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The role of the Commonwealth Grants Commission (CGC)

The Commission’s main function is to inquire into the relative fiscal capacities of the States and Territories and to make recommendations on the distribution GST revenue among them.  Under the Intergovernmental Agreement (IGA) on Federal Financial Relations, signed by the Commonwealth, State and Territory governments in 2008, its recommended distribution should achieve horizontal fiscal equalisation (HFE).  Its work falls into two broad areas.

The Commission considers how to implement the principle of HFE: for example, how should the provision of State infrastructure or the ownership of State businesses be reflected in its work?  Having made these decisions, it undertakes research to identify and measure influences on State revenue raising capacity and cost of delivering services.  Based on this research, it develops a methodology to calculate a distribution of GST revenue which reflects material difference between the States.  When this distribution is implemented, it gives each State the same fiscal capacity.  This process - a major methodology review - occurs every five years or so and in response to terms of reference provided by the Commonwealth Treasurer.  The latest major review was completed in 2010.

The methodology developed in a review incorporates data which, as economic and social conditions change, can quickly become dated.  To ensure that the GST distribution is based on conditions as close as possible to the year the GST is received by the States, the Commission updates data annually.  Except in unusual circumstances the underlying methodology is not changed in this process.  This process also happens in response to terms of reference from the Commonwealth Treasurer.  The latest report is the 2012 Update recommending the GST distribution for 2012-13.

The States are consulted by the Commission during both methodology reviews and through the updating process.

The Commission relies on data from specialist data providers, including the Australian Bureau of Statistics, as well as State government agencies in its research and as it updates economic and social conditions. 

The Commission’s processes are transparent.  Its terms of reference and recommendations are publicly available, as is advice provided to it in the course of its work.  The Commission makes available the data it uses, unless they are provided on a commercial-in-confidence basis, so that its calculations can be replicated.

From time to time, the Commission is also asked to report on the finances of Australia’s external territories, local government matters and the financing of services for Indigenous people.  Terms of reference for those inquiries are developed by relevant Australian Government agencies and the reports are considered by their Ministers.

Historical Background

The States and Territories have always had very different economic and social conditions which have affected the revenues they can collect from taxes and charges and the costs of delivering State services.

States have made claims on the Commonwealth for financial assistance (special grants) under section 96 of the Constitution, to address these differences.  The Commission was established in 1933 to assess those claims.  It developed an approach to assessing claims based on the precept that the fiscal capacity of the States and Territories should be equal.  However because it dealt only with claimant States, equalisation was partial.  At various times, Queensland, Western Australia, South Australia, Tasmania and the Northern Territory sought special grants.

In 1976, The Commonwealth and the States agreed that the fiscal capacities of the States and Territories should be made equal. Subsequently, the Commission was given the responsibility of making recommendations on how general revenue assistance (a pool of funds transferred from the Commonwealth to the States and Territories) should be distributed to achieve this objective. That process came into effect in the early 1980s.

That system is still in place today, but there have been many changes in the details.  Changes have occurred in the methodology adopted by the Commission to achieve fiscal equality among the States and Territories which are documented in successive Commission reviews.  There have also been changes in the methods used to decide the total amount of assistance available to be shared between the States.  Details of these arrangements are contained in Commonwealth Budget Paper No. 3, Federal Financial Relations.

A more detailed history of the Commission is contained in its history, Equality in Diversity, (1995) updated in The Commonwealth Grants Commission – The Last 25 Years.