1                This working paper describes the assessment of additional costs incurred by some States due to the distances of those States from other State capitals and sources of supply.  The paper also includes information on its impact on the GST revenue distribution for the 2007 Update.  The development of the assessment methods for these costs are discussed in Volume 7 of the Working Papers for the 2004 Review.

Description of Isolation Costs

2                The isolation costs assessment accounts for the additional costs incurred by some States owing to their distances from other State capitals and sources of supply.  In many instances, isolation reflects the extra costs incurred by some States in moving people or goods across State borders.  There is, however, an emphasis on States that are distant from the major cities of Sydney, Melbourne and Brisbane.  The factor is also generally confined to costs of movements between State capitals — the effects of distance and population dispersal on the costs incurred in moving people or goods within a State are reflected in the dispersion disability. 

3                Table 1 shows the calculated isolation expenses of each State for each of the isolation-related expenditure items for 2005‑06. 

Table 1            Isolation related costs, 2005‑06

4               

Assessment Method

Description of the assessment

5                Costs arising from isolation (or interstate movements) affect most State functions and for the 2007 Update these costs included:

·                labour-related costs such as leave fares, rental subsidies, recruitment expenses, additional recreation leave and fringe benefits tax — also included were professional infrastructure costs which arose from the need to bring in professional expertise not available locally; 

·                freight costs on the movement of goods and materials used in service provision (including construction materials, plant and equipment) because the sources of supply were in other States;

·                airfares and travel allowances relating to attendance by officials at meetings and conferences in other State capital cities; and

·                medical travel related subsidies which arose from the need to subsidise travel expenses of hospital patients treated interstate. 

6                The isolation disabilities were assessed for the expenditure items included in the above list, except that medical travel related subsidies were included in a more general 'travel related subsidies' item.  The travel related subsidies item also included subsidised travel for students and artistic and sport performers, as well as hospital patients. 

7                In addition, disabilities were assessed for commercial isolation, which accounted for higher costs of goods (such as high technology equipment and medical supplies) due to small markets and geographical isolation.

8                Isolation expense components were assessed in those categories which were judged to contain isolation-related costs.  For each relevant category, the average proportion of expenses due to isolation was calculated by:

·                allocating a share of the isolation-related costs to each category, on the basis of the proportion of each category's expenditure that is affected by isolation^[1]; and

·                expressing the per capita isolation-related costs allocated to each category as a percentage of the total average per capita expenditure for the category in 2004‑05.

9                The method of assessment of isolation costs remained the same as that used in the 2006 Update.  The 2007 Update, however, included a greater range of data that was derived by indexing previous year's data by CPI rather than data provided by the States.

New developments in this update

10            The Commission decided that:

·                for the 2007, 2008 and 2009 Updates, all labour related and freight related isolation costs would be based on the 2006 assessments updated by CPI, due to concerns about the quality and reliability of State provided data;

·                the existing cost relativities between States would be preserved; and

·                as their data will not be used, States would not be asked to provide data on isolation costs for future updates.

Results for 2005-06

11            Table 2 shows the calculated isolation expenses for each State for each year of the update period.  Table 3 sets out the 2007 Update isolation factors for all affected categories except Services to Indigenous Communities.  Table 4 sets out the 2007 Update isolation factors for Services to Indigenous Communities. 

Table 2            Isolation expenses — 2007 Update

Table 3            Isolation factors, all affected categories except Services to Indigenous Communities, 2007 Update

Table 4            Isolation factors, Services to Indigenous Communities, 2007 Update

12            Table 5shows the categories affected by isolation expenses and the component weights for 2005‑06.  The share of each category in the total isolation expenses remained unchanged from those assessed for the 2006 Update.

Table 5            Isolation-related costs — 2007 Update, 2005‑06

Contribution to GST Revenue Distribution

13            Table 6 shows the redistribution of GST revenue due to the isolation assessments in the 2006 Update and the 2007 Update. 

Table 6            Isolation, effect of assessment on GST revenue distribution, 2006 Update and 2007 Update

(a)             Assuming same pool.

(b)       This figure shows the change in the amount redistributed among the States between the 2005 Update and the 2006 Update.  It does not necessarily equal the difference in the total redistribution from EPC between the two inquires.

14            Compared with an equal per capita assessment, the 2007 Update redistributed $143.5 million away from the New South Wales, Victoria and Queensland, mostly to the Northern Territory.  Since 2000-01, State expenses as a whole have increased by 31.2 per cent, while isolation expenses have grown by 19.9 per cent, partly due to indexing some components by CPI in later years. This slower growth in isolation costs has led to a declining impact of isolation and hence a redistribution from the more isolated states to the less isolated states between the 2006 and 2007 Updates. Differential rates of growth between the states in airfares, and in freight and labour costs in the earlier years of the update period have also led to some redistributions between States.

 

This chapter was prepared by the Expense — Education section of the Commonwealth Grants Commission.  If you have any questions about its content please contact Tim Carlton on (02) 6229 8879 or tim.carlton@cgc.gov.au.

         Date: 23/2/07