Federal-state financial relations

The Intergovernmental Agreement on Federal Financial Relations provides the overarching framework for the Australian Government’s financial relations with the states. It sets the foundation for collaboration on policy development and service delivery, and for the implementation of economic and social reforms in areas of national importance.

There are a number of inter-governmental forums that oversee Australia’s system of federal-state financial relations. These include:

  • Council for Federal Financial Relations (CFFR), which comprises the Treasurers of the Australian, state and territory governments and which oversees the operation of the Intergovernmental Agreement on Federal Financial Relations.
  • Heads of Treasuries (HoTs) meetings, which are convened every three to four months to discuss federal financial relations issues, and which are attended by Australian, state and territory Under Treasurers. HoTs also provide advice to the CFFR as required.
  • Council of Australian Governments (COAG),  the peak intergovernmental forum in Australia, attended by the Prime Minister, Premiers and Chief Ministers, and the President of the Australian Local Government Association.

Queensland Treasury provides support for the Premier, Treasurer and Under Treasurer to participate at these forums.

Treasury also works with other Queensland Government agencies to negotiate national partnership funding agreements with the Australian Government, ensuring that Queensland’s interests are considered and that negotiations comply with the Queensland Government principles for intergovernmental activities. We also advocate on Queensland’s behalf to ensure that Australian Government funding to Queensland is distributed fairly and with consideration to Queensland’s expenditure requirements, demographic growth, size and other characteristics.

Major inter-governmental reforms underway

COAG and CFFR are responsible for driving major reforms important to Australia’s future. Currently, they are conducting two major reviews through white paper processes:

  • White Paper on the Reform of the Federation, which is reviewing overlap between local, state and federal responsibility or involvement in the delivery and funding of public programs.
  • White Paper on the Reform of Australia’s Tax System, which is reviewing for fairness and simplicity, how much revenue is raised through tax at the state and federal levels and how it is raised.

These white papers present the best opportunities in recent inter-governmental history for all governments to influence change and address the challenges faced by our federation. Treasury is actively working to ensure the reforms align with the Queensland Government’s objectives, that there is clarity of roles and responsibilities between the Australian and state governments, that Queensland’s revenue-raising ability is sustainable and efficient and that vertical fiscal imbalance (Word 30 K) (VFI) is minimised.

In 2013, the Australian Government announced the preparation of two White Papers on Federalism and Tax Reform, to be prepared collaboratively with the states.

The White Paper processes present an opportunity for Queensland to ensure reforms align with the Queensland Government's objectives, clarify federal-state relations, improve the sustainability and efficiency of Queensland's revenue base, and address VFI.

Federalism White Paper

The Federalism White Paper seeks to clarify roles and responsibilities to ensure states are sovereign in their own spheres and reduce duplication between levels of government. Ensuring states have access to a sustainable and stable revenue base will also need to be considered and will link with the Treasury-led Tax Reform White Paper process. The key sectors under consideration for reform of roles and responsibilities are health, education, housing and homelessness.

The key principles that the federalism reform process aims to address include: subsidiarity; equity, efficiency and effectiveness of service delivery; national interest, accountability and outcomes; durability; and fiscal sustainability.

A number of issues papers have been released and public consultation forums held to consider the issues of federalism. A draft Discussion Paper was released in June 2015, to be followed by release of the Green Paper, and the White Paper by the end of 2015 or early 2016.

Tax Reform White Paper

On 30 March 2015, the Australian Government released the first Tax Reform issues paper Re:think for public consultation. The Australian Government's issues paper has begun the consultation process for future directions of Australia's tax system, including state taxes.

The Queensland Government will take a lead role in shaping the direction of this process, including the special Treasurers' Tax Summit in August 2015 with a view to providing options for the Green Paper which will be released in late 2015. This will be followed by a White Paper later in 2016.

From this process, the Queensland Government supports improved efficiency and equity of Australia's tax system and a fair and sustainable model of distribution of all tax revenues to encourage economic growth and the economy, supported by a division of roles and responsibilities which reduces the current inefficient levels of VFI.

Queensland has undertaken tax reform over the past decade and a half, with reform of its mix, design and administration, and removal of a large number of less efficient taxes. However, Queensland does not have the fiscal capacity to simply cut its own taxes given the need to ensure Queenslanders can access quality services.

States face significant spending pressures, reflecting rising community expectations about the breadth and quality of services delivered. States require reliable streams of revenue, but also capacity to adjust their levels of revenue to allow them to meet fiscal and economic challenges that arise.

Horizontal fiscal equalisation review

The GST payments each state and territory receive each year from the Australian Government (to address VFI) are calculated using a complex methodology that takes into account each state and territory’s revenue-raising ability and their expenditure requirements. This calculation is called the horizontal fiscal equalisation (HFE) calculation.

Queensland’s full submissions to the CGC HFE process, past and current are available on the CGC website.