment or the returns tocapital (for example, capital gains tax). Tothe extent that these impact on the cost ofcapital (as opposed to labour) the neteffect overall may be balanced.

While this increase in labour cost isobvious for pay-roll tax, this is less so forincome tax. In the case of income tax, itwill increase the amount that needs to bepaid to an individual in order to leavethem with a given disposable income.Conversely, if there were no income tax,

employees could be paid less and be noworse off.

If pay-roll tax were applied withoutexception, it would apply to all labourregardless of the industry in which it wasemployed, the size of the firm, or theparticular skills of the workforce. In thisrespect it is potentially a very broad basedtax and as a consequence, like income tax, itwould be a relatively efficient tax.

However, as both income tax and pay-rolltax add to the cost of employing labour,there is a valid argument that if Australia’sexports are to be more competitive, these‘tax costs’ need to be reduced. This could beachieved by moving more of the tax burdento a broad based consumption tax as no taxwould be paid on goods or services that areexported and reducing the costs ofemploying labour by reducing income taxrates.

At the end of the day, the future ofpay-roll tax is more likely to bedetermined by the impact replacing itwould have on the rate of an alternate tax(such as a consumption tax). Given thatthe least desirable taxes should bereplaced first, including pay-roll tax, mayincrease the required consumption taxrate beyond an acceptable level.

Figure 4.2 illustrates some of the trade-offs that need to be recognised. It can beseen that to replace Commonwealthwholesale sales tax, plus State andTerritory financial taxes and motorvehicle stamp duties would require abroad based consumption tax rate ofbetween 7.1% and 10.2% depending onthe consumption tax base. Includingpay-roll tax would lift these rates tobetween 10.1% and 14.5%, againdepending on the consumption tax base.


36

Figure 4.2

CONSUMPTION TAX RATES REQUIRED TOOFFSET EXISTING INDIRECT TAXES

Consumption Tax Rate

Tax RevenueRaised

BroadBase(a)

MediumBase(b)

NarrowBase(c)

$B % % %

State and TerritoryTaxesFinancial TaxesFID and debits 2.06 0.7 0.8 1.0Business stamp

duties2.06 0.7 0.8 1.1

Motor vehicle stampduties

2.21 0.4 0.4 0.5

Pay-roll tax 8.33 3.0 3.4 4.3Stamp duty on

insurance1.08 0.4 0.4 0.5

Stamp duty onresidentialconveyance

2.26 0.8 0.9 1.2

Motor vehicleregistration fees

2.19 0.8 0.9 1.1

Gambling taxes 3.61 1.3 1.5 1.8Land tax 1.77 0.6 0.7 0.9

Commonwealth TaxWholesale sales tax 14.17 5.3 6.0 7.6

(a) Private Final Consumption Expenditure less expenditure onhousing and financial services (assumed input taxed).

(b) As for (a) less expenditure on education and health.

(c) As for (a) less expenditure on food, education and health.

It is all very well to identify those Stateand Territory taxes which are undesirabledue to their efficiency or equity costs.However, the States and Territories stillrequire the revenue raised by these taxesin order to provide the essential servicesthat the population demands of them. Ifthese taxes are to be removed (as they

should be) then alternative arrangementsneed to be made to provide the States andTerritories with access to replacement taxbases.

COMMONWEALTH/STATE/TERRITORY FINANCIAL RELATIONS

Commonwealth/State/Territory financialrelations are at a low ebb. The States and

Territories are able to raise significantlyless revenue than they require to provideessential services. As a consequence theyrely heavily on the largess of theCommonwealth to provide the balance oftheir revenue requirements.

At present the Commonwealth raises 78%of all government revenue but is directlyresponsible for only 58% of governmentexpenditure. The High Court decision onbusiness franchise fees meant that Statesand Territories now only have controlover revenues sufficient to cover around54% of their expenditure responsibilities.

This imbalance between revenue raisingcapacity and expenditure responsibilities(technically known as vertical fiscalimbalance) inhibits, for various reasons,the ability of State and TerritoryGovernments to respond to the needs andwishes of the communities they serve. Italso reduces the accountability of Stateand Territory Governments for the use ofresources at their disposal since theCommonwealth often uses its control ofthe national purse to impose its prioritieson the States.

When it comes to distributing the nation’sresources, the Commonwealth Governmentis in a classic position of conflict of interest.It has a responsibility to distribute taxrevenues to the States and Territories, but italso has its own expenditure responsibilities.It should come as no surprise that when thehard decisions have had to be taken on fiscalrestraint, it is payments to the States andTerritories that have received the largestcuts, or lowest increases.

The process of reducing the States andTerritories share of the nation’s resourceshas been slow but relentless. Payments tothe States and Territories have declinedfrom 32% of Commonwealth revenue in1984-85 to 21% today.

National Tax Issues

37

The States and Territories have sought tocompensate for the loss of Commonwealthrevenue by increasing their own revenueraising efforts. However, as their taxingpowers are limited this has meant that theyhave targeted less efficient and less equitabletaxes than would be the case if they hadaccess to broader based national tax bases.

While the States and Territories could becompensated for vacating (abolishing) theirleast efficient taxes through a guaranteedshare of revenue raised by the consumptiontax, an alternative, and more appropriate,approach would be for the States andTerritories to gain access to the nationalincome tax base.

There are two advantages of this approach.First, on the grounds of constitutionalcapacity alone, it makes sense that the Statesand Territories should gain access to theincome tax base rather than anyconsumption tax base. The States havealways had the constitutional ability to levyincome taxes. Secondly, and also tied to thisfirst point because that capacity isrecognised in the constitution, it would bepossible for States and Territories to havegreater control in relation to income taxes.For example, a State income tax (howeverapplied) could be levied at differential ratesbetween the States and Territories. This is instark contrast to the situation that hasdeveloped in relation to section 90 safety netarrangements where the States andTerritories have had to enter intocomplicated subsidy arrangements in orderto maintain tax outcomes in eachjurisdiction, due to the Commonwealth’sinability to levy differential taxes betweenjurisdictions.

This then becomes a two step process.Firstly, the States and Territories vacate theirleast efficient taxes in support of a nationalbroad based consumption tax. The rate ofthat tax would be set to replace (at least)wholesale sales tax at the Commonwealth

level and foregone State and Territory taxes.Revenue raised would be retained by theCommonwealth.

The second step would be to provide theStates and Territories with access to thenational personal income tax base. TheCommonwealth would reduce its take fromnational income tax to reflect its newrevenue from a broad based consumptiontax, thus providing room for the States andTerritories to levy an income tax surcharge.

While this seems somewhat complicated, inpractice it would be relatively straightforward and, apart from some effect onprices due to the changed tax mix, would beseamless for taxpayers. Price effects wouldvary considerably between individualproducts depending on the relative tax levelapplying before and after the change. Thiswould not only be influenced by taxvariations at the final product level, but alsotax changes on inputs.

As part of this changeover, the States andTerritories could receive a greater share ofincome tax revenues directly, via theState/Territory surcharge, than the value of therevenue streams they surrender. This increasedrevenue received directly would be entirelyoffset by reduced Commonwealth grants, andhence reduced Commonwealth taxes. In thisway, the degree of vertical fiscal imbalancecould be significantly reduced, providing theStates and Territories with greater certaintyregarding their revenues and also greateraccountability regarding their expenditures.

As a rough estimate, a State income tax rateof 8.6% would be sufficient to provide theStates and Territories with ‘compensation’for removing financial taxes and businessstamp duties and stamp duties on motorvehicle transfers, plus provide for thereplacement of business franchise feerevenue and deliver an additional $12Breduction in the level of vertical fiscalimbalance.

39

Chapter 5

INTERGOVERNMENTAL FINANCIALRELATIONS

Relations between the Commonwealth and theStates and Territories are characterised byvertical fiscal imbalance. The Commonwealthraises more than three quarters of the totalrevenue collected by the Commonwealth and allState and Territory governments but requiresonly 58% for its own services, whereas the Statesand Territories rely on funding from theCommonwealth to provide around 46% of theirservices.

Over the past decade the Commonwealthincreased expenditure on its own functions at theexpense of grants to the States. Hence Stateexpenditure on core functions was restricted by adecrease in the share of national resources passedon by the Commonwealth. This forced the Statesto increase their own revenue effort to maintainservices and as a result, vertical fiscal imbalancewas reduced. However, with the High Courtdecision in August 1997 ruling businessfranchise fees invalid, the States’ and Territories’tax base has narrowed. Vertical fiscal imbalancehas increased as a result.

While the demand for services at all levels ofgovernment has increased significantly in the lasttwo decades, there is no strong evidence tosuggest that Commonwealth responsibilities havegrown more rapidly than those of the States andTerritories. Thus the Commonwealth’s decisionto restrict general purpose grants to the Statesand Territories in favour of its own purposeexpenditure and specific purpose grants cannotbe justified.

Major reform is needed to address these problemsto ensure that Australians receive an equitableshare of the nation’s resources through the levelof government which has the constitutional

responsibility for service provision. One means ofachieving this aim is to establish an expert bodyto recommend the appropriate allocation ofnational revenue among the tiers of government.

VERTICAL FISCAL IMBALANCE

Vertical fiscal imbalance is a defining featurein intergovernmental relations in Australia.Because of its dominance of the financialarrangements of the States, and particularlythe Northern Territory, it is referred toregularly throughout this Budget Paper.

Vertical fiscal imbalance occurs where thenational government (Commonwealth)raises more revenue than it needs for its ownpurposes and the provincial governments(States and Territories) raise less than theirresponsibilities require. The assumption bythe Commonwealth Government of incometax powers from the States in 1942 under itsemergency Wartime powers compoundedthe level of vertical fiscal imbalance inAustralia significantly.

More recently another constitutional changehas disturbed the level of vertical fiscalimbalance. In August 1997, the High Courtdetermined that business franchise feeslevied by States and Territories were invalidand as a result, State and Territory ownsource revenue was reduced by some $5B.Because of the significance of the revenueloss, the Commonwealth agreed that itwould extend its own wholesale sales taxand excise duties to recover revenue roughlyequivalent to the amount lost by the States


40

and Territories. This has been returned tothe States and Territories by theCommonwealth in the form of revenuereplacement payments.

Figure 5.1

VERTICAL FISCAL IMBALANCE 1997-98

0

20

40

60

80

100

120

140

160

Commonwealth States and Territories

Total revenue if RRP are treatedas State and Territory revenue

Total revenue if RRP are treatedas State and Territory revenue

$BOwn-Purpose Expenditure Total Revenue

Note: Revenue replacement payments (RRP) are treated as aCommonwealth grant.

Figure 5.1 shows the level of vertical fiscalimbalance in Australia and extent to which ithas worsened as a result of the High Court’sdecision.

In broad terms, the Commonwealth nowraises 78% of the combined revenuecollected by the Commonwealth and Statesand Territories but only accounts for 58% ofcombined own-purpose expenditure. TheStates and Territories rely on transferpayments from the Commonwealth to fundsome 46% of their own-purposeexpenditure. This contrasts with the positionbefore the High Court’s decision where theCommonwealth raised 75% of total revenueand the States raised 25%.

EFFECT OF COMMONWEALTH POLICYON VERTICAL FISCAL IMBALANCE

While the High Court’s decision on businessfranchise fees has had a significant effect on

the level of vertical fiscal imbalance, of lessobvious but equal importance has been theeffect of Commonwealth policy on revenueraising and sharing which also affectedvertical fiscal imbalance.

An analysis of own-purpose expenditureprovides a meaningful method of assessingthe extent to which expenditure prioritiesbetween levels of government havechanged.

Own-purpose expenditure refers toexpenditure on the functions for which thelevel of government has functionalresponsibility. Commonwealth grants to theStates and Territories for State-typefunctions are therefore classified as Stateexpenditure not Commonwealthexpenditure.

Figure 5.2 dramatically illustrates how theCommonwealth has used its dominantposition to increase its control over a greatershare of resources. In particular:

• in 1980-81, Commonwealth expenditureon its own functions was $23B, $1Bhigher than State expenditure. Sincethen Commonwealth expenditure hasgrown to $104B, $27B higher than Stateand Territory expenditure; and

• since 1980-81 revenue raised by theCommonwealth has increased from$36B to $142B, up by $106B. However,Commonwealth grants to the States andTerritories have only increased by $23Bto $33B.

Thus while States have increased theirrevenue collections, this has beeninsufficient to offset the declining level ofCommonwealth grants. As a result,expenditure on State-type functions is now alower proportion of total public sectorexpenditure.

Intergovernmental Financial Relations

41

Figure 5.2

REVENUE, OWN-PURPOSE EXPENDITUREAND GRANTS

0

25

50

75

100

125

150

1980-81 1984-85 1988-89 1992-93 1997-98

Commonwealth Revenue

Commonwealth Own-Purpose Expenditure

State and Territory Own-Purpose Expenditure

Grants to States and Territories

$B

Source: Government Financial Estimates, ABS Cat No 5501.0; andNorthern Territory Treasury.

The retention by the Commonwealth of agreater share of nationally raised revenuehas meant that the States and Territorieshave had to increase their own sourcerevenue effort more than theCommonwealth. This has reduced verticalfiscal imbalance to a significant degree overtime but because it has happened graduallyit has not been given a great deal ofprominence. The High Court’s decision hassimply returned vertical fiscal imbalance tothe level it was at in the early eighties.

A similar picture is gained when theinformation is looked at on a real per capitabasis (Figure 5.3). Real per capita own-purpose expenditure by the States andTerritories has been constant over the pastten years. However, real per capita own-purpose expenditure by the Commonwealthhas risen by around 54%. Grants per capitato the States and Territories have increasedin 1997-98. However, this is a result of theon-passing of revenue replacementpayments to the States and Territories.

SPECIFIC PURPOSE GRANTS

Not only have the resources available to theStates and Territories decreased relative to

those available to the Commonwealth, butthe type of funds provided to the States andTerritories has also shifted from generalpurpose, which are able to be used at theStates’ and Territorys’ discretion, to beingspecific purpose and subject to significantlevels of Commonwealth control. Around39% of Commonwealth payments to Statesand Territories are now received in the formof specific purpose grants.

Figure 5.3

OWN-PURPOSE EXPENDITURE AND GRANTSREAL PER CAPITA BASIS

0

1

2

3

4

5

6

7

1980-81 1984-85 1988-89 1992-93 1997-98


$000pc

State and Territory Own-Purpose Expenditure

Grants to States and Territories


Figure 5.2 and Figure 5.3 treat spendingfunded through specific purpose grants asown-purpose expenditure of the States andTerritories as they are for services which arethe constitutional and administrativeresponsibility of the States and Territories.

However, the Commonwealth has at timesdisputed this view and argues that specificpurpose grants should be regarded as itsown-purpose expenditure.

While the Territory does not accept thisview, it is true that the level of discretionavailable to States and Territories has beensignificantly diminished as a result of theincrease in specific purpose grants. Thus theinclusion of specific purpose grants asCommonwealth own-purpose expendituredemonstrates clearly the extent to which theCommonwealth has been able to increase its


42

control over policy on expenditures of alllevels of government.

Figure 5.4

OWN-PURPOSE EXPENDITURE AND GRANTS

50

100

150

200

250

300

350

400

450

500

1980-81 1984-85 1988-89 1992-93 1996-97


General RevenueGrants to States

SPGsState and Territory Own-

Purpose ExpenditureIncludes RRP

ExcludesRPP

Index


Figure 5.4 shows the relative change inCommonwealth and States and Territoriesown-purpose expenditure when specificpurpose grants are treated as part ofCommonwealth own-purpose expenditure.In part, the increase in Commonwealthexpenditure relative to that of the States andTerritories can be attributed to the differencein growth between specific purpose andgeneral purpose grants.

The shift from general purpose grants to tiedfunding since the late 1980s can also beclearly seen. The increase in general revenuegrants in the last year is a result of theinclusion of the revenue replacementpayments as Commonwealth grants.

CHANGE IN COMMONWEALTHRESPONSIBILITIES

The demands on all governments forincreases in the standards and range ofservices in the last two decades have beensignificant. At the same time pressure forgreater efficiency in the delivery ofgovernment services has grown.

It is reasonable to examine whether thegrowth in Commonwealth own purpose

expenditure or its retention of a greaterproportion of nationally raised revenue canbe explained by increases in theCommonwealth’s responsibilities comparedto the States.

An analysis of Commonwealth spendingsince 1980 shows that current expenditurehas increased almost five times compared tofour times in the States.

The bulk of the increase in Commonwealthexpenditure has been in the areas of generalpublic services, health and social security,and welfare payments.

The Australian Bureau Statistics (ABS)classification of general public servicesincludes expenditure on items such aslegislative and executive affairs, financialand fiscal affairs and general economicservices. It is likely that increased spendingin this area by the Commonwealth would bedriven by policy rather than a need foradditional services.

Commonwealth current expenditure onhealth has increased from 11% of outlays in1980 to 15%. However, at the same timeState and Territory spending on health hasrisen from 19% of expenditure to 21%. Thisshows that the States and Territories are asaffected by increasing demand for healthservices as the Commonwealth whichwould be expected given that primaryresponsibility for healthcare rests with theStates and Territories. Consequently aposition that increasing demand for healthservices justifies greater retention of revenueby the Commonwealth rather than anequitable distribution to the States andTerritories cannot be supported.

Analysis further shows that while demandhas grown in all areas of health, the largestgrowth in Commonwealth expenditure hasoccurred in the limited areas for which it haschosen to have responsibility such as

Intergovernmental Financial Relations

43

medical and pharmaceuticals benefits.Grants to States and Territories for theirhealth responsibilities (hospitals andcommunity care) have not increased to thesame degree. As a result States andTerritories have had to increase their ownspending on health.

The third area of growth in Commonwealthoutlays is expenditure on social security andwelfare. It is acknowledged that increases inthe proportion of aged persons andunemployed since 1980 may partiallyexplain a need for increased Commonwealthexpenditure. However, analysis of the ABSdata shows that Commonwealth spendingin this area has increased six timescompared to an increase of eight times in theStates. In fact, as a share of Stateexpenditure, social security and welfarespending has doubled compared to anincrease from 30% to 36% of expenditure forthe Commonwealth.

There are also other areas such as publicorder and safety and education whereincreases in Commonwealth expenditurehave exceeded those of the States andTerritories even though they are primarilyState responsibilities.

In summary, it appears that a significantproportion of the increases inCommonwealth own-purpose expenditureare driven by policy choice and increasedinterference in State responsibility ratherthan by population growth, inflation orchanges in Australia’s demographiccomposition. Unfortunately these increaseshave occurred at the expense of generalrevenue assistance to the States andTerritories.

SOLUTIONS

Vertical fiscal imbalance is not, of itself, aproblem if the Commonwealth Government

distributes to States an equitable share ofnationally raised revenue. However, overtime, the Commonwealth has used itsdominant tax raising position to:

• increase expenditure on its ownfunctions; and

• through the growth in specific purposegrants, expand its influence into areasthat have been the preserve of the Statesand Territories.

The Commonwealth has been able to do thisbecause its tax revenue has increasedsignificantly through economic growth andfiscal drag but it has kept payments to theStates and Territories commensurate withpopulation growth and inflation only.

As a result, States and Territories have hadto rely to a greater degree on their relativelyinefficient and narrow tax bases in order tomaintain a sufficient level of revenue.Greater reliance on State and Territory taxbases has had more detrimental economicconsequences than if the revenue had beenraised by the Commonwealth and sharedequitably with the States and Territories.

A number of solutions have been proposedto ensure that the Commonwealth does notexploit its position at the expense of theStates and Territories. These include:

• a transfer of tax powers from theCommonwealth;

• providing tiers of government with afixed percentage of tax revenues; and

• continuing with a real per capita growthcommitment to the financial assistancegrants pool.

At present, tax reform appears to providethe most promising solution to overcomingthe problems which result from the currentarrangements.


44

An alternative solution to the problemcreated by vertical fiscal imbalance is theestablishment of an expert body to advise onthe distribution of national resourcesbetween the two tiers of government. Such abody would improve accountability,provide expert independent advice on theallocation of national resources, and provideincreased data on which to base long termdecisions about future revenue requirementsand standards of service. This would notremove the need for the continuation ofhorizontal fiscal equalisation to determinegrants allocation between the States andTerritories.

Currently State and Territory Budgets arebeing caught between two opposingpressures. On one side they are experiencingincreasing demand for the services they

provide (especially health) and the need tomaintain fiscal integrity. On the other sidethey face decreasing real per capita fundingfrom the Commonwealth.

While the Commonwealth has a legitimatenational role in setting appropriate broadminimum standards and priorities, it is alsoimportant to recognise the importance ofState and Territory Governments in beingable to provide services at a level that bestaddresses the needs of the population. Thesetwo factors should be considered inadvancing reform that will benefit allAustralians in terms of a more equitabledistribution of the nation’s resourcesthrough the level of government which hasthe constitutional responsibility to do so andwhich will provide the most efficientoutcome.

DATA APPENDIX

The data in this chapter has been preparedon a total public sector basis for both theCommonwealth and the combined Statesand Territories. Where possible, data fromGovernment Finance Estimates ABS Cat.No. 5501.0 has been used. Some 1997-98 datais based on estimates from the 1998 NationalFiscal Outlook.

The charts in this chapter all showown-purpose expenditure. To derive own-purpose expenditures the effects of transfersbetween the Commonwealth and States andTerritories have been removed. Paymentsthrough the States and Territories have beenretained within Commonwealth outlays as

they reflect Commonwealth, rather thanState, expenditure priorities. Specificpurpose grants to the States have beenincluded as States own-purpose outlays inFigure 5.2 and Figure 5.3 andCommonwealth own-purpose outlays inFigure 5.4.

Figure 5.3 shows real per capita figures. Thevalues presented are in constant 1998-99prices and calculated using the non-farmGDP implicit price deflator from ABS Cat.No. 5206.0 and the 1998 National FiscalOutlook. Population figures were as at31 December each year and from ABS Cat.No. 3101.0.

45

Chapter 6

1998 PREMIERS’ CONFERENCE

The annual Premiers’ Conference is the forum inwhich the Commonwealth, States and Territoriesagree to the distribution of financial assistancegrants and other Commonwealth general revenuepayments. It is the formal mechanism for theequitable distribution of revenue raised by theCommonwealth on behalf of the nation. Theredistribution of national revenue is necessarydue to the degree of vertical fiscal imbalance thatexists in Australia.

Commonwealth grants represent about 80% oftotal Northern Territory budgetary resources.Thus the outcome of the Premiers’ Conferencehas a direct bearing on the level of servicesprovided in the Territory.

The 1998 Premiers’ Conference was adjournedshortly after convening as the Commonwealthrefused to negotiate on the level of base fundingunder the Australian Health Care Agreement.No formal agreements were reached. However,the Commonwealth stated that the proposalsoutlined in the Offer Document will be the basisfor Commonwealth grants to the States andTerritories.

Estimates of Commonwealth grants presented inthe body of this chapter are current as atApril 1998 and are based on theCommonwealth’s Offer Document. Detailedestimates of specific purpose grants were notprovided and will not be available until after theCommonwealth Budget is delivered.

PREMIERS’ CONFERENCE AGENDA

The build up to the 1998 Premiers’Conference was somewhat different toother years, with major issues not usually

the subject of detailed discussions atPremiers’ Conferences featuringprominently on the agenda. Significantagenda items were tax reform and futurehealth funding arrangements. State andTerritory governments consideredadequate discussion of these itemsessential.

Items of no less significance, but mattersusually considered by Premiers’Conference, were the various componentsof general revenue grants and the NationalFiscal Outlook. Even in this area a numberof contentious issues required resolution.These included:

• the means by which the financialassistance grants pool would bedistributed – there was a choicebetween two sets of relativities;

• the interaction between the choice ofrelativities and the arrangements forhealth care funding;

• adequate arrangements for the sizeand distribution of revenuereplacement payments established as aresult of the High Court’s decision toinvalidate business franchise fees; and

• the implication of the National FiscalOutlook on the need for States andTerritories to pay the last tranche oftheir fiscal contribution, to reduce theCommonwealth’s budget deficit.

The Prime Minister had also nominated guncontrol for discussion.


46

States and Territories were sufficientlyconcerned about the existing and growingpressure on health, particularly hospitalservices, to seek to have health fundingarrangements discussed as the first mainitem on the Agenda. A commitment wassought from the Commonwealth foradditional health care funding because ofthe shortfall in the offer providedpreviously to Health Ministers, and theinadequate provisions for growth.

States and Territories estimate the shortfallin base health care funding to be in theorder of $1.1B. The Commonwealth didnot discuss the shortfall and it indicatedcategorically that the offer, with respect tohealth funding, was not negotiable. At thatpoint Premiers and Chief Ministersadjourned the Conference. None of theother important matters were discussed.

The Prime Minister has since indicatedthat the financial arrangements would beas outlined in the Offer Document. and thehealth funding proposals would be asprovided to Health Ministers.

THE OFFER DOCUMENT

The 1998 Offer Document outlined thelevel of financial assistance and generalrevenue grants, the level of NationalCompetition Policy payments, and theStates fiscal contribution to theCommonwealth Deficit ReductionProgram.

Even though they comprise a significantproportion of Commonwealth funding toStates and Territories, specific purposegrant details were not provided. Indicativeestimates were again based on theCommonwealth’s updated forwardestimates, and cannot be taken as firmcommitments.

The following analysis is on the basis ofthe Offer Document as presented. At thisstage there is no indication that theproposals it contains will vary. The data inthis chapter may differ from data whichappears in Budget Paper No. 2, which as faras possible has been updated according tothe most recent advice from theCommonwealth.

GENERAL REVENUE ASSISTANCE

The key features of the 1998 OfferDocument with regard to general revenueassistance are:

• the Commonwealth will extend thethree year rolling guarantee forincreases in the financial assistancegrants pool in real per capita termsuntil 2000-01. The per capita elementbeing dependent on compliance withNational Competition Policy reforms;

• the Commonwealth has presumedthat the State Fiscal Contribution willcontinue to be paid; and

• as part of the new arrangements forhealth care funding, equalisationrelativities are used to distributefinancial assistance grants; Medicareguarantee payments to New SouthWales and Victoria will no longer beprovided; and the level of fundsquarantined from the equalisationprocess will fall from $883M to $50M.

Figure 6.1 is drawn from the OfferDocument, and provides a comparison ofgeneral revenue assistance to States andTerritories in 1997-98 and 1998-99.

The Commonwealth has argued that theOffer represented an increase in generalrevenue assistance to States andTerritories of 4.8% which was said to be

1998 Premiers’ Conference

47

extremely generous in a low inflationaryenvironment and higher than the increasein the Commonwealth’s own purposeoutlays.

However, this is a fallacious argument.There is an increase of 4.8% in netpayments after the fiscal contributionpayment has been taken into account.However, the fiscal contribution in1998-99 is only half that paid in 1997-98,and the smaller reduction gives rise to an

apparent increase in that payment. As thefiscal contribution is actually the Statesand Territories own money, it isunreasonable for the Commonwealth toclaim a reduction to it is equivalent to anincrease in Commonwealth payments.This is discussed later in this chapter.

When the effect of the fiscal contribution isremoved the increase in Commonwealthpayments is significantly lower at 2.7% (asshown in Figure 6.1).

Figure 6.1

GENERAL REVENUE ASSISTANCE TO STATES AND TERRITORIES, 1997-98 AND 1998-99

FinancialAssistance

Grants

SpecialRevenue

Assistance

NationalCompetitionPayments

GrossGeneralRevenue

Assistance

Change from

Previous YearFiscal

Contribution

Net of Fiscal

Contribution

ChangeNet ofFiscal

Contribution

$M $M $M $M $M % $M $M %

1997-98

NSW 4 555.1 190.2 72.2 4 817.5 144 3.1 216.6 4 600.9 3.1VIC 3 351.5 242.3 53 3 646.8 93.7 2.6 159 3 487.8 2.6QLD 3 090.6 39.3 3 129.9 76.8 2.5 117.9 3012 2.5WA 1 566.4 20.7 1 587.1 8.3 0.5 62.2 1 524.9 0.4SA 1 551.9 17 1 568.9 33.5 2.2 50.9 1518 2.2TAS 680.6 5.4 686 6.2 0.9 8.1 677.9 2.1ACT 236.7 34.5 3.5 274.7 - 4.7 -1.7 5.3 269.4 0.2NT 969.5 2.2 971.7 26.4 2.8 6.5 965.2 2.8

Total 16 002.3 467 213.3 16 682.6 384.2 2.4 626.5 16 056.1 2.4

1998-99

NSW 4 767.9 73.6 4 841.5 24 0.5 101.5 4740 3.0VIC 3 548.1 54 3 602.1 - 44.7 -1.2 74.4 3 527.7 1.1QLD 3 224.5 40.3 3 264.8 134.9 4.3 55.6 3 209.2 6.5WA 1 617.1 21.3 1 638.4 51.3 3.2 29.3 1 609.1 5.5SA 1 678.9 17.2 1 696.1 127.2 8.1 23.7 1 672.4 10.2TAS 738 5.4 743.4 57.4 8.4 15.6 727.8 7.4ACT 281.8 25 3.6 310.4 35.7 13.0 10.2 300.2 11.4NT 1 033.9 2.2 1 036.1 64.4 6.6 3.1 1033 7.0

Total 16 890.2 25 217.6 17 132.8 450.2 2.7 313.4 16 819.4 4.8

Source: Commonwealth Offer to the States and Territories 1998.


48

FINANCIAL ASSISTANCE GRANTS

The Territory’s financial assistance grantsshare is estimated to increase by $64M in1998-99. The share of the financialassistance grants pool is calculated byapplying the per capita relativities for eachState and Territory arising from theCommonwealth Grants Commission’s(CGC) Report on General Revenue GrantRelativities 1998 Update, weighted byestimates of each State and Territorypopulation as at December 1998.

The $64M increase in the Territory’s shareof the financial assistance grants pool isdue to:

• the real per capita growth in the Pool(+$26M);

• the increase in the Pool which resultsfrom the re-incorporation of the Poolfunded Medicare guarantee paymentsto New South Wales and Victoria(+$18M);

• a higher rate of population growthrelative to the Australian average,resulting in a greater share of thefinancial assistance grants pool (+$9M);and

• an increase in the Territory’s underlyingassessed need for assistance (+$11M).

Changes to financial assistance grantscaused as a result of proposed new healthcare funding are:

• the escalation of the hospital fundinggrants component (+$11M);

• the addition of further unquarantinedhospital funding grants (+19M); and

• the distribution of the Pool based onequalisation relativities rather thanMedicare adjusted relativities (-$30M).

Figure 6.2 summarises these influences.

Figure 6.2

EXPLANATION OF INCREASE INTERRITORY’S SHARE OF FINANCIALASSISTANCE GRANTS POOL 1998-99

Influence Effect$M

Real Per Capita Escalation of FAG Pool +26

Re-absorption of Medicare GuaranteePayments into FAG Pool

+18

Equals: Effect of changed Pool +44

Northern Territory Population Growthrelative to National Increase

+9

Underlying Growth in Territory Needs +11

Equals: Effect of Territory data +20

Escalation of HFG Component +11

Additional Unquarantined Funds +19

Move from Medicare Adjusted toEqualisation Relativities

-30

Equals: Effect of Changed Health carearrangements

0

Total Change in Territory's share 64

FAGs: Financial Assistance Grants.

HFGs: Hospital Funding Grants.

Because of the inter-relationship withhealth funding, the distribution offinancial assistance grants cannot beconsidered in isolation from the healtharrangements. The combined effect offinancial assistance grants and healthfunding arrangements are discussed laterin this chapter.

SPECIAL REVENUE ASSISTANCE

Special Revenue Assistance of $25M willcontinue to be paid to the AustralianCapital Territory in 1998-99. This paymentrelates to transitional allowances agreed atthe time of Self-Government.


49

NATIONAL COMPETITION POLICYPAYMENTS

National Competition Payments (NCP) aremade in accordance with the agreementsentered into between the States, Territoriesand the Commonwealth in 1995.

Most of the benefits of competition reformcarried out by the States and Territoriesaccrue to the Commonwealth (in the form ofadditional taxation revenue). As such, theCommonwealth distributes dividends toStates and Territories as a means of sharingthe benefits of reform. Dividends are paidon a per capita basis.

The Commonwealth agreed to increase thePool of Financial assistance grantsequivalent to the increase in population, andin addition to pay the States and Territoriesan additional competitive paymentdividend. A total of $217.6M, distributed ona per capita basis will be provided in1998-99.

The Territory is expected to receive an NCPdividend of $2.2M in 1998-99.

STATE FISCAL CONTRIBUTION

At the 1996 Premiers’ Conference it wasagreed that States and Territories wouldcontribute to the Commonwealth’s deficitreduction strategy, in return for theCommonwealth abandoning a proposedapplication of Sales Tax to Stategovernment activity.

Initially the States agreed to contribute$619M in 1996-97, $640M in 1997-98, and$300M in 1998-99, subject to yearly review.The amounts were determined withreference to expected real per capitagrowth in the financial assistance grantspool, and allocated between States on aper capita basis. Effectively the Statesaccepted a reduction in real terms ofpayments from the Commonwealth to

assist the Commonwealth to reduce itsdebt burden.

States are able to determine the method bywhich their contribution to theCommonwealth deficit reduction strategyis made through either reduced financialassistance grants or specific purposegrants.

These payments were originally to bereviewed annually at the Premiers’Conference. The Commonwealth wouldnot agree to a review in 1997 and has notagreed to do so this year. However, thechange in the fiscal position of theCommonwealth compared with the Statesand Territories makes a review essential.

The National Fiscal Outlook shows thatthe Commonwealth is forecasting itsunderlying fiscal position to improve froma deficit of $2.8B in 1997-98, to a surplus of$2.5B in 1998-99. This is in contrast to aprojected deficit of $7.3B in 1997-98 and$3.3B in 1998-99, when the fiscalcontributions were first agreed in 1996.Given this huge improvement in theCommonwealth’s fiscal position there canbe no justification for the continuation ofthe agreement on the current terms.

HEALTH CARE FUNDING

The Medicare agreement is due to expire on30 June 1998. The renegotiation of thereplacement Australian Health CareAgreement was the key issue at thePremiers’ Conference.

COMMONWEALTH HEALTH OFFER

The latest Commonwealth offer includesonly a small increase in funding of $300Min the first year (1998-99), increasing to$600M in the last year of the agreement(2002-03). This falls short of the States andTerritories estimate of $1.1B, which is


50

required to be added to the base fundingarrangements in 1998-99. TheCommonwealth has also proposed somechanges to funding for veterans healthcare, which would involve additionalfunding or savings (through reduceddemand) to States and Territories in theorder of $150M per year.

While the issue of funding has not yetbeen finalised, the structure of the newagreement appears to have been accepted.The new agreement will consistpredominantly of funding for admittedpatients with components for non-admitted patients, palliative care, mentalhealth, quality improvements and systemrestructuring. The existing bonus poolsand identified funding for AIDS hasceased.

The agreement will also propose tocontain automatic increases in funding ifprivate health insurance coveragedeclines.

INTERACTION OF GENERALREVENUE AND HEALTH FUNDING

Health care funding is predominantlyconstituted of quarantined andunquarantined hospital funding grants.Unquarantined hospital funding grantsare included with financial assistancegrants for distribution by the CGC’srelativities. Quarantined hospital fundinggrants are subject to different distributionarrangements.

Because of the link between hospitalfunding grants and financial assistancegrants the health agreements have asignificant impact on the level of financialassistance grants paid to each jurisdiction

as well as the overall level of combinedhealth and general revenue grants.

In addition to the changes to financialassistance grants (Figure 6.1), as a result ofthe new health arrangements there arecomplementary effects on the distributionof hospital funding grants. An additional$19M is to be provided in unquarantinedhospital funding grants which is offset bya reduction in quarantined funds of $58M.The net effect on hospital funding grants isa significant reduction of $39M. Like theTerritory, a number of jurisdictionsexperience significant variations in theshare of hospital funding grants.

To avoid an inequitable outcome, theCommonwealth has proposed a set ofadjustments for 1998-1999 so that eachjurisdiction is compensated for the moveto equalisation relativities and receives thesame increase in health related funds over1997-98. This is achieved through a specialadjustments module in 1998-99. Theadjustment module results in anadditional $19M for the Territory.

The changes in hospital funding grantsand the adjustments module are shown inFigure 6.3. In subsequent years no furtheradjustment should be required, as theCGC relativities will be compatible withthe new health care arrangements.

Estimates in the Offer document based onthe latest health offer forecast grants to theTerritory of $77.3M, including theadjustment, in 1998-99 compared to$87.2M received in 1997-98. This declineneeds to be considered in conjunction withthe increase in financial assistance grants.Figure 6.3 shows the components of thehealth offer.


51

Figure 6.3

GENERAL REVENUE ASSISTANCE AND HEALTH CARE GRANTS TO THE STATES AND TERRITORIES

1997-98 AND 1998-99

1997-98 1998-99

GeneralRevenue

Assistance Unquarantined Quarantined Total

GeneralRevenue

Assistance Unquarantined QuarantinedAdjustment

Module Total Change

$M $M $M $M $M $M $M $M $M $M %

NSW 4 817.5 1 410.9 177.4 6405.8 4 841.5 1776.6 16.6 -17.5 6617.2 211.4 3.3

Vic 3 646.8 1 027.4 81.9 4756.1 3 602.1 1264.6 12.1 1 4879.8 123.7 2.6

Qld 3 129.9 743.8 191.1 4064.8 3 264.8 948.3 9.2 -24 4198.3 133.5 3.3

WA 1 587.1 376.8 163 2126.9 1 638.4 498.9 4.8 39.5 2181.6 54.7 2.6

SA 1 568.9 350.7 151.3 2070.9 1 696.1 451.7 3.9 -6 2145.7 74.8 3.6

Tas 686 107.1 41.1 834.2 743.4 116.5 1.2 1 862.1 27.9 3.3

ACT 274.7 57.5 17.5 349.7 310.4 63.5 1 -13 361.9 12.2 3.5NT 971.7 27.8 59.4 1058.9 1 036.1 57.3 1 19 1113.4 54.5 5.1

Total 16 682.6 4 102 882.7 21667.3 17132.8 5177.4 49.8 0 22360 692.7 3.2


SPECIFIC PURPOSE GRANTS

The 1998 Offer Document foreshadowed littlechange in the total of specific purpose grantsto States and Territories; however there aresignificant variations by jurisdiction. It isacknowledged that these figures are based onCommonwealth forward estimates and henceare likely to be influenced by Commonwealthpolicy decisions and new initiatives before itsbudget.

On the basis of the Offer Document, specificpurpose grants to the Territory are expectedto decrease from $286.2M in 1997-98 to$263.8M in 1998-99, or by 7.8%. This is asignificant reduction which will affect theTerritory’s capacity to continue to provideservices funded by these arrangements.

Full details will not be available until theCommonwealth Budget is brought down.However, most of this reduction is caused bychanges in the treatment of health carefunding. Debt redemption assistance is alsoexpected to reduce significantly in 1998-99.

Figure 6.4 provides estimates of specificpurpose payments to and through

jurisdictions. Specific purpose grants madeto the States allow for a level of discretionover the expenditure. Grants madethrough the jurisdiction are non-discretionary and the Territory’s role is asan agent for the Commonwealth.

Specific purpose grants provided through theTerritory are estimated to increase by 32%,from $40M in 1997-98 to $52.7M in 1998-99,whilst the level of specific purpose grants tothe Territory is set to be significantlyreduced. On this basis, the level of fundingprovided to the Territory Government willbe reduced in favour of local government ornon-government organisations.

As with all other jurisdictions the Territoryremains dissatisfied with the imposition ofCommonwealth priorities through anincreasing reliance on specific purpose ratherthan general purpose funding. Furthermore,specific purpose grant arrangements can beextremely complex. The administrativeburden, duplication, overlap and intrusioninto State and Territory areas of responsibilitymeans that this area of funding should bereformed urgently.


52

Figure 6.4

SPECIFIC PURPOSE GRANTS TO AND THROUGH THE STATES AND TERRITORIES 1998-99

To StatesThroughStates(a) Total Change in Total Payments

Change in Payments toStates and Territories

$M $M $M $M % $M %

NSW 3 619.3 1 261.7 4 880.9 133.2 2.8 72.6 2.0

VIC 2 476.7 1 022.5 3 499.1 173.3 5.2 132.5 5.7

QLD 1 955.2 687.7 2 642.8 -6.3 -0.2 -41.9 -2.1

WA 1 287.4 403.1 1 690.4 20.1 1.2 -5.7 -0.4

SA 997.6 273.4 1 270.9 -89.4 -6.6 -102.7 -9.3

TAS 308.9 103.5 412.4 -45.4 -9.9 -50.4 -14.0

ACT 159.2 82.2 241.3 -23.2 -8.8 -26.9 -14.5

NT 211.1 52.7 263.8 -22.4 -7.8 -35.1 -14.3

Total 11 015.3.6 3 886.4 1 4901.7 140.1 0.9 -57.6 -0.5


Note: (a) Includes Specific Purpose Grants to Local Government.

The need for reform is highlighted by thenumber of specific purpose grants currentlyrequiring renegotiation, and those that aresimply not acceptable to the States. Theseinclude:

• The Commonwealth State Housingagreement;

• The Australian Health Care Agreement;

• The Australian Land TransportDevelopment Program; and

• The Home and Community Careprogram.

Together these programs distribute around50% of all specific purpose payments to theStates and Territories.

TOTAL COMMONWEALTH PAYMENTS

Total Commonwealth payments to theTerritory are expected to be $1 296.8M in1998-99, a nominal increase of 3.6% from1997-98. Figure 6.5 details the change inCommonwealth Assistance provided to theStates and Territories.

Whilst the Commonwealth is maintainingfinancial assistance grants, NationalCompetition payments, and SpecialRevenue Assistance in real terms, knownspecific purpose grants continue to reduce inreal terms, by over 1% in 1998-99.

Excluding the effect of the FiscalContribution, the Territory is expected toreceive the second largest increase in generalrevenue assistance, at 6.2%. This is primarilydue to higher population growth in theTerritory relative to national populationgrowth, and an increase in the financialassistance grants pool due to the real percapita escalation and cessation of the Poolfunded Medicare guarantees.

This 6.2% increase in general revenueassistance is substantially offset by the 7.8%reduction in specific purpose grants paid toand through the Territory. Together theseresult in an increase in Commonwealthgrants to the Territory of 3.3%.

As can be seen in Figure 6.5, totalCommonwealth assistance (that is, generalrevenue assistance and specific purposegrants) has increased by 1.9%.


53

Figure 6.5

TOTAL REVENUE ASSISTANCE TO THE STATES AND TERRITORIES(a)

FinancialAssistance

Grants

SpecialRevenue

AssistanceCompetitionPayments

GeneralRevenue

Assistance

UnquarantinedHealth Care

Grants

QuarantinedHealth Care

GrantsAdjustments

ModuleOtherSPPs

Total NetPayments toStates andTerritories

% Increaseover

1997-98

1997-98

NSW 4 555.1 190.2 72.2 4 817.5 1 410.9 177.4 3 159.4 9 565.2

VIC 3 351.5 242.3 53.0 3 646.8 1 027.4 81.9 2 216.4 6 972.5

QLD 3 090.6 0.0 39.3 3 129.9 743.8 191.1 1 714.1 5 778.9

WA 1 566.4 0.0 20.7 1 587.1 376.8 163.0 1 130.6 3 257.5SA 1 551.9 0.0 17.0 1 568.9 350.7 151.3 858.2 2 929.1

TAS 680.6 0.0 5.4 686.0 107.1 41.1 309.5 1 143.7

ACT 236.7 34.5 3.5 274.7 57.5 17.5 189.5 539.2

NT 969.5 0.0 2.2 971.7 27.8 59.4 199.0 1 257.9

Total 16 002.3 467.0 213.3 16 682.6 4 102.0 882.8 9776.7 31 444

1998-99

NSW 4 767.9 0.0 73.6 4 841.5 1 776.6 16.6 - 17.5 3 105.3 9 722.5 1.6%

VIC 3 548.1 0.0 54.0 3 602.1 1 264.6 12.1 1.0 2 221.5 7 101.3 1.8%

QLD 3 224.5 0.0 40.3 3 264.8 948.3 9.2 - 24.0 1 709.4 5 907.7 2.2%

WA 1 617.1 0.0 21.3 1 638.4 498.9 4.8 39.5 1 147.3 3 328.9 2.2%

SA 1 678.9 0.0 17.2 1 696.1 451.7 3.9 - 6.0 821.4 2 967.1 1.3%TAS 738.0 0.0 5.4 743.4 116.5 1.2 1.0 293.7 1 155.8 1.1%

ACT 281.8 25.0 3.6 310.4 63.5 1.0 - 13.0 189.9 551.8 2.3%

NT 1 033.9 0.0 2.2 1 036.1 57.3 1.0 19.0 186.5 1 299.9 3.3%

Total 16 890.2 25.0 217.6 17 132.8 5 177.4 50.0 0.0 9675 3 2035 1.9%

Source: 1998 Premiers Conference Offer Document.

Note: (a) Excludes Fiscal Contribution, and Other Payments and Repayments as listed in the 1998 Premiers’ Conference Offer Document.


54

APPENDIX 1

COMMONWEALTH GRANTSCOMMISSION 1998 UPDATE

Every year, the CGC updates the per capitarelativities used by the Premiers’ Conferencein distributing General Revenue Grants, andhospital funding between the States andTerritories. This year, the information waspublished in the CGC’s Report on GeneralRevenue Grant Relativities 1998 Update.Relativities are updated to reflect:

• data updates and revisions, such asthe replacement of some expenditureestimates with Australian Bureau ofStatistics data; and

• moving the five year review periodforward (upon which the relativitiesare calculated) to include 1996-97 dataand remove 1991-92 data.

For 1998, the Commission was asked tocalculate two sets of relativities.

• Medicare-adjusted relativities that arecomparable with those used since the1993 Medicare Agreement; and

• equalisation relativities in which healthassessments and the treatment ofpreviously quarantined healthpayments are based on theequalisation principle.

The choice of relativities is related to thelikely adoption during 1998 of the newAustralian Health Care Agreement.

The Commission’s recommendations arecritical in determining the Territory’s shareof the financial assistance grants pool for1998-99.

MEDICARE-ADJUSTEDRELATIVITIES

The Medicare-adjusted relativities reflect thearrangements which have been in placesince 1993 when the Commonwealthdirected the Commission with respect to itsassessment of hospital and some healthexpenditures (and revenues) and separatedcertain Medicare-related funds from thecombined financial assistance grants andhospital funding grants pool, quarantiningtheir distribution from the CGC relativitiesprocess.

The Territory has benefited more than otherjurisdictions (on a per capita basis) from thequarantined Medicare-related funds becausethe distribution is based largely on theproportion of public patients in publichospitals, which is high, in the Territory’scase.

The 1998 Update assesses the Territory’sMedicare-adjusted relativity at 4.95012, anincrease from the current year’s 4.89353. Indollar terms, this would mean an additional$12.2M for the Territory if the currentMedicare arrangements carried over to1998-99.

EQUALISATION RELATIVITIES

The equalisation relativities reflect theinclusion of factors in the Commission’sassessment which have been excluded byvirtue of provisions of the MedicareAgreement since 1993. The combined effectof the loss of the favourable distribution ofthe quarantined funds and inclusion of thesefactors is not to the Territory’s advantage.

The report assesses the Territory’s relativityon an equalisation basis for 1998-99 as4.81869. Figure 6.6 shows the effect of eachof the relativities if applied to the 1997-98


55

Pool. In reality, funding received in 1998-99would be higher than that shown due toescalation of the Pool for population growthand price increases.

Figure 6.6

COMPARISON OF DISTRIBUTIONS UNDERDIFFERENT HEALTH ARRANGEMENTS

(a)1997-98

(b)1998-99

Medicare-adjusted

(c)1998-99

Equalisation

$M $M $M

FAGs + HFGs 979.0 991.2 1 016.5

Other Medicare 57.9 57.9 0

Total 1 036.9 1 049.1 1 016.5

Note that the:

• difference between 1997 and 1998Medicare-adjusted relativities (b) – (a)would result in a $12.2M increase in1998-99 over 1997-98;

• difference between 1997 Medicare-adjusted relativities and 1998equalisation relativities (c) – (a) wouldresult in a $20.4M decrease in 1998-99over 1997-98; and

• difference between 1998 equalisationrelativities and 1998 Medicare-adjusted relativities (c) – (b) will resultin $32.6M less in 1998-99 under newarrangements than if existingarrangements continued.

COMPOSITION OF CHANGE INTHE DISTRIBUTION

The main areas contributing to the change inthe implied distribution are the result ofchanges in the following categories:

• Police (+$9.1M) - largely from anincrease in standard expenditure andrevisions to the age-sex population

data. The Territory has high disabilityfactors in this category;

• Superannuation (+$4.3M) - reflects anincrease in the standard due to thesubstitution of 1996-97 data for1991-92;

• Debt Charges (+$6.9M) - results fromdata changes in other assessmentcategories that flow through to thedebt charges assessment;

• Community Health Services (+$2.3M)- reflects an increase in the standardcaused by revisions to financial databy New South Wales; and

• Corrective Services (+$3.1M) - reflectsan increase in the standard due to thesubstitution of 1996-97 data for1991-92 data.

Significant offsetting categories are:

• General Revenue Grants (-$22.6M) -reflects an increase in the standardbudget surplus, largely due toincreases in own-source taxation, andcontributions from trading enterprisesacross all States. The CGC’s modelapplies the same surplus to all Statesand Territories, which has the effect ofreducing grants to jurisdictions withgreater needs. If the surplus haddeclined or become a deficit, theTerritory would have experienced anincrease in grants; and

• Business Franchise Fees - Tobacco(-$2.3M) - a large increase in theTerritory’s assessed revenue capacitydue to the substitution of 1996-97 datafor 1991-92 data.

1999 MAJOR REVIEW

The CGC generally reviews themethodology used in determining


56

relativities every five years. TheCommission is set to report on the nextreview in February 1999.

As part of the five-yearly review theCommission examines the overall structureof the assessment process, the compositionof existing assessment categories, andmethods used in calculating relevantdisability factors.

A number of vexing issues have alreadyarisen as part of the 1999 review. Theseinclude:

• the possible inclusion of capitaltransactions in the Commission’sassessment;

• the possible removal of the standardbudget result term;

• the introduction of accrual accounting;

• the treatment of revenue replacementgrants as a result of the section 90ruling; and

• the possible inclusion of highereducation as part of the CGC’sassessment.

The Commonwealth actively consults withthe States and Territories concerning boththe annual review of relativities and the five-yearly review of the methodology.

57

Chapter 7

GOVERNMENT BUSINESS DIVISIONREFORMS

Since 1995, the Northern Territory Governmenthas been implementing a set of policies designedto ensure the efficient operation and managementof its Government Business Divisions (GBDs).

Significant progress has been made regarding thecosting and pricing activities of GBDs, and inenhancing competitive neutrality by removingsome key advantages and disadvantagespreviously available to GBDs because of theirgovernment ownership.

However, some essential policies are still underdevelopment or evolving, and additional policyinitiatives might also be necessary oncecommercialisation is fully operative in thoseinstances where efficiency gains proveintractable.

This chapter briefly overviews reforms to date,identifies policy processes which are still to beimplemented in full, and examines the keyadditional policy options available to theGovernment once commercialisation is inplace.

REFORMS TO DATE

For some time, the Territory Governmentalong with all Australian jurisdictions hasbeen striving to improve the efficiency of thebusiness enterprises which it owns andoperates. The Territory’s GBDs are listed inAppendix 1 to this chapter.

Currently, GBD reform in the Territoryinvolves a set of administrative reforms andcompetitive neutrality measures, aimedprimarily at achieving commercialisation ofthe Territory’s GBDs.

OBJECTIVES OF REFORM

Since late 1995, GBD reform in the Territoryhas been guided by a set of Cabinetapproved principles for the operation ofGBDs. In essence, the principles involveGBDs:

• operating under a charter of operationsapproved by Cabinet, setting out aGBD’s operational objectives andstrategies;

• recovering full costs from users ofcommercial services;

• establishing and operating undercommercially-oriented managementstructures; and

• pursuing cost efficiency in the provisionof services.

The goals of the GBD reform process aretwo-fold. The first is to improve efficiency inthe allocation of resources. Allocativeefficiency involves the degree to which thereis an optimal apportionment of a given levelof resources between alternative uses.Allocative inefficiency sees relativelyinefficient enterprises prosper, divertingresources from more efficient competitors ormore highly-valued end uses, whetherinside or outside the public sector.

The second goal of GBD reform is to drivedynamic efficiency gains. Dynamic efficiencyinvolves the degree to which the minimumlevel of inputs is being used to produce a


58

given level of a particular output. Dynamicinefficiency sees higher costs of governmentservices to domestic consumers and highercosts of government-provided inputs forTerritory businesses (therefore hamperingthe ability of Territory business to competein domestic and overseas markets).

The pursuit of GBD reform in the Territoryis based upon the judgment that significantallocative and dynamic efficiencies areavailable in the GBD sector.

INSTRUMENTS OF REFORM

Also underpinning the Government’s GBDreform process is the view that suchinefficiencies can be significantly reduced bypolicy adjustments on the part of theGovernment. In particular, the emphasis isupon market-based means of facilitatingefficiency improvements.

Over the last two years, considerable workhas been undertaken by both the GBDs andNorthern Territory Treasury to this end. Todate, most emphasis has been placed on:

• the full attribution of costs to GBDs, withall GBDs now required to pay the fullcosts of employing staff, all corporateoverheads such as the cost of leasingpremises, auditing and legal costs, and allcorporate taxes, fees and fines;

• the development of prices whichproperly reflect those costs, involving themovement toward a two-part pricingstructure based upon a reasonableapportionment of fixed and variablecosts;

• the identification and budget funding ofthe Community Service Obligations(CSOs) provided by GBDs; and

• the development of managementsystems and structures suited to a

commercial environment, and whichprovide GBDs with a degree of flexibilityand autonomy in their decision makingso they can be more responsive to theircommercial environment.

Altogether, these reforms see greaterutilisation of the pricing mechanism toallocate resources between alternative uses.By fostering competitive neutrality, theamount of resources controlled by GBDswill increasingly be determined by theirrelative efficiency rather than any specialadvantages they enjoy (or specialdisadvantages they suffer) by virtue of theirownership.

ASSESSMENT

Reforms implemented to date have achieveda great deal in improving the efficiency withwhich resources are allocated, both withingovernment and across the economy as awhole.

With time, improvements in efficiency willbe able to be clearly assessed throughmovements in GBD performance measuresand by benchmarking these to comparableenterprises elsewhere. Since for most GBDsthis process is only in its first year,meaningful comparisons across time are notyet available. As this data accumulates,performance results will be presented insubsequent years on GBD performanceresults. Appendix 2 of this chapter detailsfinancial performance measures againstwhich GBDs will be reporting.

Despite the current lack of useful data formeasurement purposes, it is clear that thereform process to date has already achievedconsiderable progress in focussing theattention of GBDs on key businessobjectives. The costing and pricing activities,in particular, have provided GBDs with amuch greater insight into their business

Government Business Division Reforms

59

operations and provided much moredetailed information on the cost of serviceprovision.

Similarly, as agencies now control thefunding previously provided direct toGBDs, they are more aware of the cost ofconsuming GBD services and the alternatecompeting resource requirement they face.This has led agencies to give greaterconsideration to their level of use.

Some of the administrative and processchanges required to implement theGovernment’s GBD principles involve theresolution of complex issues or can only beprogressed sequentially (that is, it is onlypossible to address some issues once pre-requisite changes have been bedded downand experience gained with them).

As a result, some significant policy issuescontinue to require work over 1998-99 andfuture years. Notable among the policyissues to be addressed over the coming yearare:

• the pricing of individual CSOs, now thataggregate arrangements for funding ofapproved CSOs are in place;

• the determination of appropriate rates ofreturn on equity and an associateddividend policy, now that certainfundamental aspects of costing andpricing have been implemented; and

• the evaluation of GBD performance, nowthat GBDs have begun reporting theirperformance against an initial set offinancial and non-financial performanceindicators.

The remainder of this chapter considers howsome of these additional policy issues mightdevelop, before canvassing whether furtherextensions might be required to the

Government’s commercialisation programwere some efficiencies to prove elusive.

FURTHER REFINEMENTS

While many of the reform elements are inplace, some are still under development ornot yet fully implemented. Further progressis necessary on these fronts ifcommercialisation is to achieve its fullimpact. Once fully implemented, thesereforms are likely to achieve the goals ofcommercialisation in most GBDs.

COMMUNITY SERVICEOBLIGATIONS

CSOs arise where the Governmentspecifically requires a GBD to carry outactivities relating to outputs or inputs whichthe GBD would not elect to do on acommercial basis - or would only undertakecommercially at higher prices or lowerstandards - and which the Government doesnot require non-government businesses toundertake.

While these obligations may be legitimategoals of Government, the Government’sGBD principles recognise that inappropriatetreatment can impair the commercial focusof the GBD concerned. Unless CSOs aredelivered by GBDs pursuant to acommercially negotiated and budget fundedcontractual arrangement, and are pricedaccordingly, there may be insufficientincentives to encourage efficiencies in thedelivery of CSOs. Moreover, from theGovernment’s perspective as purchaser,without budget funding the appropriatenessof CSO programs may not be routinelyassessed against the full cost of deliveringthe program.

With a view to ensuring that the cost ofproviding approved CSOs is minimised andthe GBD has an incentive to perform these


60

services in an efficient manner, theGovernment’s GBD Guidelines provide for:

• each GBD to report information onidentified CSOs;

• each CSO being valued on an avoidablecost basis according to the GBD’sadopted pricing structure; and

• funding for approved CSOs beingprovided from the Budget, with theamount being provided determinedannually in the budget context.

To date, progress has been made in movingto the direct funding of CSOs. In 1998-99, theBudget provides for $62.8M in funding ofCSOs provided by the Territory’s GBDs.

Under consideration for implementation intime for next year’s Budget are extensions tothe CSO arrangements involving:

• full implementation of apurchaser/provider framework withparticular emphasis on the negotiation ofan agreed unit price for each CSO activity,to further improve the incentivesavailable for the GBD-provider to pursueefficiencies; and

• annual review of the amounts of eachCSO being purchased in the Budgetcontext.

Incentives for GBDs to pursue costefficiencies will be strengthened by theGovernment meeting a set price per CSOunit instead of funding total costs. Whereany reduction in total costs results in acorresponding reduction in the CSOpayment, the opportunity to capitalise onefficiency gains is reduced.

This effect has also been exacerbated by thepractice to date of ensuring budgetneutrality when increasing transfers from

the budget by equivalent increases individends payments from the GBD. Whilethere are good reasons to introduce financialchanges affecting the GBD’s net contributionto the Budget in a budget neutral way in theinitial years of operation, the pursuit ofbudget neutrality in subsequent years maydampen incentives for improving theefficiency of CSO delivery.

By striking a unit price, and the GBD onlyreceiving funding based on that unit price,any efficiencies achieved by bettermanagement of resources by the GBD willbe seen to improve the GBD’s financialperformance, and any inefficiencies or poormanagement will adversely impact uponbusiness earnings.

Finally, as agencies responsible forpurchasing the CSOs recognise that theCSOs effectively involve budgetaryexpenditures, there will be increased focusin government on obtaining value formoney in respect of each CSO. Also theremay be an increased focus in creatingmarket pressures for the efficient provisionof CSOs through regular reviews, effectivecontract management and competitivetendering as appropriate.

DIVIDENDS

The Government’s GBD Guidelines requireprices for GBD services to include provisionfor a rate of return on equity and taxationequivalents where the GBD is deemed to bein competition, directly or indirectly, withthe private sector.

Reflecting the complexity of the issuesinvolved, the pricing methodologiesimplemented to date by GBDs have not yetrequired inclusion of a component for areturn on equity (profit). This issue will beconsidered over 1998-99 for inclusion intoprices in future years.


61

One key objective of the reform process is toengender a more commercial focus in GBDsboth within management and staff. Centralto that commercial focus is close attention tothe bottom line. If there is no allowance forGBDs to earn a return, or profit, on theiractivities there will be no profit focus.

Similarly, if meaningful comparisons areto be made between Territory GBDs andsimilar enterprises elsewhere, particularlywhere those comparisons are to privatesector organisations, a profit element willgenerally be included in costs and returnson equity would form a key financialmeasure.

Determining appropriate rates of return willbe relatively straightforward in the case ofGBDs operating in competitive marketsegments (such as fleet management), butmore difficult in those areas wherecompetition is constrained (such aselectricity and water). It must also berecognised that in such cases, setting a rateof return will impact on CSO payments, aswell as consumers prices (to the extent thatthese are allowed to vary).

GBDs must also plan to earn a suitablereturn on equity if they are to ensure that thecapital invested by the Government in thebusiness is utilised appropriately. Capitalproductivity has traditionally been an areaof poor performance with the governmentbusiness sector, with improvements aparticular goal of commercialisation.

Likewise, the actual amount paid as annualdividends should reflect the degree ofsuccess achieved in earning a return onequity (that is profit). Only as ongoingdividends are increasingly set according tocommercial principles are GBDs more likelyto treat the Government’s equitycontribution and retained earnings as‘shareholder capital’, and will managementrecognise that it is the maintenance and

enhancement of the value of such capital forwhich they must be held accountable.

Over the next year, attention in this area willbe focussed on deriving:

• a medium term target rate of return onequity for each GBD, indicating thereturn on the Government’s investmentsought in the context of explicit fundingof CSOs and a commercial debt/equitystructure;

• an indicative dividend payout ratio (as aproportion of profit) for each GBD, to actas a starting point for dividendnegotiations; and

• a dividend regime where annualdividends are driven primarily by theneed to maintain a suitable capitalstructure.

Target rates of return on equity are likely tobe set equal to the long-term governmentbond rate (representing the risk free rate)plus a risk premium unique to each GBD.Final target rates for a particular GBD willneed to be established on a case-by-casebasis through consultation and financialanalysis - mainly because risk profiles arelikely to differ and there may be differencesin the extent to which all CSOs are explicitlyfunded. CSOs restraining GBDs fromrecovering the full cost of resources may befunded, in whole or in part, through areduction in the rate of return otherwiserequired.

Government’s usually prefer returns in theform of high dividends rather than capitalgains and, if this were the case in theTerritory, the indicative dividend payoutratios to be set for individual GBDs wouldtypically be higher than private sectoraverages.

By basing dividend payments ultimately oncapital structure considerations (that is, the


62

target debt to equity ratio), GBDs wouldonly retain the cash resources necessary toachieve the targeted equity levels (and nomore) and to fund their approved capitalexpenditure program. Under such a regime,once future capital expenditure is agreed,the level of dividends would be driven bythe profitability of the GBD, the need to keepthe target debt to equity ratio, and measuresdriving that target such as interest cover, inthe desired range. Having set the capitalstructure and approved a future level ofcapital expenditure, the level of dividends isa residual, with negotiations on the dividendpayout in a particular year, in effect, being anegotiation on the future level of capitalexpenditure by the GBD.

MONITORING ANDBENCHMARKING PERFORMANCE

The Government’s Guidelines call for GBDsto monitor their performance with respect tocore services and to periodically report theresults of such monitoring.

Over the past year, initial performanceindicators (both financial and non-financial)have been established by each GBD. For thefirst time, a range of such indicators hasbeen reported in the annual reports of all theGBDs (except the International ProjectManagement Unit which is involved in athorough business review, the results ofwhich will be used to develop performancemeasures).

Focus to date has been on enabling theGBDs to develop their reporting systems.With the basis of these systems now in place,it is appropriate to:

• progress the reporting arrangements toimprove consistency between GBDs inthe selection and measurement of theperformance indicators being reported;and

• develop external benchmarks to assist inevaluating these performanceindicators.

Progress is expected to be made in bothrespects over the coming year. As this isdone, it will also be possible to embark ondeveloping processes aimed atindependently assessing each GBD’sperformance for Cabinet.

POSSIBLE ADDITIONAL MEASURES

Once the commercialisation reformsdescribed above are in place andmanagement culture in the Territory’s GBDsis well on the way to becoming morecommercial, consideration may also need tobe given to further policy initiatives in orderto achieve all the dynamic efficiencies thatmay be available in some of the larger GBDs.

With commercialisation in place, optionsgoing forward revolve around the‘corporatisation’ of government businesses.

The National Competition PolicyAgreement states that, where appropriate,participant jurisdictions like the Territorywill adopt a ‘corporatisation’ model forgovernment business enterprises. To date,the approach of the Territory has been tocorporatise (as distinct to privatise) only thelarger enterprises, that is the TerritoryInsurance Office, Power and WaterAuthority, and the Darwin Port Authority.These corporatised GBDs have a separatelegal identity achieved via legislation.

In addition to incorporation under specialActs or corporations law, thecorporatisation model favoured in otherjurisdictions involves adopting privatesector corporate governance arrangements,which see management of governmentbusinesses being given substantialdecision-making discretion in exchange


63

for strengthened performance monitoringand strategic shareholder oversight.

The remainder of this chapter looks at whatwould be involved if full corporatisationwere to be contemplated for a GBD oncecommercialisation was in place, and whatfactors may determine whether such anapproach is appropriate in the Territorycontext. In doing so, the considerations thatwould need to be weighed up whendeciding whether to fully corporatise a GBDare identified. It is one thing to be certainthat inefficiencies remain: it is quite anotherto be sure that the costs of correcting suchinefficiencies do not exceed (or consume) thebenefits to be had.

NATURE OF CORPORATISATION

‘Corporatisation’ is a form of corporategovernance which is a step closer to thattypically seen in large private sectorbusinesses than under ‘commercialisation’.In particular, full corporatisation involvesgranting operational autonomy tomanagement beyond that already availableunder commercialisation matched witheffective accountability for exercise of thatdiscretion, all aimed at maximising thereturn on the owner’s investment in theorganisation.

At its most extreme, corporatisation issimilar to the privatising of management (ona fee for service basis) rather than ofownership, with the importation of privatesector corporate governance arrangementsinto the public sector.

From experience in other jurisdictions inAustralia, key policy elements required foreffective corporatisation would be:

• Ministers taking on more of an owner-shareholder role, with shareholder-Ministers exercising strategic controlconsistent with their accountability to

Parliament and the public, but leavingboards and management to developbusiness strategies and to handle day-to-day operational policies;

• a Board of Directors being establishedwhich is commercially focussed ratherthan representative, and accountable tothe shareholder-Minister for the overallperformance of the GBD, with suchBoards charged with ensuring that theGBD’s activities are managed in the bestinterests of the Government as soleshareholder;

• GBD management being granted fulloperational autonomy with respect tomaking key restructuring decisions,introducing commercial-like workpractices and conditions of employmentand determining the ongoing assetacquisition and disposals program tomaintain existing operational capacity;and

• the Government as owner establishing:

– a performance contract with theGBD, involving owner-determinedtargets regarding a GBD’s rates ofreturn on equity and capital/assets,capital structure and dividendpayments and owner-determinedrules regarding core (approved)activities, borrowings, informationdisclosure and the scope for futureequity injections;

– a performance monitoring capabilitywithin Government independent ofthe GBDs, involving clear reportingand information requirements ofGBDs; and

– graduated rewards (and sanctions)for good (and poor) performance.


64

Such governance changes could only becontemplated in the Territory context onceall aspects of commercialisation were inplace and the GBDs in question weredisplaying an appropriate commercialculture.

The main governance extensions fromcommercialisation to fully corporatiseselected GBDs would involve:

• devolution of operational authority toGBD boards and management;

• extending the charter of operations intosomething closer to a ‘statement ofcorporate intent’, including by settingfinancial targets from the Government’sperspective (shareholder); and

• introducing graduated rewards andsanctions, in addition to remunerationarrangements, thereby moving toeffective ex post accountability of boardsand management for their performance.

ECONOMIC BENEFITS OFCORPORATISATION

While commercialisation will ensure thatGBDs are charging cost-reflective prices, it ispossible that these costs may continue toexceed those of privately-operatedbusinesses because the governancearrangements facing GBD managementresult in incentives to produce efficientlywhich do not match those facing privatesector management.

Some of the governance arrangementsfacing private sector management but whichdo not form part of commercialisation of theTerritory’s GBDs are:

• effective performance contractingbetween the owners and management;

• strong sanctions for management forworse-than-expected performance, andsufficient rewards for better thanexpected performance; and

• the Government, as owner, deliberatelystaying out of operational decisions, toensure that management is fullyaccountable for resulting performance.

The absence of the incentives that go withthese governance arrangements may resultin some GBDs’ cost structures (and so pricescharged) being higher than those possibleunder a more corporate-like governanceregime.

The rationale for eventually grantingdiscretion to management beyond thatalready available under the Government’scommercialisation guidelines is that it maybe essential if all economies are to beidentified and management’s accountabilityfor business performance is to bestrengthened.

ECONOMIC COSTS OFCORPORATISATION

Management autonomy cannot beunfettered and owners must be sufficientlyinformed to hold management fullyaccountable for GBD performance. Wherethese conditions have not been met in theprivate sector, more often than not the resulthas been the destruction rather than creationof shareholder value.

In fact, the discretion allowed management -necessary to reap greater economies andstrengthen accountability - gives rise topotential agency costs. These costs areassociated with the scope available to boardsand management to pursue businessobjectives that are not in the interests of theGovernment as shareholder. Suchdivergence of interest may result from the


65

risk preferences and time horizons of GBDmanagement being different from those ofthe Government as shareholder. Suchproblems increase the greater the degree offormal separation of government from theoperations of its business enterprises, andare magnified where the enterprise inquestion has the capacity to generate largeoperating cash flows.

Corporatisation therefore also involvescertain costs associated with the monitoringand incentive mechanisms necessary to dealwith such agency problems. The main costsare associated with:

• contracting desired performance levelswith management;

• providing incentive arrangements whichreward good performance and penalisepoor performance; and

• monitoring actual performance againsttargeted levels.

The remainder of this section looks at thesecosts in the Territory context. Whether fullcorporatisation could eventually becontemplated in the Territory oncecommercialisation has been implemented infull depends upon an assessment of the sizeof these costs relative to the potentialbenefits described earlier in the form ofincreased shareholder value.

PERFORMANCE CONTRACTING

To become a performance contract which aGBD’s board and management would havewith shareholder Ministers, a GBD’s charterof operations would need to be extended toinclude a small number of carefullydesigned (financial and non-financial)performance targets, focussed on themaintenance and enhancement of

‘shareholder value’ in particular. Suchperformance targets would need to beestablished by the Government rather thanthe GBDs themselves, and would involveconsideration of the riskiness of thebusiness.

Clearly, such arrangements would only beeffective where commercially sophisticatedboards were in place, and there was acapacity within government to set (andmonitor) meaningful performance targets.

REWARDS AND SANCTIONS

Clear incentives would need to be in place tomake any performance contracts work.Otherwise, in the case of GBDs, there wouldbe no convincing process or incentiveframework to ensure that pressure wasapplied to reduce costs.

While appropriate remunerationarrangements may need to play a role(including bonuses for better-than-targetedperformance) perhaps of more importancewould be:

• public performance reportingarrangements which impact upon thereputations of boards and management;and

• graduated sanctions for below-parperformance which take effect prior tocircumstances warranting dismissal ofthe board or management, perhapsinvolving (as performance departsincreasingly from targeted levels)increased reporting requirements and/orreduced managerial autonomy andincreased shareholder-imposedadministrative controls.

Unless appropriate rewards and sanctionsare in place, experience from otherjurisdictions is that boards and managementwill not be held accountable for their


66

performance and incentives for the pursuitof efficiency, gains will be inadequate.Clearly, such arrangements have their owncosts and carry certain risks for theGovernment.

ACCOUNTABILITY MECHANISMS

Finally, only through effective accountabilitymonitoring of a GBD’s performance wouldshareholder-Ministers be able to ensure thatsuch performance was in line withpreviously agreed objectives. Monitoringalso provides early warnings regarding anyemerging problems.

To be effective, such monitoring would needto be independent of the GBDs in question.As shareholder-Ministers do not have timethemselves to monitor performance, this rolewould have to be assigned to monitoringunits within government. The tasks facingsuch units are the evaluation of businessperformance and its expected futureearnings, and the risks being undertaken bythe business.

Such monitoring units would need to bestaffed with people with the commercial andcapital market skills necessary or theindustry specific knowledge required tomonitor the Government’s investments in itsbusiness enterprises.

CONCLUSION

Corporatisation is basically an extension ofcommercialisation, involving granting agreater degree of autonomy to GBDmanagement and a retreat by theGovernment to a strategic shareholder role.

While there may be important gains to behad from effective corporatisation in the

form of improved dynamic efficiency and abetter return on government capital tied upin the GBDs concerned, moving beyondcommercialisation to full corporatisationclearly also has major costs and risks forgovernment.

Dynamic efficiency is most likely to beimproved by greater managerial autonomycoupled with strategic ownership oversightand the associated costs and risks might bemanageable in circumstances where:

• management has commercial experienceor potential;

• the governing board is commerciallyfocused;

• performance benchmarks are readilyavailable;

• performance contracting and monitoringskills are present within government; and

• appropriate rewards and sanctions areavailable.

These conditions are only likely to be metwith regard to the larger GBDs, and thenonly after progress has been made on thecommercialisation front, and a convincingcase is made that some importantinefficiencies remain.

These conditions are unlikely to be met forsmaller GBDs or GBDs not in competitionwith, or supplying goods or inputs to, theprivate sector. Unless such conditions aremet, corporatisation is unlikely to be anappropriate step for the TerritoryGovernment to consider.


67

APPENDIX 1

NORTHERN TERRITORY GOVERNMENT BUSINESS DIVISIONS

GBD Host agency(a) external/internal(b)

Darwin Port Authority Department of Transport and Works external

Construction Agency Department of Transport and Works internal

NT Fleet Department of Transport and Works internal

Government Printing Office Department of Transport and Works internal

Department of Communications andAdvanced Technology: CommercialServices

Department of Communications and AdvancedTechnology internal

Darwin Bus Service Department of Transport and Works external

Wildlife Parks Parks and Wildlife Commission of the Northern Territory external

International Project Management Unit Department of Asian Relations, Trade and Industry external

TAB Racing and Gaming Authority external

Power and Water Authority Northern Territory Treasury external

Northern Territory Housing Commission Department of Housing and Local Government external

Note: Host agencies act as owner on behalf of the Northern Territory Government, and are the Agency responsible for a GBD in the first instance.External GBDs supply market-like goods and services to the private sector, whereas internal GBDs supply their goods and services at this stagesolely to other arms of government.


68

APPENDIX 2

GBD PERFORMANCE MEASURES

As part of the performance monitoringprocess, GBDs are required to reportannually against a number of set financialperformance measures (where these aremeaningful). These financial performancemeasures are detailed below. They havebeen adapted from the financialperformance measures developed by theSteering Committee on NationalPerformance Monitoring.

1. RETURN ON ASSETS

Earning Before Interest and Income Tax(Equivalents) but after Abnormals (EBIT)

Average Total Assets

This measure determines the relativeefficiency of a GBD’s utilisation of its assetsto generate income. It provides an indicationof profitability and efficiency which wouldbe relevant in a competitive environmentwhere return has to be maximised for agiven capital base.

There is some merit in the argument thatthis measure is of limited value to GBDswho do not operate in fully competitivemarkets since their focus is on cost recoveryrather than profit maximisation. However,this position may change over time, andtime-series data will be useful to assess theimpact on profitability of opening marketsto competition.

2. RETURN ON OPERATINGASSETS

EBIT less Investment Income*

Average Total Assets less AverageFinancial Assets

*Investment Income is income received and receivable onfinancial assets (for example, interest, dividends, etc).

This specifically measures the profitabilityand efficiency of the core activities byexcluding investment activities.

3. OPERATING SALESMARGIN

DEBIT less Investment Income

Total Revenue (including CSOs) lessInvestment Revenue

This ratio measures the efficiency of GBDsby calculating the portion of revenue that isconverted into profit. Over time, it providesa measure of a GBD’s ability to minimiseexpenses.

4. RETURN ON EQUITY

Operating Profit After Income Tax*

Average Total Equity#

*Operating profit after income tax is total revenues less totalexpenses (including interest and abnormal items) less income tax.Extraordinary items are not included.

#Total equity is total assets less total liabilities and thereforeincludes capital, reserves and retained earnings.

This ratio measures the return that theowners of the GBD (Government) receivefrom their investment.

5. DIVIDEND TO EQUITY RATIO

Dividends Paid or Provided For

Average Total Equity

As an alternative to Return on Equity, thismeasures the return that is actually paid tothe owners.

6. DIVIDEND PAYOUT RATIO

Dividends Paid or Provided For

Operating Profit After Tax

This measures the proportion of profit that ispaid to the owners. While in the privatesector, investors and creditors often use thisas an indication of management intentionsfor the future of a firm, from Government’s


69

perspective this measure will be used moreto ensure an efficient use of capitalresources.

7. DEBT TO EQUITY

Debt*

Total Equity

*Debt is all repayable borrowings (both interest bearing and non-interest bearing), non-repayable interest bearing borrowings,redeemable preference shares and finance leases. Excludescreditors and provisions. Offsetting assets (such as contributionsto sinking funds) should not be deducted.

This indicator is used to assess the stabilityof a GBD’s capital structure and its mediumto long term solvency.

8. TOTAL LIABILITIES TOEQUITY

Total Liabilities*

Total Equity

*Total liabilities includes debt, provisions and creditors.

This measure is used to indicate the stabilityand sustainability of a GBD’s capitalstructure. The ratio compares the level oftotal debt financing as a proportion of totalequity financing.

9. CURRENT RATIO

Current Asset*

Current Liabilities*

*Current assets and liabilities are those which are expected to beconverted into cash (or are due to be paid in the case of liabilities)within the next twelve months.

Measures the short term solvency of a GBDby comparing the liabilities that may berequired to be settled at any time to thecurrent assets available to be liquefied tomeet them. This enables an assessment ofthe sufficiency of a GBD’s working capital.

10. INTEREST COVERAGE

EBIT

Gross Interest Expense

Interest payments on debt are a hurdle that aGBD has to overcome each year. Interest

coverage measures how well placed a GBDis to meet its commitments by determininghow many times over it earns its interestrepayments.

11. COST RECOVERY RATIO

Revenue from Operations*

Expenses from Operations*

*Revenue or expenses from operations are total amounts lessabnormal items and those amounts associated with investingactivities.

Measures the performance of the coreactivities of a GBD by determining theexcess of its revenues over the expensesincurred to generate them. The coreactivities are the foundation of a GBD’sperformance and so give an indication of themedium term viability of a GBD.

12. OPERATION PERFORMANCE

Revenue from Operations less Expensesfrom Operations

Average Total Assets less averageFinancial Assets

Measures the performance of a GBD by itsefficiency in extracting profit from itsoperating assets. For those GBDs not in afully competitive environment cost recovery,rather than profit maximisation, is the keyobjective. As such this measure will be oflittle significance initially. However, likeother profitability measures, there is someuse in calculating the indicator in order toobtain time-series data.

NON-FINANCIAL MEASURES

In addition to the above financialperformance measures, GBDs are required todevelop non-financial performance measures.These are used to monitor areas such as:

• standard of service;

• customer satisfaction;

• employee relations; and

• level of service.

71

Chapter 8

PRIVATISATION AND OUTSOURCING

The transfer of government assets and functionsto the private sector has been a significant focusof Governments at all levels in Australia over thelast decade. The contracting out of governmentactivities has been under way for some time, andassets sales are set to continue with some Statesannouncing major initiatives to preparegovernment businesses for sale in 1998.

This chapter considers the nature and promise ofprivatisation and outsourcing in a NorthernTerritory context.

The two options of privatisation and outsourcingare distinguished, and general reasons forgrowing interest in privatising in otherjurisdictions are explored. For both privatisationand outsourcing, the respective economic benefitsand costs are canvassed, and the circumstancesrequired for maximum net benefit andminimising risk are suggested.

Given the small, dispersed and isolated nature ofTerritory markets, and the skill-intensive natureof contracting and monitoring, the scope forprivatisation and outsourcing in the Territorycan only be determined on a case-by-case basis.They clearly have a role to play in somecircumstances, as evidenced by a range ofprivatisation and outsourcing experiences in theTerritory since Self-Government.

DEVELOPMENTS INGOVERNMENT OWNERSHIP

Crucial to an appreciation of privatisationor outsourcing options is anunderstanding of why governments tookon the operation of the business oractivity in the first place. The usualexplanation is that government provisionis needed because reliance on private

provision would result in the goods andservices in question being under-providedor too highly priced.

Such ‘market failure’ is particularly apparentwith infrastructure, and may take manyforms:

• some facilities and networks may benatural monopolies and could giverise to monopoly pricing if privatelyowned;

• some facilities are indivisible andmust be built to a minimum feasiblesize, and typically have a high level ofuser benefit which cannot be capturedas income;

• some facilities are characterised byhigh external benefits and costs, suchthat those who benefit may not payand those who suffer the costs maynot be compensated; and

• some facilities may be public goodsfor which it is not feasible to identifyand charge all users.

In these circumstances, the longstandingview has been that efficient pricing andsupply practices can be more easily affectedthrough government ownership orprovision than by regulating a privatemonopoly or by subsidising (or arrangingsupply by) a private provider. Governmentbusinesses have been considered to be morelikely to act in the ‘public interest’ byrestraining prices and ensuring sufficientsupply. Any information required onmarket conditions would also be more


72

readily provided by a government-ownedbusiness.

From experience elsewhere in Australia andoverseas, many different influences arecontributing to the increased support forprivatising government businesses orfunctions. These include:

• rejection of previously-held notionsthat government ownership of certainbusinesses or activities is anappropriate or effective interventionin the market place;

• a philosophical view that smallgovernment is better than largegovernment;

• the argument that private sectorprovision is more efficient (and lesscostly) than government provision;

• growing acceptance that thecommunity’s interests can be betterhandled by government being thebusiness regulator and/or throughcontracted community serviceprovision - and that an ownership rolegives rise to a conflict of interest inthis regard;

• increased concentration on corebusiness apparent in both the privateand public sectors which has led tothe divestment of non-core functionsto specialist providers;

• a favourable market environmentcurrently for asset/business sales; and

• recognition that it is governments andnot the private sector which areincreasingly faced with capitalconstraints, requiring privateparticipation and funding to meetgrowing infrastructure needs previouslyonly possible by government provisionand funding.

The fundamental issue in privatisation iswhether the benefits which governmentsand the community derive fromgovernment ownership or direct serviceprovision can be achieved more effectivelyvia other means.

The factors which gave rise to governmentownership or participation in the past mayno longer be as relevant in presentcircumstances.

The key changes which have been mostapparent over the last decade have been:

• a considerable improvement ingovernments’ capacity to regulateprivate providers, with thestrengthening of economic regulationcompetencies within government as aresult of (for example) the nationalcompetition agenda, and a growingcapacity to negotiate and managepurchaser contracts; and

• the much increased willingness ofprivate sector providers with financialand operational capacity to provideinfrastructure and publicly-fundedservices, and the growth andincreased competitiveness ofassociated markets.

Governments have only really beenprepared to contemplate various forms ofprivatisation as they have becomeincreasingly satisfied that their interests andthose of the community are capable of beingbetter served by alternative policyapproaches (such as by regulation,identification of cross subsidies, explicitCommunity Service Obligations (CSOs) andthe like).

OPTIONS

There is a wide range of processes throughwhich activities, assets or functions can ineffect be transferred from government to theprivate sector. These range:

Privatisation and Outsourcing

73

• from the privatising of management(rather than ownership) ofgovernment businesses and activities,either via ‘corporatisation’ or thetendering out of management itselffor a fixed period, and allowing thegovernment business to operate like aprivate firm for the duration of suchan arrangement, even though theassets and liabilities remain withgovernment;

• to the privatising of the ownership ofbusinesses as a whole or of individualassets, usually termed ‘privatisation’or asset sales; and

• to the privatising of the provision ofcertain goods or services to or onbehalf of government, via variousoutsourcing or contracting-outarrangements.

This chapter focuses on the privatisation andoutsourcing options. Corporatisation is dealtwith in Chapter 7.

PRIVATISATION

Privatisation involves governmentswitching focus from being anowner/shareholder to being a regulatorand purchaser. Privatisation is mostevident in situations where the goods andservices being produced are essentially‘private goods’ (and substantially paid forby end-use customers). In thesecircumstances, the business and assets inquestion themselves have an inherentvalue to the private sector. Privatisationinvolves selling a government business tothe private sector. It can be complete orpartial. Depending upon the extent ofcompetition in the relevant market, policyframeworks can be established bygovernment at the same time to ensurethat the community shares in any

resulting efficiency gains or that any coststo the community are minimised.

BENEFITS OF PRIVATISATION

Currently, the greatest attraction inprivatisation is the impetus it gives to thepursuit of dynamic efficiencies. Dynamicefficiency involves the degree to which theminimum level of inputs is being used toproduce a given level of a particular output.This requires the assets or business inquestion being put in the hands of ownerswith enough of a stake to benefit fromimproved performance (or to suffer from adeterioration) and with the power to achieveresults.

The scope for dynamic efficiency gains as aresult of privatisation therefore dependsupon the nature of the new private sectorowners, such as:

• Ownership dispersed over a largenumber of individual shareholdersmay not result in efficiency levelsmuch different than those undergovernment ownership, becausestrategic shareholder oversight ofmanagement is not possible.However, it may speed a business’responsiveness to meet changingmarket circumstances;

• Institutional investors (such as lifeinsurance companies or superannuationfunds) could have positive supervisoryeffects on management to the extent thatthey tend to watch dividends moreclosely than either government orindividual shareholders and sell sharesif earnings stagnate or fall. Institutionalinvestors are unlikely, however, to bringany trade-specific skills to the oversightof management; and

• A controlling shareholding by astrategic (that is, trade) investorwould put skilled owner-investors incharge of the business. Comparedwith governments as owners,


74

strategic (trade) owners may have agreater capacity to identify andexploit remaining efficiencies and tomanage and digest risks.

Privatisation also has the attraction that itcan basically eliminate the administrativeand monitoring burdens on the governmentof having to oversight the risks and returnsof the businesses in question. Thegovernment can then concentrate onactivities more suited or appropriate togovernment ownership.

A final benefit of privatisation is thebudgetary gains possible from anyprivatisation, and the associated additionalfinancial flexibility that results. Such gainsdepend upon whether investors areprepared to pay a premium for the controlof the government business (that is, anamount in excess of the value of the assetsunder continuing government ownership).

Such a premium is only likely in situationswhere, in the view of investors,opportunities exist to drive capital andoperating costs lower, make betterinvestment decisions and improveutilisation of existing assets. A premiumwould only in fact exist if the governmentwas unsure that it could capture anyefficiency gains over time itself - via animproved dividend stream following aconcerted commercialisation orcorporatisation process - were the businessto remain under government ownership.

Any budgetary benefits will be greatestwhen market conditions are favourable.Although conditions vary from time to time,and in relation to particular lines of business,present market conditions for governmentasset sales are clearly favourable. Australiais experiencing a low inflationary, lowinterest rate market. Investors are keen todiversify their assets into businesses whichwill provide opportunity for higher returns.(Differences in asset sale prices can beexplained through varying investor return

profiles. An investor may be prepared topay $100M for a $10M per year incomestream - for a return of 10% - at higher thanpresent interest rates. For a 15% return,$67M may be paid to acquire the sameincome stream).

COSTS OF PRIVATISATION

While there might be considerable scope forefficiencies and financial benefits fromprivatisation, the costs to achieveprivatisation can be sizeable. The main costsinvolve:

• payments to external advisers whocontribute legal, financial, accountingand project management skills, whichcan typically involve up to 1% of anysale proceeds;

• the costs of regulating a privatemonopoly where competition mightbe wasteful;

• the costs of contracting the continuingsupply of CSOs from a privatisedprovider; and

• any preparations necessary toimprove the financial structure andeconomic performance of thegovernment business in advance ofsale and its effective regulation.

The advisory costs are self-explanatory. Theremainder of this section looks at the lessobvious regulatory, CSO and preparationcosts associated with privatisation.

Regulatory costs

Where a monopoly or market-dominantbusiness is privatised, it is incumbent upongovernment to ensure that the marketpower transferred to private owners is notused to the detriment of consumers. Thisrequires establishment of a price andconduct regulation regime to apply to theprivatised enterprise.


75

In the absence of effective competition,whether any efficiencies achieved by privateownership are shared with consumersdepends upon the price paths allowed andso the value of ‘X’ under any CPI-X pricecap arrangements.

While regulatory costs are undoubtedlyinvolved, whether they are so prohibitive asto rule out privatisation reflects on thecapacity of government to undertake a corefunction. Operating regulatory mechanisms(that is, correcting genuine instances ofmarket failure) is where governmentsshould have a comparative advantage.

CSO Costs

Where required community services areunlikely to be provided at all or ininsufficient quantities by a privatisedbusiness on commercial grounds,governments are obliged to contract for theirdelivery with the privatised supplier. Thisrequires purchase contracts coveringprice/quantity/quality of individual CSOs.These contracts would be similar to thepurchase agreements necessary were thebusiness to remain under governmentownership, and the prices involved shouldnot be higher than with a commercialisedgovernment business.

What would be different underprivatisation, however, is that thegovernment would not be able to makechanges to the quantity or quality of thegoods or services in question as easily as itcan when it owns the provider. Thisflexibility is lost when the CSO is privatelyowned and supply is governed by a written(and legally enforceable) contract.

The counterside to loss of flexibilityhowever, may be that reduced flexibilityrepresents greater certainty for the provider,and that this provides the basis for a lowercost structure and thus lower prices chargedfor the goods or services.

Whether such costs would be large dependsupon the ability of government to write andsupervise contracts in ways that do notcome at the expense of the service or itsconsumers. Governments are only slowlyexpanding the purchaser (and contractnegotiation and management) skillsnecessary to ensure that CSOs are providedsatisfactorily by private providers.

Preparation costs

Privatisation might not be immediatelypossible or desirable, as some restructuringand preparation of the government businessin question might be warranted prior to sale.This is particularly the case where:

• the sale price might otherwise beadversely affected because potentialinvestors are uncertain or scepticalabout the value of the business; thereare complex pre-existing contractualobligations; the business has excessivedebt levels or possesses significantcontingent liabilities; or it has an over-manning problem; and

• effective regulation might be difficultwithout some restructuring because ofthe lack of transparency and themixing of monopoly and contestableelements due to excessive horizontalor vertical integration in the existingbusiness structure.

ASSESSMENT

Provided effective regulatory and CSOregimes can be put in place to achieve broadsocial and economic objectives, a strong casemay exist for privatising a governmentbusiness where the private sector can do anequal or possibly better job in running thebusiness commercially - irrespective ofwhether the government business is amonopolist or not.

Only where government is not confident inits capacity to regulate the prices charged by- or to contract service delivery with -


76

privately-owned businesses might the costsof privatisation tend to offset any potentialdynamic efficiency benefits.

Dynamic efficiency is most likely to beimproved by privatisation coupled withregulation - and the associated costs andrisks might be manageable - incircumstances where:

• the business is relatively transparentand does not display excessivedegrees of vertical or horizontalintegration;

• pricing rules are established or easilydevised;

• regulatory skills are available ingovernment;

• effective CSO valuation and fundingarrangements are in place; and

• minimal financial and organisationalpreparations are necessary to attractsufficient investor interest.

Where these conditions are not met,privatisation is likely to hold considerablerisks for the government and thecommunity. Any net benefits availablemight be captured in their entirety byprivate participants to such transactionswhile all the associated risks could remainwith government.

OUTSOURCING

Outsourcing involves government switchingfocus from being a producer or provider ofthe goods or services in question to being apurchaser of those goods or services.Outsourcing is most evident where theimmediate purchasers are largely within thepublic sector (whether the goods or servicesare an intermediate input into governmentor a ‘social good’ being purchased usingtaxpayer funds for supply to thecommunity). In these circumstances, it is thefunction or right to supply which would be

of value to the private sector, with the assetsor businesses involved in in-house provisionusually having little value in their own right.

Outsourcing is the transfer of a functionpreviously performed in-house to an outsideprovider. Normally outsourcing involvesselecting a preferred provider of goods andservices from a range of bidders by seekingoffers and evaluating these against selectioncriteria. The discussion here does notconsider agencies using the services of otheragencies within government which also hasbenefits.

Governments of many countries areembracing the benefits of outsourcing andthe Australian States are adoptingoutsourcing in more facets of theiroperations.

Government Business Divisions (GBDs) inthe Territory are bound to analyse theprospect of outsourcing as a means toreduce costs. However, the opportunity toreduce service provision costs is not limitedto GBDs, and can be applied to other areasof government. Experience in otherjurisdictions indicates that outsourcing canoccur across a wide range of governmentservices.

BENEFITS OF OUTSOURCING

The main benefit of outsourcing is that it canresult in cost-savings in the provision ofgovernment services. It provides theopportunity to access the provision ofservices more cost effectively from serviceproviders who specialise in a particularservice. Alternatively, outsourcing mayachieve least cost service provision via theintroduction of competition.

A second benefit particularly relevant in theTerritory context is that outsourcing canpromote economic development byfostering private sector activity andemployment. This benefit may bemaximised provided the private sector


77

suppliers are based or have a substantialpresence in the Territory.

A final benefit of outsourcing is that itresults in a clearer view within governmentof the activities being undertaken andwhether current activities are effective inmeeting underlying policy goals.

COSTS OF OUTSOURCING

Outsourcing is not a cost-less exercise. Arange of requirements must be in place toensure that the potential benefits ofoutsourcing are initially realised and thatthey are maintained in the long term.Putting these requirements in place comes ata cost, which must be balanced against thebenefits. These costs can be either financialor economic in nature.

Only when the net present value of anybenefits outweighs that of any costs willthere be a business case to undertake aprogram of outsourcing.

Contracting costs

Essential to any outsourcing is the contractbetween the purchasing agency ingovernment and the private sector providerof the goods and services in question.Whereas with a government providerarrangements can be developed over time asissues arise, when a private provider isinvolved, all the detail has to be decidedbefore the contract is let.

The contract must clearly state theresponsibilities of each party, whatinformation must be shared between partiesand establish the mechanisms for redresswhen substandard performance isidentified.

The contract must also clearly specify whatservices are to be performed, how they areto be performed, the minimum quality ofthe service and how they are to bemeasured. Incorrect or inadequate contractspecification may lead to unforeseen and

unacceptable reductions in service quality orto excessive cost to Government in terms ofthe quality of the service delivered. Animportant aspect of specification relates toensuring there is no unacceptable reductionin the quality of the service.

Contestability Costs

The success of outsourcing in achieving theleast cost provision of services is alsodependent upon active competition. It isnecessary to bundle activities to makepackages of adequate size and durationwhich will attract bidders for serviceprovision.

When the activities are unique togovernment or there are a limited number ofproviders, a market may need to bedeveloped if outsourcing is to beundertaken.

Monitoring Costs

Once an outsourcing contract is awarded,the outsourced service needs to bemonitored and the contract terms enforced.

Monitoring is necessary to ensure thecontractor meets the contractualperformance. Ongoing monitoring assists inthe identification of difficulties or differencesin expectations so that corrective action canbe taken. Monitoring can includeperformance indicators, regular contractorreports on outcomes, customer surveys anddirect inspections.

The contract must allow the government towarn the contractor if performance levelsare not satisfactory and improvements arenecessary. There should be scope forpenalties and for the government to rescindany contract for failure to meet contractedobligations and outcomes.

ASSESSMENT

Provided effective contracting, monitoringand market arrangements are in place, a


78

case may exist for outsourcing an increasingnumber of Government activities.

Where private markets or providers do notyet exist or contracting and monitoringdifficulties can be anticipated might thecosts of outsourcing tend to offset any cost-saving benefits.

Cost savings are most likely to be achievedby outsourcing - and the associated costsand risks might be manageable - incircumstances where:

• contract negotiation and writing skillsexist with government;

• the services in question are welldefined and their desired qualities arecapable of measurement;

• there are a number of locally-basedservice providers in the position tobid in a competitive tender process;and

• monitoring and enforcement skillsexist within Government.

Where these conditions are not met,outsourcing is likely to hold considerablerisks for the Government and thecommunity, and the net benefits availablemight be captured in their entirety byprivate participants to such transactions.

Some Territory-specific issues may mitigateagainst the use of comprehensiveoutsourcing such as has occurred in otherjurisdictions. These include:

• the small size of the Territoryeconomy - the lack of potentialsuppliers will limit the extent towhich competition can be used as atool to drive efficiency; and

• the small size of the public sectormeans that central support of theprocess may not be available to thesame degree as in larger jurisdictions,

and that necessary skills in tenderingprocesses, costing issues, contractadministration and performancemonitoring might be in shortersupply.

CONCLUSION

The Territory is in a unique positioncompared to the States, implying that theappetite for privatisation and outsourcingseen in the States may not necessarily beappropriate to the Territory.

In particular, the relatively small andgeographically dispersed nature of theTerritory’s markets - and their geographicisolation - means that the scope forcompetition is less in the Territory than inthe States, increasing the monitoring andregulation costs to be expected.

For these reasons, it is unclear how farprivatisation and outsourcing can be takenin the Territory environment.

Nevertheless, the Territory has had its shareof experience with privatisation andoutsourcing, suggesting that these policyresponses can be relevant in particularcircumstances.

One of the Territory’s first experiences withprivatisation was in 1982 with the sale of theMt Wells Mining Battery. Further examplesof outsourcing and privatisation haveincluded the sale of the Government MiningLaboratory in 1984; the contracting out ofroad construction commenced soon afterSelf-Government; the private provision ofgas pipelines in 1983 and 1986 to supply fuelfor the Territory’s major power stations; andthe Northern Territory Power transmissionline in 1988 which is privately operated andthe establishment of the Pine Creek PowerStation run by an Independent PowerProducer in 1990. In addition, stage one ofthe Ayers Rock Resort sale was completedin 1993 and the second and final stage in1997.


79

Outsourcing is used by the AuditorGeneral’s Office, Strategic and AuditServices (Department of the Chief Minister)and more recently by the Attorney General’sDepartment. Financial and performancemanagement system audits of Governmentagencies are outsourced to local accountingfirms and overseen by staff of theAuditor-General’s Office. Strategic andAudit Services calls for tenders from bothlocal and interstate accounting firms as theneed arises for the performance of internalaudits and other strategic based projects.Most of the litigation and commercial legalservices for the Territory Government issoon to be provided by local private sectorlegal practitioners and overseen by staff ofthe Northern Territory Attorney-General’sDepartment.

In relation to potential privatisations, theGovernment has established an Asset SalesTeam to advise on the potential for the saleof assets and to manage any sale processesshould they eventuate. Recently theTerritory Government reassessed theholding of land located at the TradeDevelopment Zone, Berrimah. The land notrequired for Zone purposes will now be soldby the Department of Lands, Planning andEnvironment.

Hence, in the Territory as elsewhere, anexamination of the potential benefits ofprivatisation and outsourcing is a necessarycomponent of efficient Government.


80

APPENDIX 1

AUSTRALIAN PRIVATISATION ANDOUTSOURCING EXPERIENCES

While the Territory is in a unique marketenvironment in comparison to the otherStates - so that it is not always possible ordesirable for the Territory to follow in thesame direction as the other States - there area number of Australian privatisation andoutsourcing experiences which have thepotential to be relevant to the Territory.

The Electricity Industry

Victoria commenced a significant overhaulof its electricity industry in 1993 and isclearly the State most advanced in terms ofelectricity reform. The privatisation of thedistribution, generators and transmissionassets commenced in 1995.

Tasmania and South Australia have bothannounced their intentions to sell theirelectricity assets.

Gas

GASCOR in Victoria has contracted outappliance and mains repairs andmaintenance since 1995 and the Gas andFuel Corporation of Victoria contracted outsupport services in 1994.

Queensland privatised its State GasPipelines in 1996 and South Australiaprivatised its Oil and Gas Corporation in1993.

Communications

In 1997, the Australian Customs Serviceannounced its intention to outsource the fullrange of its information technologyrequirements to EDS Australia for fiveyears. The South Australian Governmentalso uses EDS Australia for all of its dataprocessing activities.

Printing Offices

South Australia and Western Australia havesold their Government printing offices to theprivate sector.

Motor Vehicle Fleets

All State Governments and the AustralianCapital Territory Government have enteredinto or are presently negotiating the sale andleaseback of their light vehicle fleets. As aconsequence the private sector will own thelight vehicle fleets.

The Western Australian, Victorian andCommonwealth Governments have allengaged private sector fleet managers to runtheir motor vehicle fleets. Other States areinvestigating the fleet managementoutsourcing option.

Totalisator AdministrationBoards (TABs)

The Victorian Government privatised itsTAB in 1994 by way of a public float. TheNew South Wales Government announcedthe impending privatisation of its TAB in1997. Both the Queensland and SouthAustralian Governments are looking atoptions in relation to the future of theirTABs.

Insurance

The New South Wales, Western Australianand South Australian government insuranceoffices were privatised in 1993, 1995 and1996 respectively.

Prisons/Correctional Centres

Outsourcing is being used for some prisonmanagement in New South Wales, Victoriaand Queensland. Certain prisons have alsobeen constructed by the private sector.


81

APPENDIX 2

CASE STUDY AYERS ROCK RESORT

The benefits of privatisation which canaccrue to the Territory can be explainedthrough the use of a case study of the AyersRock Resort. The Ayers Rock Resort wasestablished in the early 1980s by the AyersRock Resort Company Ltd (previouslycalled the Yulara Development CompanyLtd and then owned by the Territory). From1992, the Territory’s interest was held by theAyers Rock Resort Corporation, throughshares in the Company. In December 1993,the Corporation, on behalf of the Territory,sold 40% of the Company’s shares toinstitutional investors (The Advent Group).In 1996, the Company purchased the AliceSprings Resort.

In April 1997, the Government and theAdvent Group decided to investigate sellingthe Resort. They then appointed DeutscheMorgan Grenfell (DMG) as financialadvisers. In August, in line with DMGadvice, they resolved to sell.

In order to achieve the optimal result and toremove unnecessary uncertainty,agreements were reached for the provisionof power, water and sewerage services;most Government owned housing in theResort was sold to the Resort company; andthe local Aboriginal community was offeredand accepted an interest in the Resort. Aswell, the company and the shareholdersprepared the properties for sale. Thisincluded preparation of an InformationMemorandum which was provided toprospective purchasers, plus a draft

Prospectus to use if a public float seemedlikely to yield a better return toshareholders.

The legislation that provided for the AyersRock Resort Corporation requiredamendment to permit the Corporation todispose of its interests in the Ayers RockResort.

The Ayers Rock Resort (Sale) Act wastherefore introduced and passed by theLegislative Assembly in November 1997.Following negotiations with severalpotential purchasers, the General PropertyTrust (a member of the Lend Lease Group)entered into a conditional purchasearrangement in October 1997. When the Actbecame law, the sale was completed on2 December 1997. The sale included aninterest in the Trust for the local Aboriginalpeople.

The sale price represented a multiple ofroughly twenty times earnings. Afterrepayment of the company’s debts andtaxes, the proceeds of sale will be paid to theCompany’s shareholders. Inclusive of thevalue of Government housing included inthe sale plus stamp duty, the Governmentwill receive around $130M.

These funds will be available for investmentin other profitable ventures of benefit to theTerritory.

83

Chapter 9

ALTERNATIVE BUDGETPRESENTATIONS

When preparing Budget material, the needs ofmultiple users, including those of theLegislative Assembly, the Northern TerritoryGovernment, individual Government agencies,the media and the community must beconsidered. Statutory and national reportingframeworks are also observed.

The various presentations in this chapter arebased on the two scopes: the Northern TerritoryBudget Sector and the nationally agreedUniform Presentation Framework (UPF).Budget scope includes the traditional grosspresentation as well as the net or economictransactions framework. Whereas uniformpresentation uses the economic transactionsframework only, there are differences in thetreatment of certain items in the economictransactions framework presentations for eachscope.

SCOPE OF FINANCIAL DATA

The Northern Territory Budget Papersinclude two different scopes for therecording and classification of financial data.The Northern Territory Budget Sector whichincludes outlays and receipts traditionallyincluded in the Territory’s budget, and theUPF.

The Northern Territory Budget Sectorcoverage is used in Budget Papers Nos. 1, 2and 4 and has traditionally included thetransactions which form the Public Accountas determined by the Financial ManagementAct, and the Northern Territory University.

Since 1988-89, in addition to the BudgetSector the Northern Territory Budget Papershave presented budget information in a

form consistent with the system ofGovernment Finance Statistics promulgatedby the Australian Bureau of Statistics (ABS).It was decided at the 1991 Premiers’Conference that all jurisdictions shouldinclude this information in their BudgetPapers. In March 1997 a revised UPF wasagreed by the Loan Council to beimplemented from 1998-99.

The UPF involves publishing data ineconomic transactions format for threesectors: General Government; PublicTrading Enterprises (PTEs) and aggregatesfor the non-financial public sector. It alsorequires, from 1998-99, the publication offorward estimates of the GeneralGovernment sectors of all jurisdictions andexpected debt figures and the Loan CouncilAllocation for the financial year drawing to aclose, and the forthcoming budget year.

From 1998-99, the ABS will commencepublishing data on Public FinancialEnterprises (PFEs) for actual rather thanbudget estimates. This enhancement is alsoto be included in UPF reporting but notbefore the ABS has done so.

As for all jurisdictions, the coverage ofentities for the Territory under UPF isbroader than what is included in theTerritory’s Budget Sector.

The adjustments that need to be made toBudget scope data to get to UPF at presentare:

• Northern Territory University isclassified as a multi-jurisdictional agency,


84

reflecting the shared responsibilitybetween the Commonwealth and theStates-Territories for Universities;

• the Ayers Rock Resort CompanyLimited, Ayers Rock Resort Corporationand the Conditions of Service Trust arebrought within the scope;

• all business divisions are treated astrading enterprises in Budget scope.UPF treats only those agencies that tradein the market place, such as Power andWater Authority, as trading enterpriseswhereas other agencies such as theDepartment of Communications andAdvanced Technology: CommercialServices and NT Fleet that trade withinGovernment are treated as GeneralGovernment; and

• the lending component of housing istreated as a PFE and is out of scope.

• These differences will change againwhen the PFE sector is incorporated intothe UPF presentation during 1998-99.

NORTHERN TERRITORY BUDGET

SCOPE

Northern Territory Budget Sector data ispresented in both the conventional mannerwhere all transactions of agencies areidentified and recorded (‘gross’presentation); and according to theeconomic transactions framework aspromulgated by the ABS.

Figure 10.1 presents the conventionalBudget summary according to outlays bycategory of cost, receipts by source, and useof balances. The first two columns of dataare for the Budget Sector, including theNorthern Territory University. The thirdcolumn is the Public Account and excludesthe University.

The economic transactions presentation is aconsolidated presentation of Budget Sector

transactions, and identifies the net impact ofthe operations of the Territory Budget on theprivate sector. It is often called the ‘net’presentation.

Figure 10.2 provides the Territory budgetsector 1997-98 Budget estimated outcomeand the 1998-99 Budget estimates in aneconomic transactions format.

The main adjustments to the grosspresentation to produce the net presentationare:

• expenditures are disaggregated intocurrent and capital;

• transfers within the budget sector areremoved from both expenditure andreceipts;

• charges and recoveries and second handasset sales are netted off againstexpenditures so that only the net impacton the Budget is shown; and

• borrowings and net advances aretreated as financial transactions.

In both the Territory’s budget sectorpresentations, and those shown under theUPF arrangements, the Territory treatsCommonwealth sourced revenuereplacement payments as Commonwealthrevenue. The ABS has decided to treat thesepayments as State and Territory taxes.However, even though the revenuereplacement arrangements were institutedby the Commonwealth at the request ofStates and Territories to replace the loss ofBusiness Franchise Fees arising from theHigh Court decision of August 1997, thedecisions about the rate, incidence, andcollection procedures have now legallypassed from the States and Territories to theCommonwealth. In the Territory’s view theABS decision to classify these transfers asState and Territory own-source revenuedoes not reflect the real situation and is notappropriate.

Alternative Budget Presentations

85

Figure 10.1

NORTHERN TERRITORY BUDGET SECTOR - GROSS OUTLAYS AND RECEIPTS

Public Account1997-98 Estimate

1998-99 Budget

1998-99 Budget

$M $M $M

OUTLAYS BY ACCOUNT 2,946 2,846 2,781 General Agency Operating Accounts 2,257 2,174 2,109 Business Division Operating Accounts 689 672 672

OUTLAYS BY CATEGORY OF COST 2,946 2,846 2,780 Personnel Costs 895 900 858 Operational Costs 875 871 853 Capital Expenditure 329 253 248 Grants and Subsidies 423 499 498 Interest 253 248 248 Advances 160 60 59 Advance to the Treasurer 11 16 16

RECEIPTS BY ACCOUNT 2,740 2,837 2,765 Consolidated Revenue Account 1,444 1,605 1,605 General Agency Operating Accounts 631 576 504 Business Division Operating Accounts 666 656 656 Provisions 0 1 1

RECEIPTS BY SOURCE 2,740 2,837 2,765 Taxes Fees and Fines 228 224 224 Charges 549 565 559 Miscellaneous Receipts 37 38 35 Sale of Land 11 10 10 Capital Receipts 81 153 153 Property Income 31 28 28 Interest Received 30 35 35 Advances Received 41 38 39 General Purpose Commonwealth Grants 1,015 1,058 1,058 Commonwealth Revenue Replacement Payments 88 104 104 Other Commonwealth Grants 322 309 274 Territory Borrowing 36 -3 -3 Intrasector Receipts 271 277 248 Provisions 0 1 1

USE OF BALANCE (a) 205 9 15 Consolidated Revenue Account 104 1 0 General Agency Operating Accounts 78 -7 0 Business Division Operating Accounts 23 16 15

(a) OPENING BALANCE 388 183 181 Consolidated Revenue Account 117 13 13 General Agency Operating Accounts 142 64 63 Business Division Operating Accounts 129 105 105

less CLOSING BALANCE 183 174 166 Consolidated Revenue Account 13 13 13 General Agency Operating Accounts 64 71 63 Business Division Operating Accounts 105 90 90

Budget Sector


86

Figure 10.2

NORTHERN TERRITORY BUDGET SECTORECONOMIC TRANSACTIONS

Public Account

1997-98 Estimate

1998-99 Budget

1998-99 Budget

$M $M $M

CURRENT EXPENDITURE 1,619 1,602 1,580 Final Consumption Expenditure 1,200 1,197 1,152 Current Grants and Subsidies 234 228 251 Interest Paid 184 177 177

CAPITAL EXPENDITURE 306 245 243 New Fixed Assets 288 235 231 Capital Grants 62 149 151 Other Net Expenditure -44 -139 -139

less

TERRITORY REVENUE 354 363 366 Taxes Fees and Fines 228 224 227 Property Income 31 28 28 Interest Received 29 35 35 Unsubsidised Surplus of Business Divisions 65 76 76

COMMONWEALTH GRANTS 1,425 1,472 1,437 General Purpose Grants 1,015 1,058 1,058 Revenue Replacement Payments 88 104 104 Other Grants 322 309 274

equals

INCREASE IN TERRITORY DEBT -69 -10 -10 Net Territory Borrowing -28 -2 -2 Commonwealth Advances -41 -8 -8

DECREASE IN FINANCIAL ASSETS 215 22 30 Net Territory Advances Repaid 9 13 14 Use of Balances 205 9 16

INCREASE IN PROVISIONS 0 1 1

Budget Sector

The Territory’s preferred budgetarypresentation in economic transactionsformat differs in several respects from thestandard Government Finance Statisticsformat adopted by the ABS. A keydifference is that the Territory presentsinformation in a form which allows readyidentification of the change in the Territory’sgross and net debt, which are importantbudget policy measures.

The ABS (and the Commonwealth) use ‘thedeficit adjusted for net advances’ as one ofthe key aggregates for analysis. Thedifference between the Territory’s focus ongross and net debt and the ABS focus on ‘thedeficit adjusted for net advances’ is thetreatment of equity. In the Territory’spreferred presentation, equity is netted offagainst outlays whereas the ABS includesequity transactions in the deficit adjusted for


87

net advances. Both measures are valid andthe difference in emphasis is a function ofthe different responsibilities of the two levelsof Government.

At the Commonwealth and national level,the deficit adjusted for net advancesidentifies the total call on financial marketsto purchase government debt or take upequity in privatised government entities.This call in turn indirectly relates to theimpact of government activity on thecurrent account deficit. However, theTerritory is more concerned with its Budgetposition.

Given that the Territory comprises only 2%of total Australian output, measuring theeffect on the national current account ofTerritory Government activity has littledirect relevance. Hence the Territory hasmaintained its focus on net debt which is ameasure of more relevance to its ownBudget circumstances and is a concept morereadily understood by interested parties.

UNIFORM PRESENTATIONFRAMEWORK

The Northern Territory Budget Sector andthe UPF both use the economics transactionsframework form of presentation. However,moving from Budget Sector economictransactions framework to UPF, requiressome regrouping of outlays and receipts.Some transactions are treated differently,namely:

• grants paid by the Department ofEducation to school councils aretreated as grants by the Territory,whereas under UPF, current grants areclassified as final consumptionexpenditure and capital grants aretreated as new fixed assets;

• the distribution of funds from TAB istreated as an intrasector transaction in

the Territory Budget, whilst it istreated under UPF as operationalexpenditure by a PTE and an indirecttax received by General Government;

• stamp duties paid by the NorthernTerritory Housing Commission aretreated as an intrasector transaction inthe Territory Budget, whilst underUPF are treated as operationalexpenditure by a PTE and an indirecttax received by General Government;

• payments for Mortgage AssistanceScheme Adjustments and the BuildingApprenticeship Scheme are treated asgrants in the Budget, but operationalexpenditure under UPF;

• net advances paid are treated asfinancing transactions by the Territorywhilst UPF treats these as capitalexpenditure;

• sales of second hand assets areincluded under other net capitalexpenditure by the Territory, butunder UPF are netted off against newfixed assets to give gross capitalexpenditure;

• equity sales are included in other netcapital expenditure by the Territorywhilst UPF includes them in netadvances paid; and

• Community Service Obligations paidto PTEs are treated as an intrasectorpayment in the Territory Budget andnetted off against the dividends paidby PTEs under other income; whilstthey are treated under UPF as asubsidy paid to PTEs by GeneralGovernment, and included in the netoperating surplus of PTEs and inproperty income as dividendsreceived.


88

Figure 10.3 compares the Territory Budgetand UPF data for 1998-99, using theTerritory’s preferred presentation format,that is, with advances paid treated as part offinancing transactions. This presentationallows for the differences in scope andtreatment of different transactions to beidentified.

FUTURE DIRECTIONS IN REPORTING

From February 1999, in accordance withUPF requirements, the Territory willcommence publishing a Mid Year FinancialReport, which includes the expected budgetoutcome and a revised Loan CouncilAllocation for 1998-99, and revised forwardestimates for the General Governmentsector.

Much has been achieved collectively duringthe past decade through presenting data instandard formats and classifications in arange of publications. This has allowedcomparisons to be made across jurisdictionsand over time. The Territory has activelysupported these moves. Furtherdevelopments as a result of changedaccounting methods and sectoralclassification will affect the comparability ofdata over time.

Almost all jurisdictions have moved, or aremoving to, some form of accrual reportingfor all agencies. In response to this, the ABSis to publish government finance data on anaccruals basis with respect to the 1997-98outcomes and 1998-99 Budget estimates.This means a break in series which may inpart be overcome by backcasting of data.However a degree of estimation is requiredwhich threatens the data integrity.

For those jurisdictions which have alreadymoved their Government reporting systemsto an accruals basis, such as the AustralianCapital Territory and New South Wales,

some estimation is now used to incorporatetheir data into the largely cash-based systemof government finance statistics. From theend of 1997-98, the Territory’s largely cash-based data will need to be adjusted to fit thefull accruals-based reporting formats of theABS and UPF. Work is progressing toensure this can occur.

Further, the ABS has reclassified someagencies from the treatment accorded themuntil 1996-97:

• universities are now classified to aseparate multi-jurisdictional sector,and are excluded from the statistics ofindividual jurisdictions. Whileconceptually this is not of particularconcern, the backcasting of data by theABS for this change produces someserious anomalies. The backcastinghas only been effected to 1992-93,making longer-term analysis difficult.For those years where backcasting hasoccurred, the amount of adjustment insome jurisdictions seems to be muchlarger than is warranted; and

• central borrowing authorities (such asNorthern Territory TreasuryCorporation) are to be excluded fromthe non-financial public sector from1998-99, and included in the PFEsector. Again there are backcastingproblems. However, there is also thedifficult issue of identifying theamount of assets and liabilities of eachcentral borrowing authority that oughtproperly be attributed to the GeneralGovernment sector in eachjurisdiction.

The Northern Territory encourages the ABSto resolve these issues to ensure that thevalue and integrity of its data togovernments, analysts and theCommonwealth Grants Commission is notcompromised.


89

Figure 10.3

NORTHERN TERRITORY PUBLIC SECTORECONOMIC TRANSACTIONS

Territory Non-FinancialBudget PublicSector Sector Variation

$M $M $M

CURRENT EXPENDITURE 1 602 1 605 3 Final Consumption Expenditure 1 197 1 171 - 26 Current Grants and Subsidies 228 257 29 Interest Paid 177 177 0

CAPITAL EXPENDITURE 245 238 - 7 New Fixed Assets 235 232 - 3 Capital Grants 149 148 - 1 Other Net Expenditure - 139 - 142 - 3

less

TERRITORY REVENUE 363 341 - 22 Taxes Fees and Fines 224 234 10 Property Income 28 28 0 Interest Received 35 52 17 Unsubsidised Surplus of Business Divisions (a) 76 27 - 49

COMMONWEALTH GRANTS 1 472 1 436 - 36 General Purpose Grants 1 058 1 058 0 Revenue Replacement Payments 104 104 Other Grants 309 274 - 35

equals

INCREASE IN TERRITORY DEBT - 10 - 8 2 Net Territory Borrowing - 2 0 2 Commonwealth Advances - 8 - 8 0

DECREASE IN FINANCIAL ASSETS 22 22 0 Net Territory Advances Repaid 13 0 - 13 Use of Balances 9 22 13

INCREASE IN PROVISIONS 1 52 51

1998-99Uniform Presentation

Unsubsidised surplus in Territory Budget; subsidised surplus in UPF.

UNIFORM PRESENTATIONFRAMEWORK REPORTING

REQUIREMENTS

Under the UPF jurisdictions have agreed toadopt, progressively, a number of additionalrequirements. These include:

• summary tables for GeneralGovernment, PTEs and the non-financial public sector in the agreedformat for the current and theforthcoming budget year;

• a summary table for taxes, fees and finesfor the current and the budget year;

• expenditure by purpose for thecurrent and the budget year;

• forward estimates for three years forthe General Government sector; and

• Loan Council allocation for the currentand budget year.

The tables which follow fulfil theseagreements.


90

Figure 10.4

UNIFORM PRESENTATION - NORTHERN TERRITORYTOTAL NON-FINANCIAL PUBLIC SECTOR

1997-98 Estimate

1998-99 Budget

$M $M

CURRENT OUTLAYS 1 624 1 605 Final Consumption Expenditure 1 181 1 171 Interest Payments 184 177 Current Grants 212 211 Other Current Payments 47 46

CAPITAL OUTLAYS 299 239 Gross Capital Expenditure 231 188 New Fixed Capital Expenditure 285 232 Expenditure on Secondhand Assets (net) - 54 - 44 Capital Grants 56 147 Net Advances Paid (a) 9 - 95 Other Capital Outlays 3 - 1

TOTAL OUTLAYS 1 923 1 844TOTAL OUTLAYS (excluding net Advances paid) 1 914 1 939

REVENUE 1 732 1 778 Taxes, Fees and Fines (a) 238 234 Operating Surplus of PTE's and PFE's 22 27 Interest Received 50 52 Grants Received (b) 1 391 1 437 Other Revenue 31 28

DEFICIT AND FINANCING TRANSACTIONS 191 66 Net Advances Received - 41 - 8 Net Domestic and Overseas Borrowings - 27 0 Increase in Provisions 50 52 Other Financing Transactions 209 22

Less

Increase in Provisions 50 52

DEFICIT 141 14

Less

Net Advances Paid 9 - 95

DEFICIT ADJUSTED FOR NET ADVANCES PAID 132 109

NET DEBT 1 444 1 455

(a) Includes revenue replacement payments from the Commonwealth.

(b) Excludes revenue replacement payments from the Commonwealth.


91

Figure 10.5

UNIFORM PRESENTATION - NORTHERN TERRITORYGENERAL GOVERNMENT

1997-98 Estimate

1998-99Budget

$M $M

CURRENT OUTLAYS 1 623 1 604 Final Consumption Expenditure 1 181 1 171 Interest Payments 184 177 Subsidies Paid to PTE's and PFE's 27 27 Current Grants 184 183 Other Current Payments 47 46

CAPITAL OUTLAYS 279 205 Gross Capital Expenditure 188 156 New Fixed Capital Expenditure 208 175 Secondhand Assets Sales - 21 - 20 Capital Grants 57 148 Net Advances Paid 34 - 94 Other Capital Outlays 0 - 5

TOTAL OUTLAYS 1 902 1 809TOTAL OUTLAYS (excluding net advances paid) 1 868 1 903

REVENUE 1 767 1 814 Taxes, Fees and Fines (a) 238 234 Interest Received 90 98 Grants Received (b) 1 391 1 437 Dividends Received from PTE's and PFE's 17 17 Other Revenue 31 28

DEFICIT AND FINANCING TRANSACTIONS 135 - 5 Net Advances Received - 41 - 8 Net Domestic and Overseas Borrowings - 10 8 Increase in Provisions (net) 0 0 Other Financing Transactions 186 - 5

Less


DEFICIT 135 - 5

Less

Net Advances Paid 34 - 94


NET DEBT 919 915




92

Figure 10.6

UNIFORM PRESENTATION - NORTHERN TERRITORYPUBLIC TRADING ENTERPRISES

1997-98 Estimate

1998-99Budget

$M $M

CURRENT OUTLAYS 62 67 Interest Payments 45 50 Other Current Payments 17 17

CAPITAL OUTLAYS 20 35 Gross Capital Expenditure 43 33 New Fixed Capital Expenditure 77 57 Expenditure on Secondhand Assets (net) - 34 - 23 Capital Grants 0 0 Net Advances Paid - 25 - 2 Other Capital Outlays 2 4

TOTAL OUTLAYS 82 102TOTAL OUTLAYS (excluding net Advances paid) 107 104

REVENUE 27 31 Net Operating Surplus of PTE's 22 27 Interest Received 5 4 Grants Received 0 0 Other Revenue 0 0

DEFICIT AND FINANCING TRANSACTIONS 55 71 Net Advances Received 0 0 Net Domestic and Overseas Borrowings - 18 - 8 Increase in Provisions 50 52 Other Financing Transactions 23 27

Less


DEFICIT 5 19

Less

Net Advances Paid - 25 - 2


NET DEBT 538 554


93

Figure 10.7

UNIFORM PRESENTATION - NORTHERN TERRITORYTAXES, FEES AND FINES COLLECTED

1997-98 Estimate

1998-99 Budget

$M $M

TOTAL TAXES, FEES AND FINES 238 234

TAXES ON EMPLOYERS' PAYROLL AND LABOUR 80 87FORCE TAXES

TAXES ON PROPERTY 70 62 Stamp duties on financial and capital transactions 50 42 Financial institutions' transactions taxes 20 20

TAXES ON THE PROVISION OF GOODS AND SERVICES 35 35 Taxes on gambling 28 28 Taxes on insurance 7 7

TAXES ON USE OF GOODS AND PERFORMANCE OF 47 43ACTIVITIES Motor vehicle taxes 31 31 Franchise taxes (a) 3 Other 13 12

FEES 4 5

FINES 2 2

(a) Excludes revenue replacement payments.


94

Figure 10.8

UNIFORM PRESENTATION - NORTHERN TERRITORYEXPENDITURE BY GOVERNMENT PURPOSE CLASSIFICATION

1997-98 Estimate

1998-99 Budget

$M $M

TOTAL OUTLAYS 1,924 1,844

CURRENT EXPENDITURE 1,625 1,605 General Public Services 206 210 Public Order and Safety 170 172 Education 344 346 Health 325 326 Social Security and Welfare 50 51 Housing and Community Amenities 74 51 Recreation and Culture 74 70 Fuel and Energy 10 10 Agriculture, Forestry, Fishing and Hunting 59 53 Mining and Mineral Resources, Other than Fuels; 16 16 Manufacturing Transport and Communication 78 91 Other Economic Affairs 64 60 Other Purposes 155 149

CAPITAL EXPENDITURE 299 239 General Public Services 71 45 Public Order and Safety 9 10 Education 39 26 Health 23 13 Social Security and Welfare 0 0 Housing and Community Amenities 36 43 Recreation and Culture 17 15 Fuel and Energy 27 19 Agriculture, Forestry, Fishing and Hunting 8 1 Mining and Mineral Resources, Other than Fuels; -2 -1 Manufacturing Transport and Communication 61 63 Other Economic Affairs 9 3 Other Purposes 1 2


95

Figure 10.9

UNIFORM PRESENTATION - NORTHERN TERRITORYLOAN COUNCIL ALLOCATION

1997-98 1998-99 Estimate(a) Budget

$M $M

General government sector deficit/surplus (b) 129 - 5

PTE sector net financing requirement 6 19

Non-Financial Public sector deficit/surplus 135 14

Memorandum items - -

Loan Council Allocation 135 14

(a) Estimate is based on Uniform Presentation data including Northern Territory University, consistent with the original nomination.

(b) Includes borrowings on behalf of Local Government..

The latest estimate of the Territory’s 1997-98 Loan Council Allocation of $135M is $101M above the estimate previously advised to Loan Council. This revisionexceeds the upper bound of the tolerance limit of 2% of public sector revenue ($35M). The main causes of the revision reflect the budgetary impact of theKatherine Region Floods ($35M); changed timing of receipts from the sale of Ayers Rock Resort ($30M); and higher health expenditures ($15M).

The 1998-99 Budget time Loan Council Allocation of $14M is slightly lower than the Territory’s original nomination of $24M, but within the tolerance limit.


96

Figure 10.10

UNIFORM PRESENTATION - NORTHERN TERRITORYGENERAL GOVERNMENT FORWARD ESTIMATES

1999-2000 Forward Estimate



$M $M $M

CURRENT OUTLAYS 1 620 1 678 1 734 Final Consumption Expenditure 1 196 1 249 1 298 Interest Payments 176 174 173 Subsidies Paid to PTE's and PFE's 30 30 30 Current Grants 176 183 191 Other Current Payments 42 42 42

CAPITAL OUTLAYS 196 195 198 Gross Capital Expenditure 156 155 156 New Fixed Capital Expenditure 175 174 176 Expenditure on Secondhand Assets (Net) - 19 - 19 - 19 Capital Grants 46 46 46 Net Advances Paid 1 1 1 Other Capital Outlays - 7 - 7 - 5

TOTAL OUTLAYS 1 816 1 873 1 932TOTAL OUTLAYS (excluding net advances paid) 1 815 1 872 1 931

REVENUE 1 808 1 868 1 929 Taxes, Fees and Fines (a) 247 262 264 Interest Received 94 89 87 Grants Received (b) 1 422 1 472 1 533 Dividends Received from PTE's and PFE's 17 17 17 Other Revenue 28 28 28

DEFICIT AND FINANCING TRANSACTIONS 8 5 3 Net Advances Received - 56 - 53 - 15 Net Domestic and Overseas Borrowings 35 29 30 Increase in Provisions (net) 0 0 0 Other Financing Transactions 29 29 - 12

Less

Increase in Provisions 0 0 0

DEFICIT 8 5 3

Less

Net Advances Paid 1 1 1

DEFICIT ADJUSTED FOR NET ADVANCES PAID 7 4 2

NET DEBT 906 915 906



97

Chapter 10

TERRITORY OWN-SOURCE REVENUE

The Northern Territory has substantially thesame revenue raising powers as the States.However, the revenue raising base that isavailable to the States and Territories is limitedby constitutional and other arrangements.

Thus, while the Territory has limited discretion,like the States, on the range of taxes and chargesthat can be applied, it has discretion over therates of taxes and charges.

This chapter analyses the Territory's overallrevenue raising capacity and compares the ratesof taxes and charges in a number of the moreimportant revenue raising areas in the Territoryand the States.

The analysis confirms that the Territory percapita revenue raising capacity, and the rates oftaxes and charges applied in the Territory, issimilar to that of the States.

INTRODUCTION

All governments raise revenue to pay for theservices the public requires. Within thelegislative powers of each level ofgovernment, the amount of revenue raiseddepends on the size of the revenue base andthe rate of tax or charges imposed. In thepast, the Territory's tax base has beenconstrained by the size and stage ofdevelopment of the economy and, as aresult, the level of taxes and charges paidper capita was lower in the Territory than inthe States. However, as the Territoryeconomy has grown, this disadvantage hasdiminished and the Territory's overallrevenue collections per capita are broadlycomparable with the average of the States.

One element of the Territory's fiscal strategyis that the Territory's revenue raising effortshould be broadly comparable to that of theStates.

The Territory has substantially the samerevenue raising powers as the States.However, the range of taxes and chargesthat can be applied by States and Territoriesis constrained by constitutional provisionsand legislative arrangements. As a result,the revenue regime available is limited.Furthermore, a number of the taxesavailable to the States and Territories are, inmany respects, inefficient because they arenarrowly based and can affect resourceallocation decisions.

Tax reform offers all jurisdictions theopportunity to move to a more efficientmeans of taxation. It is likely that a numberof the inefficient State-type taxes such asfinancial taxes, will be abolished andreplaced with a broad based consumptiontax levied by the Commonwealth.

The States and Territories will require a newtax base to replace the revenue foregone;most probably access to the personal incometax base. Thus the structure of the taxes andcharges reported in this chapter will changeas the tax reform process progresses.

The range of comparative taxes in this year'spublication is less than previous years as aresult of the High Court decision inAugust 1997, which removed the States andthe Territories ability to impose BusinessFranchise fees. (Further details on the HighCourt decision and tax reform are providedin Chapter 4.)


98

The major categories of own-source revenuefor the Territory are taxes, fees and fines,charges, capital receipts, property income,interest income and miscellaneous receipts.These are described in more detail in BudgetPaper No. 2. Taxes and charges generate themajority of own-source revenue for theTerritory.

This chapter analyses the Territory's overallrevenue raising capacity and compares ratesof taxes and charges in a number of themore important revenue raising areas in theTerritory and the States.

REVENUE CAPACITY AND EFFORT

In order to compare the contributions toown-source revenue of various taxationregimes, it is necessary to compare bothrevenue capacity and revenue raisingeffort. The capacity to collect revenuefrom taxes and charges is a function of thesize of the revenue base. Revenue effort isa measure of the extent to which arevenue base is used.

The Commonwealth Grants Commission(CGC) assesses both revenue capacity andrevenue effort in its assessment of therelative fiscal needs of States and Territories.

The CGC determines an Australianstandard revenue base for each maincategory of own-source revenue. Therevenue capacity of each State and Territoryis assessed by comparison of the actualrevenue base to the Australian average todetermine revenue capacity.

Revenue effort compares actual revenue tothe revenue that would have been collectedhad an average tax rate been applied.Average revenue effort is set at 100%. Themeasurement of revenue effort may bedistorted if the standardised revenue basediverges significantly from the actualrevenue base.

Figure 10.1 provides a comparison of taxingcapacity and effort in 1996-97.

Figure 10.1

REVENUE CAPACITY ANDEFFORT BY JURISDICTION

0

20

40

60

80

100

120

140

NSW Vic Qld WA SA Tas ACT NT

Revenue Capacity Revenue Effort

State Average

Source: 1998 Commonwealth Grants Commission Update Report.

The chart highlights both the relative size ofthe standardised revenue bases and therevenue effort for all jurisdictions. TheTerritory’s revenue capacity and effort isclose to 100%; a fact which is often notappreciated by observers of the Territory’sfinances.

The High Court decision removing theability of the States and Territories to imposeBusiness Franchise fees, means the figures inFigure 10.1 will change when data for1997-98 is included in the analysis.Jurisdictions, particularly the NorthernTerritory, had different capacities to raiserevenue from Business Franchise fees andimposed different rates of tax. Hence, thebalance between effort and capacity willchange from that which existed prior to theHigh Court decision.

COMPARISONS OF TERRITORY ANDSTATE RATES OF TAXES AND

CHARGES

Since Self-Government the NorthernTerritory has applied a range of State-liketaxes and charges. All jurisdictions choosenot to apply particular taxes. The Territory

does not impose a Land Tax nor a FireServices Levy. However, the Territory wasthe first jurisdiction to impose a TourismMarketing Duty. New South Wales adopted

Territory Own-Source Revenue

99

a similar policy in respect of accommodationin the Sydney Central Business District in1997.

Where State and Territory tax bases arerelatively mobile, any attempt to raiseTerritory taxes and charges significantlyabove the rates imposed in otherjurisdictions can be counterproductive.Hence, the Territory is, to a degree,constrained by the rates at which taxes andcharges are levied. The following sectionprovides comparative data on selected taxesand charges.

STAMP DUTY

The main components of Stamp Duty areConveyance, Insurance and Motor VehicleRegistration duties and these are shownin Figure 10.2. No increases in the rates ofstamp duty are included in the 1999Budget.

Figure 10.2

STAMP DUTY

0

10

20

30

40

50

60

70

91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99

Conveyance

Insurance

Motor Vehicle Registration

Other

$M

Source: Northern Territory Treasury.

The 1997-98 conveyance receipts shown inFigure 10.2 were abnormally high due to alarge one off transaction. If that isdiscounted then the 1998-99 estimate reflectsthe trend established in earlier years.

CONVEYANCE DUTY

Figure 10.3

STAMP DUTY PAYABLE ON PURCHASEOF A HOUSE VALUED AT $140 000

0

1

2

3

4

5

WA NSW ACT Tas Qld NT SA Vic

$000

State Average

Source: State Acts and Budget Papers.

Conveyance Duty remains the mostsignificant component of Stamp Duty in alljurisdictions. Whilst Figure 10.3 shows theTerritory duty as relatively high, it shouldbe noted that the Territory does not imposea land tax. The Territory also continues tooffer first home buyers relief from duty onthe first $80 000 of their purchase.

INSURANCE DUTY

Insurance Duty is imposed on policypremiums. The rate in the Territory isslightly below the average of the States. In1998-99 it is anticipated that insurance dutywill raise $6.6 million in revenue.

Figure 10.4

MOTOR VEHICLE REGISTRATION DUTY

0

200

400

600

800

1 000

Qld Vic ACT NSW NT Tas WA SA

$

State Average

Note: Duty on a new vehicle, valued at $25 000.


100

MOTOR VEHICLE REGISTRATIONDUTY

The Territory rate of duty is marginallyabove the State average as shown in Figure10.4 but is in line with the Australian CapitalTerritory, New South Wales, Tasmania andWestern Australia. Revenue from thissource in 1998-99 is estimated to be $13.5M.

PAY-ROLL TAX

Revenue from pay-roll tax is estimated to be$86.0M in 1998-99 (excluding that raisedfrom the General Government sector) andcontinues to be the Territory’s single mostsignificant revenue source.

Figure 10.5

PAY-ROLL TAX - MAXIMUM RATES

0

2

4

6

8

Qld WA SA Vic Tas ACT NSW NT

%

State Average


Whilst pay-roll tax is one of the moreefficient of the Territory taxes,administrative complexity and associatedrecovery costs are rising as the number ofmulti-jurisdictional businesses increase andas new tax minimisation schemes aredeveloped.

The top pay-roll tax rate in the Territory iscomparable with the upper levels in theStates, while the threshold where taxcommences in the Territory is below theState average, as shown in Figure 10.5 andFigure 10.6 respectively.

The difference between the States and theTerritory results, to some extent, from

differences in the definition of ‘wages,’together with differences in rate structures.

Figure 10.6

PAY-ROLL TAX - TAX FREE THRESHOLD

0

200

400

600

800

1000

SA Vic NT NSW Tas WA ACT Qld

$'000

State Average


FINANCIAL TAXES

Financial taxes continue to be put underpressure with development of new productsoutside the scope of present taxes andthrough greater globalisation. Developmentsin electronic technology, (particularly thoseenabling dutiable banking being centralisedin larger States or off-shore) lead to thedecreasing significance of jurisdictionalborders. This gives rise to increasedadministrative costs to minimise taxavoidance and to maintain the Territory’srevenue base.

Figure 10.7

FINANCIAL INSTITUTIONS DUTY

0.00

0.02

0.04

0.06

0.08

Qld ACT NSW NT Tas Vic WA SA

%

State Average


The proposal for the replacement ofFinancial Institutions Duty (FID) with a

Territory Own-Source Revenue

101

revised Debits Tax which was announced in1997 is in abeyance to be considered in thebroader national tax reform arena. In theinterim, shrinkage of the revenue base andincreased avenues for avoidance continue topose significant threats to revenue for alljurisdictions.

The Territory rate of duty is in line with thatimposed by most jurisdictions (Figure 10.7).

DEBITS TAX

Debits Tax is imposed on debits to financialinstitution cheque accounts. If a proposal fora revised Debits Tax is accepted by alljurisdictions, the tax base would beexpanded to generate revenue lost as aconsequence of the abolition of FID.

As with FID, Debits Tax will come underscrutiny during the national tax reformdebate.

ENERGY RESOURCECONSUMPTION LEVY

The rate of levy imposed under the EnergyResource Consumption Levy Act will bereduced to zero with effect from 1 July 1998resulting in a reduction in revenue of $0.5Min 1998-99. The previous rate for liableentities was $1 per 1 000 litres consumedand raised $0.5M per annum.

TOURISM MARKETING DUTY

Tourism Marketing Duty is levied at the rateof 5% on the cost of accommodationprovided by commercial establishments.The Territory and New South Wales arepresently the only jurisdictions to imposethis form of duty. All Territory proceeds arepaid to the Northern Territory TouristCommission to finance tourism promotionactivities. The trend in Tourism MarketingDuty from 1991-92 is shown in Figure 10.8.

Figure 10.8

TOURISM MARKETING DUTY

0

1

2

3

4

5

6

7

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99e

$M p.a. EstimatedActual Budget

(e) Estimate


HOUSEHOLD CHARGES

While comparisons between the Territoryand the States are affected to some extent bydiffering definitions as to what should beconsidered to be a household charge, Figure10.9 provides a broadly comparable range ofbasic household costs faced by householdsin each State and the Territory.

Figure 10.9

SELECTED HOUSEHOLD CHARGES

0

500

1 000

1 500

2 000

Tas ACT Qld NT NSW WA SA Vic

$ p.a.

State Average

Source: Power and Water Authority.

Three of the main components of HouseholdCharges are water, sewerage and electricitycharges. The Territory position comparesfavourably with the larger jurisdictions.

SEWERAGE CHARGES

Sewerage charges (Figure 10.10) are subjectto a small increase in the Budget and arenow marginally above the average of the


102

States. The new average domestic charge is$285 per annum, up from $278 per annum.Similar increases have been made tonon-domestic charges.

Figure 10.10

SEWERAGE CHARGES FOR AN AVERAGE HOME

0

100

200

300

400

* Tas Qld NSW NT ACT SA Vic WA

$ p.a.

State Average


Note: * Sewerage service is based on Assessed Annual Valueproperty of $7 250.

ELECTRICITY CHARGES

Figure 10.11

ELECTRICITY – TOTAL DOMESTIC CHARGE

6

8

10

12

14

16

ACT Qld NSW Tas SA WA NT Vic

Cents/kWh

State AverageState Average


Total Electricity charges (Figure 10.11comprised of a fixed daily fee and a tariffper kWh) remain high in the Territorycompared with most other States. Thisreflects the high costs associated with theabsence of cheap fuel sources and the lack ofeconomies of scale. The bulk of fuel costs inthe Territory are fixed costs associated withfinancing the Amadeus Basin to Darwin gaspipeline. The domestic standard tariff is

now 12.9 cents per kWh compared to theprevious tariff of 12.03 cents per kWh.Commercial rates have increased from 15.89cents per kWh to 16 cents per kWh. As inother jurisdictions, consumers also pay dailyfixed charges, which increase the averagedomestic charge in the Territory to close to14 cents per kWh.

WATER CHARGES

Figure 10.12

WATER CHARGES FOR AVERAGE HOMEBASED ON ANNUAL CONSUMPTION OF 550 KL

0

100

200

300

400

500

600

* Tas NT ACT Qld Vic WA NSW SA

$ p.a.

State Average


Note: * Water service is based on Assessed Annual Value of propertyof $7 250.

Whilst water charges (Figure 10.12) haveincreased in this Budget, Territory chargesremain significantly below the States’average and generally do not recover costs.The new domestic water rate is comprisedof a fixed daily charge per connection of25 cents and a per kilolitre charge of60 cents. The previous charge was 53 centsper kilolitre. Similar increases have beenmade to commercial charges.

FULL COMPARISON OF TAXES,DUTIES AND FEES BETWEENTERRITORY AND STATES

A table comparing the Territory taxationrates, duties and fees with those imposed bythe States and the Australian CapitalTerritory follows as an Appendix to thischapter.

103

Appendix

NT TAX RATES COMPARED WITH STATES

NORTHERN TERRITORY TAX RATES COMPARED WITH STATESAS AT 22 APRIL 1998

104

TAX/DUTY FEE NT NSW VIC QLD SA WA TAS ACT

CONVEYANCE $0 to $500 000:Duty is calculated byformula:

D=0.065 V2 + 21VwhereD= duty payable $V = total value/1000

> $500 000: 5.4% on total

$0 to $14 000:1.25%Next $16 000:1.5%Next $50 000:1.75%Next $220 000: 3.5%Next $700 000: 4.5%> $1 000 000:5.5% on excess

$0 to $20 000:1.4%Next $80 000:2.4%Next $660 000: 6.0%> $760 000:5.5% on totalFrom 1/7/98$0 to $20 000:1.4%Next $95 000:2.4%Next $755 000:6.0%> $870 000:5.5% on total

$0 to $20 000:1.5%Next $30 000:2.25%Next $50 000:2.75%Next $150 000:3.25%Next $250 000:3.5%>$500 000:3.75% on excess

$0 to $12 000:1.0%Next $18 000:2.0%Next $20 000:3.0%Next $50 000:3.5%Next $900 000:4%> $1 000 000:4.5% on excess

$0 to $80 000:1.75%Next $20 000:2.5%Next $150 000:3.25%Next $250 000: 4.0%> $500 000:4.25% on excess

$0 to $1 300:$20Next $8 700:1.5%Next $20 000:2.0%Next $45 000:2.5%Next $75 000:3.0%Next $75 000:3.5%> $225 000:4.0% on excess

$0 to $14 000:1.25% or $20(whichever is thegreater)Next $16 000:1.5%Next $30 000:2.0%Next $40 000:2.5%Next $200 000:3.5%Next $700 000:4.5%> $1 000 000:5.5% on excess

105


Home Purchase Assistance First homeFirst $80 000: Nil.

Exempt:Property transfersbetween spouses,married or de-facto,exempt whereconsideration is nil

First homeThreshold:$155 000 – city$145 000 – country

30% discount onduty for up-frontpayments in lieu of 5yearly instalments

Exempt:Property transfersbetween spouses,married or de-facto,exempt

First home$100 000: NilFrom 1/7/98First home$115 000: Nil

Exemption phasesout at a limit of$150 000. Reliefsubject to meetingcertain eligibilitycriteria

From 1/7/98Exemption phasesout at a limit of$165 000. Reliefsubject to meetingcertain eligibilitycriteriaExempt:Eligible Pensionerexemption to$70 000. Phasingout at $100 000From 1/7/98Exempt:Eligible Pensionerexemption to$100 000. Phasingout at $130 000

First home$80 000: Nil$80 001 to $150 000:1% less $500$150 001 to$155 000:1% less $300$155 001 to$160 000:1% less $200

1% on principal placeof residence (notfirst) $250 000 plusscheduledconveyancing dutyon the excess

First home$80 000: Nil$80 001 to $130 000:Concession reducesby$42/$1 000>$130 000:No concession.

Principal residence< $85 000: 1.5%

First home buyerswhose purchases are< $85 000 (or< $127 500 north ofthe 26th parallel)can additionally claima $500stamp dutyconcession

Exempt:Transfer of propertybetween spousesfrom single to jointownership

First home< $120 000:Duty on purchaseprice can be paid byinstalments over 2years

First home<$116 000: $20$116 001 to$140 000:Concessional rate$14.23/$100 or part ofexcess or $20 (whichever greater).>$140 000:No concession.

ORAL CONTRACTS (CLAYTONS) Documentation nowrequired

Statement nowrequired

Documentation nowrequired

Documentation nowrequired

Conveyance rates Legislated for section31B

Statement required Not applicable

BILLS OF EXCHANGE Nil Nil Nil Nil Nil 10c Nil Nil

CHEQUE Nil Nil Nil Nil 10c 10c Nil Nil

106


LEASES 50c/$100 total rent$1/$100 of one year’srent if indefinite term

Exempt:Principal place ofresidence (naturalpersons)

35c/$100 total rent

Residential leasesexempt

Exempt: where rentis less than $3 000

Exempt: Nursinghome leases

60c/$100 if definiteterm$1.20/$100 on oneyear’s rent if indefiniteterm

Exempt: Residentialtenancies

35c/$100 of totalrental

Exempt:Private dwelling-house

$1/$100 or partthereof of yearly rent

Exempt: Residentialleases

35c/$100 if definiteterm70c/$100 yearly rentif indefinite term

Exempt:Residentialtenancies to$125 per week

Exempt: Residential

Commercial:< 12 months:1% of total rentpayable or $5whichever the greater> 12 months:1% of equivalent ofyearly rental or $5whichever the greater

50c/$100 total rent or$20 whichever thegreater50c/$100commercial leases

Exempt: Residential

HIRING ARRANGEMENT(RENTAL DUTY)

1.5% or $7 500whichever is the lesser

Threshold$12 000 per annum

0.75% of rental valueor $2 whichever isthe greater forcommercial leasingand commercial hirepurchase

1.5% - short termconsumer hire andother non-financialrentals$10 000 maximumduty

Exempt: First $6 000for each month

0.75% of rental value(subject to amaximum of $4 000duty on special rentalagreements) payableonly on rent in excessof $6 000 per month

Commercial hire of$35 000 or moredutiable with majorexemptions infarming, machinery,transport vehicles forcommercial use

0.43% on totalamount of rental over$100 000

1.8% of total value


1.8% of rental value


2% on rent in excessof $4 000 per month

External rentalagreement $20

0.75% of hiringcharges in respect ofequipment financearrangements

1.5% for all othertypes of hiringarrangements

Subject to maximum$10 000 duty forsingle arrangement

Exempt: First $6 000per month

HIRE PURCHASE(INSTALMENT PURCHASE)

Nil See HiringArrangements Duty

See HiringArrangements Duty

$0 to $20: Nil> $20: 0.43%

Nil Nil 2% of purchase priceor $4 000 whicheverlesser

See HiringArrangements Duty

DUPLICATES/COPIES/COUNTERPARTS

$5 fixed. If originalnot stamped copy tobe charged asoriginal

$10 or original fee ifthe original fee wasless than $10

Nil Nil Nil $2 or same asoriginal if less than$2

$20 first counterpart$1 each thereafter

Nil

107


LOAN SECURITY AND MORTGAGEDUTY

Nil $0 to $500:Nil$501 to $16 000:$5>$16 000:$5 + 40c/$100 onexcess

Exempt: Refinancingof all loans

$0 to $200:Nil$201 to $10 000:$4> $10 000:$4 + 80c/$200 orpart thereof onexcess

Exempt: First home Ifsatisfied conditionsfor exemption underconveyance duty

Exempt: Refinancingof all loans

40c/$100

Exempt: Principalplace of residence onfirst $100 000 for firsthome owners and onthe first $70 000 forothers

$0 to $4 000:$10$4 001 to $10 000:$10 + 25c/$100 orpart of excess>$10 000:$25 + 35c/$100 onexcess

$0 to $35 000:25c/$100 or part>$35 000:$87.50 + 40c/$100or part of excess

$0 to $8 000:$20$8 001 to $10 000:$20 + 25c/$100 orpart of excess>$10 000:$25 + 35c/$100 orpart of excess

Nil

MORTGAGE TRANSFER Nil Nil Nil $5 Nil $10 $20 Nil

MOTOR VEHICLE CERTIFICATES OFREGISTRATION

$3/$100 or part $3/$100 or part

From 30/6/99$2.50/$100 or part

Luxury vehicleFrom 30/6/99 >$45 000:5%

New:$0 to $35 000:$5/$200 or partthereof$35 001 to $45 000:$8/$200 or part>$45 000: $10/$200or part

Transfers:$8/$200 or partthereof

$2/$100 or part $0 to $1 000:$1/$100(minimum $5) or part$1 001 to $2 000:$10 + $2/$100or part of excess$2 001 to $3 000:$30 + $3/$100or part of excess>$3 000:$60 + $4/$100or part of excess

Commercial vehiclesand trailers where thetrailer is not a heavyvehicle:$60 + $3/$100 orpart thereof

$3/$100 or part Passenger vehicles:$0 to $599: $20$600 to $34 999:$3/$100 or part$35 000 to $39 999:$1 050 + $11/$100or part in excess of$35 000> $40 000:$4/$100 on excess

All other vehicles:<$600: $20>$600: $3/$100 orpart

$3/$100 or part

108


LIFE INSURANCE 10c/$100 Suminsured

Temporary/termpolicy: 5% of firstyears premium

$100 to $2 000:10c/$200> $2 000:$1 + 20c/$200

Term/riders: 5% offirst years premium

Exempt: Annuities

$200 to $2 000:12c/$200>$2 000:$1.20 + 24c/$200

Term/riders: 5% offirst years premium

$100 to $200:10c$201 to $2 000:5c/$100> $2 000:$1 + 10c/$100

Temporary/term:5% of first yearpremium

Exempt: Annuities

$1.50/$100 ofpremiums

Annual licence fee

$100 to $2 000:5c/$100> $2 000:$1 + 10c/$100 ofsum insured

Temporary or term:5% of first yearspremium

Exempt: Annuities

$0 to $2 000:10c/$200>$2 000:$1 + 20c/$200 onexcess

Term insurance: 5%of first yearspremium

Temporary: 2% ofpremium on policy

$100 to $2 000:10c/$200 or part>$2 000:$1 + 20c/$200 orpart

Term insurance: 5%of premium

GENERAL INSURANCE 8% of premium + $5for third party liability

Exempt: Insuranceon transport ofgoods, marine hullsand workerscompensation

11.5% of premium

5% special classes:motor vehicle,aviation, disability,income, occupationalindemnity

Exempt: Commercialmarine hulls, premiumon goods carried bysea, land or air,premium on propertyoutside NSW

10% of premium

Exempt: Commercialmarine hulls, workerscompensation (withconditions) andpremiums on goodscarried by sea, landor air

8.5% of premium

WorkersCompensation, motorvehicle, professionalindemnity insurance5% of net premium

Exempt: Hull ofvessel and premiumon goods carried bysea, land or air

$8/$100 of premiummonthly licence

Exempt: workerscompensation

Exempt: Commercialmarine hulls andtransport of goods bysea, land or air

5% of premiums

WorkersCompensation: 3%of net premium

Exempt: Commercialmarine hulls andpremium on goodscarried by sea, landor air

8% of premiums

Exempt: Marine hulls& aircraft used forinternational trade.Transport of goods ininternational trade

10% of grosspremium

Exempt: Premium ongoods carried ininternational trade

ELECTRONIC BANKING 10c per debittransaction

Nil Nil Nil Nil Nil Nil Nil

109


TOURISM MARKETING DUTY Hotels/Motels etc:5% maximum 14nights

Levy on cost ofresidentialaccommodation to amaximum of 28 daysprovided at hotelsand similarestablishments in theCentral BusinessDistrict of Sydneyand North Sydney

1/9/97 - 5%1/4/98 - 7%1/9/98 - 10%

Nil Nil Nil Nil Nil Nil

PAY-ROLL TAX$0 to $520 000:Nil$520 001 to$1 250 000:5%(Deduction reducesto nil between$520 000 and$1 300 000)

$1 250 001 to$10 000 000:6% on total>$10 000 000:7% on total

Employersuperannuationcontributions aretaxable wherecontributions exceedamounts payableunder industrialawards orsuperannuationguarantee scheme

$0 to $600 000:Nil>$600 000:6.85%

From 30/06/99: 6.7%

Employersuperannuationcontributionsincluded in the taxbase

$0 to $515 000: Nil>$515 000:6.25%

From 1/7/98$0 to $515 000: Nil>$515 000:6%


$0 to $850 000:Nil> $850 000:5%(Deduction reducesto nil between$850 000 and$3 400 000)

Employersuperannuationcontributions aretaxable where theemployee haselected to have theemployer make thecontribution as part ofsalary package

$0 to $456 000:Nil> $456 000:6%


$0 to $675 000:Nil$675 001 to$2 700 000:4.87% of excess$2 700 001 to $4 500000:$98 550 + 6.03% ofexcess$4 500 000 to $5 625000:$207 000 + 9.4% ofexcess>$5 625 000:5.56% on total


$0 to $600 000:Nil> $600 000:6.6%

From 1/7/986.35%subject to the futuresale of the Hydro-Electric Corporation’stransmission,distribution and retailbusinesses


$0 to $800 000:Nil>$800 000:6.85%


Exempt: Traineesunder AustralianTraineeship System



110


DEEDS $5 $10 Nil Nil $10 or conveyancerates

$5 $20 Nil

DEEDS CREATING TRUST ORDECLARATION OF TRUST

$50 $200 minimum $200 As for conveyances

Appointment of newtrustee - $4

$10, unlessconveying propertywhich is thenconveyance value

Declaration of Trust– depending on theeffect of thedocument $10,conveyance rates, oradjudged dulystamped

$5 As for conveyances Nil

DEBITS TAX>$1 but <$100 15 cents 30 cents 30 cents 30 cents 30 cents 30 cents 15 cents 30 cents$100 but <$500 70 cents 70 cents 70 cents 70 cents 70 cents 70 cents 35 cents 70 cents$500 but <$5 000 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 75 cents $1.50$5 000 but <$10 000 $3.00 $3.00 $3.00 $3.00 $3.00 $3.00 $1.50 $3.00$10 000 or more $4.00 $4.00 $4.00 $4.00 $4.00 $4.00 $2.00 $4.00

FINANCIAL INSTITUTIONS DUTY

Short term dealers rate

0.06%Maximum $1 500 perreceiptExempt: SocialSecurity deposits,charitable andreligiousorganisations

0.005%

0.06%Maximum $1 200 perreceipt

0.005%


0.005%

Nil 0.065% includingLocal GovernmentlevyMaximum $1 200 perreceiptExempt: Pensioncheques

Rebate for FID paidon export revenue

0.005%

0.06%Maximum $1 200 perreceiptExempt: Pensioncheques.

0.005%

0.06%Maximum $1 200 perreceiptExempt: Pensioncheques

0.005%


0.005%

MINING AGREEMENTS $50 Under hand $2Under seal $10

Under Deed: Nil Duty depends onnature of instrument

Duty depends onnature of instrument;could be exempt asan agreement orconveyance rates

Duty depends onnature of instrument

$20 minimumDuty depends onnature of instrument

Nil

111


FORECLOSURE As for conveyances As for conveyances Nil As for conveyances As for conveyances As for conveyances Nil Nil

TRUSTEE APPOINTMENT $5 $10 Under Deed: Nil $4 $10 fixed $5 $20 Nil

POWER OF ATTORNEYfor receiving dividend $5 Nil Nil Nil Nil Nil $20 Nilor money $5-other $10SHARE TRANSFERSOn Market:Both buyers and seller are liable to duty

15c/$100 or partthereof


Up to $100: 3.5c/$25or part thereofOver $100: 15c/$100or part thereof

Listed SharesBrokers:15c/$100 or partthereof, of the saleprice and thepurchase price as thecase may be.Other:30c/$100 or partthereof




Brokers:Up to 100: 4c/$25 orpart thereof.Over $100: 15c/$100or part thereof

Off Market:The purchaser is liable for duty

Listed Companies30c/$100 or partthereofUnlistedCompanies60c/$100 or partthereof


Listed CompaniesUp to $100: 7c/$25or part thereof>$100: 30c/$100 orpart thereofUnlisted CompaniesUp to $100: 14c/$25or part thereof.Over $100: 60c/$100or part thereof

Listed SharesBrokers:15c/$100 or partthereof, of the saleprice and thepurchase price as thecase may beOther:30c/$100 or partthereofUnlisted SharesBrokers:30c/$100 or partthereof, of the saleprice and thepurchase price as thecase may beOther:60c/$100 or partthereof


Listed Trades30c/$100 or partthereofUnlisted Trades60c/$100 or partthereof


Other:Off Market30c/$100 or partthereofUnlisted60c/$100 or partthereof(minimum $20)

CHANGE CONTROL OF LANDOWNING CORPS/UNIT TRUSTS

As for Conveyances As for Conveyances As for Conveyances As for Conveyances Old trustee to newtrustee where nochange in beneficialownership: $10.Othercircumstances,conveyances rates

As for Conveyances As for Conveyances As for Conveyances

CREDIT CARDS Nil Nil Nil 10c per transactionless 10c per accountperiod

Nil Nil 15c per transaction Nil

112


LAND TAX Not imposed $0 to $159 999:Nil> $159 999:$100 + 1.85% ofexcess (until 31/12/99)

From 01/01/001.7%

$0 to $84 999:Nil$85 000 to $199 999:$85 + 0.1%$200 000 to $539 999:$200 + 0.2%$540 000 to $674 999:$880 + 0.5%$675 000 to $809 999:$1 555 + 1.0% $810 000to$1 079 999:$2 905 + 1.75%$1 080 000 to$1 619 999:$7 630 + 2.75%$1 620 000 to$2 699 999:$22 480 + 3.0%$2 700 000:$54 880> $2 700 000:$54 880 + 5.0%

$200 000 exemption forall natural persons(otherwise exemption of$100 000 for companies,trustees and absentees).In addition, all land taxpayers receive a general5% rebate.

$0 to $3 999:0.20%$4 000 to $5 999:$8 + 0.36%$6 000 to $9 999:$15.20 + 0.52%$10 000 to $29 999:$36 + 0.70%$30 000 to $49 999:$176 + 0.87%$50 000 to $199 999:$350 + 1.03%$200 000 to $349 999:$1 895 + 1.20%$350 000 to $499 999:$3 695 + 1.37%$500 000 to $649 999:$5 750 + 1.54%$650 000 to $799 999:$8 060 + 1.71%$800 000 to $949 999:$10 625 + 1.89%$950 000 to $1 099 999:

$0 to $50 000:Nil$50 001 to $300 000:0.35% of excess.$300 001 to$1 000 000:$875 + 1.65% ofexcess.> $1 000 000:$12 425 + 3.7% ofexcess

$0 to $10 000:Nil$10 001 to $75 000:$15 + 0.15%$75 001 to $140 000:$112.50 + 0.25%$140 001 to $210 000:$275 + 0.45%$210 001 to $325 000:$590 + 0.8%$325 001 to $700 000:$1 510 + 1.2%$700 001 to $1 100 00:$6 010 + 1.6%> $1 100 000:$12 410 + 2%

$0 to $1 000:Nil$1 001 to $15 000:$25.00$15 001 to $40 000:$25.00 + 0.75%$40 001 to $68 750:$212.50 + 1%$68 751 to $100 000:$500.00$100 001 to $125 000:$500.00 + 1.25%$125 001 to $170 000:$812.50 + 1.5%$170 001 to $210000:$1 487.50 + 1.75%$210 001 to $250 000:$2 187.50 + 2%$250 001 to $500 000:$2 987.50 + 2.25%> $500 000:$8 612.50 + 2.5%

From 1998/99*$0 to $1 000:Nil$1 001 to $15 000:$25$15 001 to $100 000:$25 + 0.55%$100 001 to $200 000:$492 + $1.25%

$0 to $100 000:1% flat$100 001 to $200 000:1.25% flat.> $200 000:1.5% flat(Upon unimprovedvalue)

113


LAND TAX (Cont)

On Residential owner occupied land

Nil Principal residenceUnimproved landvalue< $1M: Nil> $1M:$100 + 1.85% inexcess of $1M

Exempt:Principal place ofresidence

$13 460 + 2.01%$1 100 000 to$1 249 999:$16 475 + 2.23%$1 250 000 to$1 299 999:$19 820 + 2.44%$1 300 000 to$1 349 999:$21 040 + 2.66%$1 350 000 to$1 399 999:$22 370 + 2.87%$1 400 000 to$1 449 999:$23 805 + 3.09%$1 450 000 to$1 499 999:$25 350 + 3.30%> $1 500 000 :1.8% Flat

Exempt withconditions Exempt Exempt

$200 001 to $500 000:$1 742 + 2.25%> $500 000:$8 492+2.5%

From 1999/2000*$0 to $1 000:Nil$1 001 to $15 000:$25$15 001 to $200 000:$25 + 0.55%$200 001 to $500 000:$1 042 + 2.00%> $500 000:$7 042 +2 .5%*subject to the futuresale of the Hydro-Electric Corporation’stransmission, distributionand retail businesses

Exempt Exempt

On land used for primary production Nil Exempt Exempt withconditions

Exempt withconditions

Exempt Exempt Exempt Exempt

CONSUMPTION LEVY FUEL OIL 0 – 10m litres:Nil>10m litres: $1/1000litres on total volume.

From 1/7/980 – 10m litres:Nil>10m litres:zero rate.

Nil Nil Nil Nil Nil Nil Nil

Documents

ISSUES IN PUBLIC FINANCE 1998-991998-99 Budget % % Northern Territory gross debt to GSP 35.4 33.1 The Territory is actively seeking to reduce the level of gross debt to below $2B by