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Commonwealth Grants Commission
Capital assessments
May 2011
Background
The capital assessments –
Treatment of capital grants for infrastructure
Outline
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Some background
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Determine a distribution of the GST which equalises State fiscal capacities to provide services
Commission’s task
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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
It actually
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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
Operating statement
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GST = Expenses plus: Net investment plus: Net lending less: State own-source
revenue less: Revenue from SPPs
The rearranged budget identity
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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
Two important concepts
The Capital Assessments
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Assessments for infrastructure: Net investment Depreciation expenses
Assessments for financial assets Net lending Net interest revenue and revenue from PTEs
Capital assessments include
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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
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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’
Why did we change?
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Change 2004 Review 2010 ReviewWhat is Equalised
Net operating balance Net financial worth
Calculation of GST required for equalisation
= Assessed expenses plus average NOBless assessed revenue less revenue from SPPs
= Assessed expenses plus assessed investmentplus assessed net lendingless assessed revenueless revenue from SPPs
Outcome Overtime provision of capacity to pay debt charges on borrowings to fund infrastructure
Annual recognition of impact of population growth on need for infrastructure and stock of financial assetsQuicker increase in GST for high growth States – Qld, WA, NT
Changes in methods
Assessment methodsNet investment
DepreciationNet lending
Interest & dividend revenue
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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
Investment assessment
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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
Factors affecting Investment
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Investment resultsNSW Vic Qld WA SA Tas ACT NT Redist
Dollars million -294.9 -298.9 503.6 254.3 -146.3 -60.6 -48.4 91.2 849.1
Dollars per capita -41.36 -54.75 113.08 112.43 -89.74 -120.02 -136.92 402.65 38.56
NSW Vic Qld WA SA Tas ACT NT Redist$m $m $m $m $m $m $m $m $m
Population growth -430.1 23.2 353.8 234.4 -123.6 -56.4 -9.5 8.3 619.7Capital stock disabilities 70.2 -127.5 -31.2 5.7 9.8 12.7 -14.6 74.9 173.3Cost disabilities 16 -25.6 -9.5 14.7 -5.3 -2.6 -4.8 17.2 47.9NNR 47.1 -169.7 188.1 -2 -27.9 -14.7 -19.9 -1 235.2Interactions 1.9 0.6 2.5 1.4 0.8 0.5 0.5 -8.2 8.2TOTAL -294.9 -298.9 503.6 254.3 -146.3 -60.6 -48.4 91.2 849.1
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Assessed depreciation is a proportion of the assessed stock of infrastructure at end of each year
Depreciation
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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
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Impact on GST distribution, 2010 Review
Population growth
Net lending results
NSW Vic Qld WA SA Tas ACT NT Redist
Dollars million -167.7 9.3 138.4 89.8 -47.5 -22.0 -3.7 3.3 240.8
Dollars per capita -23.51 1.70 31.08 39.71 -29.13 -43.48 -10.44 14.38 10.93
NSW Vic Qld WA SA Tas ACT NT Total% % % % % % % % %
2005-06 0.86 1.43 2.48 1.93 0.90 0.80 1.29 2.27 1.44
2006-07 1.06 1.67 2.37 2.33 1.10 0.67 1.41 1.88 1.60
2007-08 1.24 1.77 2.49 2.56 1.08 0.73 1.48 2.40 1.75
2008-09 1.40 1.95 2.52 3.09 1.16 0.99 1.69 1.95 1.91
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Since State NFW is equalised, each State could earn the average per capita revenue from these sources
Net interest and PTE revenue
Treatment of capital grants
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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
Capital grants
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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
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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
Roads
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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
Rail
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ComparisonRoad Rail 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
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Questions?
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Assets
Non-financial (real) assets
Financial assets
Produced assets Non-produced assets
Tangible produced assets•Dwellings•Other buildings•Other construction/infrastructure•Transport equipment•Computer equipment•Other equipment•Defence weapons platforms•Cultivated assets•Inventories
Intangible produced assets and valuables
Tangible non-produced assets•Land•Other
Intangible non-produced assets
Infrastructure
GFS asset classification
•Cash and deposits•Investments, loans and placements•Accounts receivable•Advances outstanding•Equity in PTEs
Net financial assets or Net financial worth
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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 real assets
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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
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Net lending assessment – 2008-09
NSW Vic Qld WA SA Tas ACT NT Total
End of year net financial worth (a)
5 447.20
Population (million) 7.0 5.4 4.3 2.2 1.6 0.5 0.3 0.2 21.6Assessed net financial worth ($m) 38 356 29 223 23 693 12 006 8 781 2 725 1 895 1 208 117 886
Start of year net financial worth (b)
6 044.09
Population (million) 6.9 5.3 4.2 2.1 1.6 0.5 0.3 0.2 21.2Assessed net financial worth ($m) 41 969 31 806 25 644 12 923 9 631 2 994 2 068 1 314 128 349
Net lendingAssessed net lending ($m) -3 613.6 -2 583.2 -1 951.0 -916.8 -850.3 -269.0 -172.8 -106.6 -10 463.3
Assessed net lending ($pc) -513.19 -481.51 -448.56 -415.96 -527.49 -537.67 -496.64 -481.09 -483.48Undiscounted factor 1.06144 0.99593 0.92777 0.86034 1.09103 1.11209 1.02723 0.99506 1.00000
Discounted category factor 1.04608 0.99695 0.94583 0.89525 1.06827 1.08407 1.02042 0.99629 1.00000
Average net financial worth ($pc)
Average net financial worth ($pc)
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Depreciation results Impact on GST
Capital stock factorNSW Vic Qld WA SA Tas ACT NT Average
2003-04 0.94772 0.92835 1.04015 1.11469 1.04881 1.07377 0.92182 2.19129 1.00000
2004-05 0.94815 0.92825 1.03902 1.11393 1.04803 1.07306 0.92134 2.19318 1.00000
2005-06 0.94856 0.92781 1.03810 1.11279 1.04737 1.07287 0.92089 2.19564 1.00000
2006-07 0.94950 0.92701 1.03693 1.11141 1.04709 1.07381 0.91955 2.20188 1.00000
2007-08 0.95121 0.92660 1.03520 1.10829 1.04695 1.07484 0.91774 2.19779 1.00000
2008-09 0.95207 0.92518 1.03436 1.10749 1.04852 1.07536 0.91121 2.20677 1.00000