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The Commission operates under the Commonwealth Grants Commission Act 1973.  It is a statutory authority whose role is to provide advice to the Australian Government in response to terms of reference from the Treasurer. 

The main subject on which advice is sought is the allocation among the States of the goods and services tax (GST) revenue.  Terms of reference for these inquiries are decided by the Australian Government in consultation with the States and Territories. 

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. 

Principle of Fiscal Equalisation

The Commission’s advice is based on the principle of fiscal equalisation which states that:

each State should be given the capacity to provide the average standard of State-type public services, assuming it does so at an average level of operational efficiency and makes an average effort to raise revenue from its own sources.

Equalisation is designed to equalise States' capacity to provide services, not their results. This is because the Commission’s recommendations relate to untied general revenue grants and each State is free to decide its own priorities.

 

Historical Background

The Commission was established in 1933 to assess claims made by States for financial assistance (special grants) under section 96 of the Constitution. At various times, Queensland, Western Australia, South Australia, Tasmania and the Northern Territory sought special grants.

After the introduction of uniform income taxation in 1942, the capacity of all the States to raise revenue fell far short of their expenditures. The converse was true for the Commonwealth. Consequently, large payments from the Commonwealth to the States have been made in each year since.

Prior to 1976, general revenue assistance to each State was determined largely by formula subject to variation through Commonwealth-State negotiations. In 1976, general revenue sharing arrangements were introduced, under which the total amount of assistance to be made available was to be decided by the Premiers’ Conference and allocated among the States using per capita relativities agreed by the Conference.

That system is still in place today, but there have been many changes in the details, particularly in the methods used to decide the amount of assistance. Details of the arrangements are contained in Commonwealth Budget Paper No. 3, Federal Financial Relations.

Other matters on which the Commission has reported in recent years include: the finances of the Australian Capital Territory (since 1993-94, the ACT has been included in the general revenue sharing arrangements which apply to the States); the interstate distribution of general purpose grants for local government; the standard of government services and standards of living on the Cocos (Keeling) Islands; the services on and financial arrangements for, Christmas Island; the financial and administrative capacity of Norfolk Island; and the distribution of funding for programs that affect Aboriginal and Torres Strait Islander peoples; and the financing of the Jervis Bay territory.

The Commission’s background and role in the Australian federation are recorded in the second edition of its history, Equality in Diversity, launched on 27 July 1995.

More recent activities of the Commission have been recorded in a third publication, released in January 2009:  The Commonwealth Grants Commission – The Last 25 Years (Zipped RTF - Adobe PDF)