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Commonwealth Grants Commission. Capital assessments May 2011. Outline. Background The capital assessments – Treatment of capital grants for infrastructure. Some background. Commission’s task. Determine a distribution of the GST which equalises State fiscal capacities to provide services.

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Commonwealth grants commission

Commonwealth Grants Commission

Capital assessments

May 2011


Outline

Outline

  • Background

  • The capital assessments –

  • Treatment of capital grants for infrastructure


Some background

Some background


Commission s task

Commission’s task

  • Determine a distribution of the GST which equalises State fiscal capacities to provide services


It actually

It actually

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


Operating statement

Operating statement

  • Revenue, including

    • PRT, Mining revenue, etc

    • Interest earnings and dividends

    • GST

    • Other Grants

  • Expenses including

    • Education, Health, Law and Order, etc

    • Depreciation

  • Net Operating Balance (NOB) = R – E

  • Net investment (NI)

  • Net lending = NOB - NI


The rearranged budget identity

The rearranged budget identity

GST = Expenses plus: Net investmentplus: Net lendingless: State own-source revenueless: Revenue from SPPs


Two important concepts

Two important concepts

  • Average budget – average State revenues and expenditures

  • Assessed budgets – the expenditures States would incur if they provided the average services and the revenues they would raise if they applied average revenue efforts


The capital assessments

The Capital Assessments


Capital assessments include

Capital assessments include

Assessments for infrastructure:

  • Net investment

  • Depreciation expenses

    Assessments for financial assets

  • Net lending

  • Net interest revenue and revenue from PTEs


Commonwealth grants commission

  • Capital assessments have always been made

  • We used to equalise the capacity of States to pay debt charges on borrowings used to acquire real and financial assets

  • Now we give States the up front capacity to acquire assets needed to provide services and hold equal amounts of financial assets


Why did we change

Why did we change?

  • Simpler - the debt charges assessment was too complex

  • To reflect ‘what States do’ with the GST

    • GST funds investment and financial assets

  • To capture effects of population growth

  • To be more contemporary

    • Recognises investment needs and changes in net financial assets ‘up front’


Changes in methods

Changes in methods


Assessment methods

Assessment methods

Net investment Depreciation

Net lending

Interest & dividend revenue


Investment assessment

Investment assessment

  • Assumption - States need the average stock of infrastructure per capita, adjusted for its infrastructure disabilities, to deliver average per capita services

  • Assessed investment is the difference between the assets required to provide average services at the end of the year and those required at the start


Factors affecting investment

Factors affecting Investment

  • Population growth

  • Capital stock (or quantity) disabilities

    • Measured as expense use disabilities, discounted by 12.5% and averaged over three years

    • Examine roads and other infrastructure separately

    • No disabilities applied to land

  • Cost disabilities

    • Measured using interstate wage differences and regional cost differences


Investment results

Investment results


Depreciation

Depreciation

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


Net lending

Net lending

  • Net lending each State requires to achieve the same NFW per capita is assessed NFW at year’s end less assessed NFW at year’s start

  • Assessed NFW is the State’s population share of the total NFW

  • This assessment is only influenced by population growth

  • Net lending needs are discounted by 25%


Net lending results

Net lending results

  • Impact on GST distribution, 2010 Review

  • Population growth


Net interest and pte revenue

Net interest and PTE revenue

  • Since State NFW is equalised, each State could earn the average per capita revenue from these sources


Treatment of capital grants

Treatment of capital grants


Capital grants

Capital grants

  • SPPs and NPPs have a revenue and a spending effect on State budgets

  • The two effects are assessed separately

    • SPP and NPP revenues are all assessed the same way - States receiving above average per capita SPP and NPP revenue receive less GST

    • Spending effects are part of the relevant expenditure assessment and reflect the relevant drivers of service use and cost


A simple gst impact

A simple GST ‘Impact’

Aust Assessed GST Average State A Impact

$ $ $

SPP expenses 100 130 30

SPP revenue 100 125 -25

GST impact for State A 5


Roads

Roads

  • Roads NPPs help fund construction of the national network

  • Road use and length disabilities affected half the spending on construction

  • Nationally determined needs also affected the other half of the spending – the interstate distribution of the NPP reflected the needs

  • All differences from the average revenue affected the GST


Commonwealth grants commission

Rail

  • Most rail services are provided by PTEs and are not general government services

  • Support for PTE investment takes form of capital grants or equity injections which increase State equity in the PTE and NFW

  • Those transactions are captured in net lending assessment which equalises NFW

  • On revenue side, all differences from the average receipts are offset by GST distribution


Commonwealth grants commission

ComparisonRoadRail Revenue side effect is same in both cases. It offsets the difference from average revenue.Expenditure effects:

  • A general govt service

  • Capital grant creates non-financial asset

  • Equalising capacity to provide service means recognise population growth and service specific disabilities

  • A PTE service

  • Capital grant creates a financial asset

  • Equalising NFW, not PTE’s capacity to provide services, means only population growth is recognised


Questions

Questions?


Commonwealth grants commission

GFS asset classification

Assets

Non-financial (real) assets

Financial assets

Produced assets

Non-produced assets

Intangible produced assets and valuables

  • Tangible produced assets

  • Dwellings

  • Other buildings

  • Other construction/infrastructure

  • Transport equipment

  • Computer equipment

  • Other equipment

  • Defence weapons platforms

  • Cultivated assets

  • Inventories

  • Tangible

  • non-produced assets

  • Land

  • Other

Intangible

non-produced assets

  • Cash and deposits

  • Investments, loans and placements

  • Accounts receivable

  • Advances outstanding

  • Equity in PTEs

Net financial assets or

Net financial worth

Infrastructure


Operating statement impact of real assets

Operating statement – impact of real assets

  • Revenue, including

    • PRT, Mining revenue, etc

    • Interest earnings

    • Dividends

    • Grants

  • Expenses including

    • Education, Health, Law and Order, etc

    • Debt charges

    • Depreciation

  • Net Operating Balance (NOB) = R – E

  • Net investment (NI)

  • Net lending = NOB - NI


Operating statement impact of financial assets

Operating statement – impact of financial assets

  • Revenue, including

    • PRT, Mining revenue, etc

    • Interest earnings

    • Dividends

    • Grants

  • Expenses including

    • Education, Health, Law and Order, etc

    • Debt charges

    • Depreciation

  • Net Operating Balance (NOB) = R – E

  • Net investment (NI)

  • Net lending = NOB - NI


Net lending assessment 2008 09

Net lending assessment – 2008-09


Depreciation results

Depreciation results

  • Impact on GST

  • Capital stock factor


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