AUSTRALIA

The Commonwealth of Australia is a constitutional monarchy, and a federation of six states and two self-governing territories. Its Constitution, The Commonwealth of Australia Constitution Act 1900, entered into force in 1901. The Australian federal system has undergone significant centralisation since its establishment. The structure of the federation remains stable, and the states remain essential components of the Australian political process.

The Parliament of Australia consists of an Upper (Senate) and Lower House (House of Representatives), and the Queen. The House of Representatives has 151 members elected for three-year terms under a preferential vote system. The Senate consists of 76 senators, 12 from each of the six states and two from each of the two mainland territories. State senators are elected for six-year mandates through a proportional representation system, and territory senators for three-year. Australia remains a member of the Commonwealth of Nations, and the Head of State is HM Queen Elizabeth II. The Queen is represented by a Governor-General whom she appoints for a five-year term on the advice of the Prime Minister. The Governor‑General is delegated most powers from the Queen; however, by convention, the Governor-General exercises these powers only upon the advice of the Prime Minister.

Australia’s federal system is enshrined in the Constitution of Australia. Each state has its own constitution, and its own parliament, with a similar structure to that of the Parliament of Australia, comprising a lower and upper house with directly elected representatives (except for Queensland, which has only one chamber). State governments are headed by a premier, in general the party leader of the state parliament’s lower house, appointed as such by a Governor, who are appointed by the Queen on the advice of a Premier. The Northern Territory and Australian Capital Territory, each headed by a Chief Minister and an appointed Administrator, have had unicameral elected parliaments since respectively 1974 and 1989. The Australian Capital Territory is the only government at regional level with no separate tier of local government meaning that responsibilities usually handled by local government are administered by the territory’s government.

Despite several failed or abandoned referendums (1974, 1988 and 2013), local governments are not explicitly recognised by the Constitution in Australia but they are recognised in state constitutions. State governments, and the Northern Territory, have their own Local Government Acts and other legislation. Consequently, the status, names (cities, shires, county councils, districts, towns, etc.), roles and responsibilities of local governments differ from state to state. Local governments are headed by city councils or shire councils, led by Mayors of Shire Presidents, and whose members vary from 4 to 15, except for the Brisbane City Council, which has 26 councillors and a Lord Mayor. Local elections vary from state to state, from direct to indirect elections of mayors, although Mayors are directly elected in the capital of each state or territory. State and local elections are run by state electoral bodies.

On 13 March 2020, a new National Cabinet was established to support vertical coordination, and is comprised of the Prime Minister, and state and territory leaders. The National Council aims to provide a platform for leaders to collaboratively address issues of national significance. In May 2020, National Cabinet agreed to the formation of a new National Federation Reform Council (NFRC), and the cessation of the former vertical coordination mechanisms, the Council of Australian Governments (COAG). The NFRC aims to change the way the federal government, and states and territories, work together and help address new areas of reform. The NFRC is made up of the Prime Minister, state premiers and territory chief ministers, treasurers from each jurisdiction and the President of the Australian Local Government Association (ALGA). A separate Council on Federal Financial Relations (CFFR), comprising the Commonwealth Treasurer as Chair and all state and territory treasurers, reports to the National Cabinet and is responsible for overseeing the financial relationship between the Commonwealth and state and territory governments.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	STATE LEVEL	TOTAL NUMBER OF SNGs (2021)
537 local governments		6 states and 2 federal territories	545
Average municipal size: 47 951 inh.
537		8	545

OVERALL DESCRIPTION: The subnational government system consists of two levels of subnational government. There are six states and two federal territories with state-like powers (the Northern Territory and the Australian Capital Territory). The six states and the Northern Territory have established 537 local governments. In the Australian Capital Territory, responsibilities usually handled by local government are administered by a department of the territory’s government.

STATE LEVEL: Prior to the constitution of the Federation, the six states of Australia were former British colonies separately established between 1788 and 1859. The two mainland territories of Northern Territory and Australian Capital Territory are self-governing. In addition, the federation also comprises the mainland Jervis Bay Territory and seven external territories under the jurisdiction of the Commonwealth government (Ashmore and Cartier Islands, Christmas Island, the Cocos (Keeling) Islands, Coral Sea Islands, Heard Island and McDonald Islands, Norfolk Island, and the Australian Antarctic Territory). The Territory of Norfolk Island was self-governing until its status was revoked in 2015. The gap in GDP per capita between the richest and poorest region increased in Australia between 2000 and 2018, partly due to high growth in the most productive regions. Behind this trend is a growth in GDP per capita of more than 50% in the Northern Territory, as compared to 34% in Tasmania.

MUNICIPAL LEVEL: The nomenclature for local governments varies across states and territories, the most common denominations being “Shire” and “Cities”. The number of municipal-level governments recently fell from 869 in 1980 to 537 in 2022, following merger policies initiated by several states (South Australia, Tasmania, Victoria, Queensland, New South Wales and Western Australia). However, due to failed attempts to amalgamate municipalities in several areas, there remain some very small local governments and amalgamation policies are still on-going. Each state economy typically has a single large metropolitan area; however, these large metropolitan-scale area are mostly under the jurisdiction of numerous local authorities. The City of Brisbane is a notable exemption that governs a significant portion of the metropolitan area of Brisbane and has a population of 1.2 million people, well above the average municipal government size of 48,000 inhabitants. Australia is the third most urbanised country in the OECD, with two-thirds of the population living in six metropolitan areas.

HORIZONTAL COOPERATION: At the state level, a Council for the Australian Federation (CAF) facilitates horizontal co-operation between states and acts as a representative for the states and territories with the federal government. CAF was created in 2006 and includes each state and territory Premier or Chief Minister.

Various forms of inter-municipal co-operation exist depending on the state: regional local government organisations (Western Australia), regional subsidiaries (South Australia), county councils (NSW) and regional organisation of councils, among others. Shared services arrangements are promoted at both state and local levels throughout Australia.

To support vertical coordination among levels of government, the Commonwealth Government released a Smart Cities Plan in 2016 and, in April 2017, launched a decentralisation programme, which aimed to ensure that the benefits of national economic growth were not restricted to Australia’s major cities. The Commonwealth Government has also implemented a series of City Deals to bring together all levels of government to support a place-based approach to development. In 2018, the Commonwealth Government launched three of Regional Deals based on the City Deals model. The Commonwealth Government had committed to produce, together with the states and territories, a White Paper on the Reform of the Federation, but this project was abandoned. Another main vertical coordination mechanisms is the 52 Regional Development Australia Committees, which were initiated by the Commonwealth Government in 2012 and bring together all levels of government, business, the community and not-for profit sectors to support the development of regional areas.

OVERALL DESCRIPTION: The Constitution defines the country’s dualist federal structure and sets out expenditure responsibilities. A 2008 Intergovernmental Agreement on Federal Financial Relations (IGA FFR) attempted to better specify responsibilities of the Commonwealth and states for specific sectors, particularly in the area of business regulation. However, there is still significant overlap in mandates between the Commonwealth and the states, in particular in healthcare (the Commonwealth funds general-practitioner services, while the states are responsible for segments of primary service and for managing, running and partly-funding public hospitals). To help overcome this challenge, a National Health Reform Agreement was agreed by all Australian governments in 2011 (which resulted in the introduction of Local Hospital Networks) and was further amended in 2020 (which provides a roadmap for future health care reforms). In August 2020, the Council on Federal Financial Relations (CFFR) implemented new governance arrangements for Commonwealth-state funding agreements, known as the Federation Funding Agreements (FFA) Framework. The CFFR aims to ensure that agreements are negotiated and administered efficiently, including through the standardisation of agreements where possible.

State and territory responsibilities cover education, roads, public transport, public works, community services, environment, sport and recreation, consumer affairs, policing, prisons and emergency services. The Commonwealth and the states are jointly responsible for health care. In some areas, the Commonwealth Government contributes funding for state and territory service delivery (i.e., healthcare), has a complimentary regulatory role (i.e., environment, agriculture) or provides complimentary services (i.e., national emergency management). With the implementation of a National Disability Insurance Scheme in 2017, the Commonwealth now provides funding for disability support services directly to individuals, rather than providing funding to state and territory governments.

Constitutional responsibility for local government lies with state and territory governments. Consequently, the roles and responsibilities of local government can vary from state to state. There are six separate state systems overseeing local governments, with a seventh system operating in the Northern Territory. In the Australian Capital Territory (ACT), the state government provides services that would normally be delivered by local governments in other states or territories. Local councils typically have statutory responsibility for local infrastructure and services including waste management, land-use planning, building regulations, local roads and community services, including childcare, elderly care and recreation, cultural and educational establishments, and some commercial establishments.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	State level	Municipal level
1. General public services (administration)		Building inspections; food and health inspections; Pet control
2. Public order and safety	Police*; Emergency services*; Courts*
3. Economic affairs / transports	Urban and regional transport (road, rail, bus, ports etc.)*; Agriculture*; Industrial relations*; Consumer affairs*	Local roads; Parking; Aerodromes; Cemeteries
4. Environment protection	Environment*; State and national parks*; Waste disposal; Sewerage	Waste collection; Recycling; Green and public space provision
5. Housing and community amenities	Public housing*; Gas regulation*; Electricity regulation and distribution (in some states and territories)*; Water supply*; Zoning legislation; Building regulations	Town and land-use planning; Building permits
6. Health	Healthcare*; Hospitals*
7. Culture & Recreation	Sport * and recreation facilities*; Museums*, Theatres*; State libraries	Local parks; Open spaces; Recreation facilities;
8. Education	Planning and delivering early childhood education*; Pre-school*; Primary school*; Secondary; Vocational and technical school*Higher education*	Local libraries; Local adult education programs
9. Social Welfare	Early childhood care* Aged care*	Public childcare centres*; Certain elderly care programs*

Scope of fiscal data: state governments, local government areas (LGAs) including several entities: cities, district councils, municipalities, shires, towns, and unincorporated areas.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: Taxation powers of the Commonwealth, and the state and territory governments are defined in the Constitution as well as in the Intergovernmental Agreement on Federal Financial Relations (IGA FFR). With the federation in 1901, the six Colonies of Australia ceded the right to impose and collect customs and excise duties (the main source of public revenue at the time) in favour of the Commonwealth. While Australian states and territories have spending responsibilities in a large array of sectors, they rely on transfers from the federal government, which results in vertical fiscal imbalances. However, approximately half of all transfers are assigned by an independent commission based on a system of horizontal fiscal equalisation. This distributes all revenue from the federal Good and Services Tax (GST) to compensate states and territories for the structural and financial disadvantages of delivering services, and it eliminates disparities in fiscal capacity between states.

A reform of the IGA FFR took place in 2008, which led to the simplification and greater flexibility of the system of intergovernmental grants. In 2020, the new FFA architecture consolidated all existing federal funding agreements into two forms of agreements: National Agreements and sectoral FFAs. National Agreements contain significant policy content and act as sources of ongoing funding, and have relatively complex and bespoke terms and conditions. The sectoral FFAs covering Health, Education and Skills, Infrastructure, Environment, and Affordable Housing, Community Services and ‘Other’, consolidated all existing National Partnership Agreements, Streamlined Agreements and Project Agreements as schedules.

Subnational, state and local government expenditure by economic classification
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure	9950	8647	1303	19.0%	16.5%	2.5%	45.0%	39.1%	5.9%	100.0%	86.9%	13.1%
Inc. current expenditure	8246	7410	835	15.7%	14.1%	1.6%	41.7%	37.5%	4.2%	82.9%	89.9%	10.1%
Compensation of employees	3844	3451	393	7.3%	6.6%	0.8%	70.9%	63.6%	7.3%	38.6%	89.8%	10.2%
Intermediate consumption	2361	1951	410	4.5%	3.7%	0.8%	62.8%	51.9%	10.9%	23.7%	82.6%	17.4%
Social expenditure	225	225	0	0.4%	0.4%	0.0%	3.6%	3.6%	0.0%	2.3%	100.0%	0.0%
Subsidies and current transfers	1542	1525	16.98	2.9%	2.9%	0.0%	45.3%	44.8%	0.5%	15.5%	98.9%	1.1%
Financial charges	273	258	15.05	0.5%	0.5%	0.0%	29.0%	27.4%	1.6%	2.8%	94.5%	5.5%
Others	0	0	0	-	-	-	-	-	-	-	-	-
Incl. capital expenditure	1704	1237	467	3.3%	2.4%	0.9%	72.5%	52.6%	19.9%	17.1%	72.6%	27.4%
Capital transfers	144	139	4	0.3%	0.3%	0.0%	51.9%	50.4%	1.5%	1.4%	97.1%	2.9%
Direct investment (or GFCF)	1560	1097	463	3.0%	2.1%	0.9%	75.3%	52.9%	22.3%	15.7%	70.3%	29.7%

EXPENDITURE: Australian subnational government spending as a share of GDP is the second lowest of the nine OECD federal countries on average (18.2% of GDP in 2020), and slightly above the average for OECD federal countries in the share in total public expenditure (45%, versus 43.5% in OECD federations on average in 2020). Staff expenditure accounts for a larger share of subnational government expenditure (38.6%) than the OECD average (36.4%), which represents 71% of total public staff expenditure, higher than the OECD average (61.2% in 2020), but lower than in the OECD federations on average (75.8%).

States and territories account for the bulk of subnational government spending (86.9% of total subnational government spending, i.e. 16.5% of GDP and 39.1% of public expenditure). The main expenditure item for states and territories is staff spending (39.9% of total expenditure).

Local government made up 13.1% of total subnational government spending in 2020, which represents 2.5% of GDP and 5.9% of total public expenditure, which is low compared to 8 OECD federal countries with data available (average is 13.4% of public expenditure in 8 OECD federal countries, excluding the US where data was not available).

Local governments dedicate on average 63% of their budget to current expenditures, compared to 80.1% for regional governments. The share of staff expenditure of local government expenditure (30.2%) is below the average for OECD federal countries (36.7%).

DIRECT INVESTMENT: Subnational governments play a key role in public investment in Australia, and accounted for three-quarters of total public investment in 2020 (3.0% of GDP). Subnational investment is primarily undertaken by state governments (72.6%). Direct investment represents 14.6% of total subnational government spending, but 12.7% of state expenditure (up from 9.5% in 2016), against 35.5% of local government expenditure (up from 33% in 2016), showing that one of the main functions of local government is to invest in infrastructure. Subnational government investment is supported by specific-purpose grants from the Commonwealth Government.

Public investment by subnational governments in Australia has increased substantially since 2016 (from 2.1% of GDP to 2.9% of GDP). The increase is driven by high infrastructure investment on the Eastern Coast of Australia, particularly in Sydney (New South Wales) and Melbourne (Victoria), which host approximately 40% of Australia’s population and have faced high population growth (at least until the COVID-19 crisis). The 2021/22 NSW Budget included infrastructure investment of over AUD 110 billion over four years, while the Victorian Budget 2021/22 included AUD 90 billion. The current level of infrastructure investment in the Victorian Budget is more than four times the 10-year average up to 2015.

A large proportion of subnational government investment is supported by specific-purpose grants to the state and local governments from the Commonwealth, particularly for infrastructure. State and territory governments and subnational State-Owned Enterprises, use a wide range of investment approaches to deliver infrastructure, including public-private partnerships (PPPs). Over 100 PPPs have been undertaken in Australia since 2000, with the majority being undertaken by the NSW (37), Victorian (29) and Queensland (25) governments. These are guided by National Guidelines for PPPs, as well as accompanying guidelines and PPP offices in states and territories. Infrastructure Australia (IA) is a statutory body established in 2008 to support infrastructure investment and to advise all-levels of government and other stakeholders. IA works with states, territories, local governments and the private sector, on the basis of rigorous cost-benefit analysis, to identify investment priorities and the policy and regulatory reforms. In addition to IA, the National Cabinet recently established National Cabinet Reform Committees (NCRCs), including one on infrastructure and transport, to improve collaboration between government bodies at all levels and the private sector, expedite approval processes, and optimise the transport system and freight productivity.

Subnational, state and local government expenditure by functional classification
2019	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure by economic function	9910	8607	1303	18.9%	16.4%	2.5%	-	-	-	100.0%	100.0%	100.0%
1. General public services	994	664	330	1.9%	1.3%	0.6%	26.3%	17.5%	8.7%	10.0%	7.7%	25.4%
2. Defence	0	0	0	-	-	-	-	-	-	-	0.0%	0.0%
3. Security and public order	897	866	31	1.7%	1.7%	0.1%	83.6%	80.8%	2.9%	9.1%	10.1%	2.4%
4. Economic affairs/transports	1884	1546	338	3.6%	3.0%	0.6%	47.4%	38.9%	8.5%	19.0%	18.0%	26.0%
5. Environmental protection	310	141	169	0.6%	0.3%	0.3%	64.8%	29.4%	35.4%	3.1%	1.6%	13.0%
6. Housing and community amenities	297	167	131	0.6%	0.3%	0.3%	78.1%	43.8%	34.3%	3.0%	1.9%	10.0%
7. Health	2333	2320	13	4.5%	4.4%	0.0%	49.5%	49.2%	0.3%	23.5%	27.0%	1.0%
8. Recreation, culture and religion	367	132	235	0.7%	0.3%	0.5%	78.7%	28.3%	50.4%	3.7%	1.5%	18.1%
9. Education	2055	2047	8	3.9%	3.9%	0.0%	53.1%	52.9%	0.2%	20.7%	23.8%	0.6%
10. Social protection	773	724	48	1.5%	1.4%	0.1%	12.8%	12.0%	0.8%	7.8%	8.4%	3.7%

Australian subnational governments are below the OECD average for their share of spending in most economic sectors, with the exception of the health and economic affairs. Health and education are key responsibilities of state and territory governments in Australia, representing the two largest areas of subnational government expenditure, respectively 23.5% and 20.7% of subnational government expenditure. In these two sectors, state and territory governments are in charge of approximately half of total public spending. Infrastructure, transport and planning is the third biggest spending area for subnational governments (representing 19.0% of subnational government expenditure, increased from 17.5% in 2016). subnational governments also play a significant role in security and public order, and housing and community amenities (they are responsible for respectively 83.6% and 78.0% of total public expenditure).

Major expenditure items for local government include general public services, economic affairs and transport, environmental protection and recreation (35% of public expenditure in this category), housing and community amenities (34%), culture and religion (50.4%).

Subnational, state and local government revenue by category
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total revenue	8574	7262	1312	16.4%	13.9%	2.5%	47.3%	40.1%	7.2%	100.0%	100.0%	100.0%
Tax revenue	2791	2273	518	5.3%	4.3%	1.0%	19.1%	15.6%	3.6%	32.6%	31.3%	39.5%
Grants and subsidies	3915	3508	407	7.5%	6.7%	0.8%	-	-	-	45.7%	48.3%	31.0%
Tariffs and fees	1100	742	359	2.1%	1.4%	0.7%	-	-	-	12.8%	10.2%	27.4%
Income from assets	768	740	28	1.5%	1.4%	0.1%	-	-	-	9.0%	10.2%	2.2%
Other revenues	0	0	0	0.0%	0.0%	0.0%	-	-	-	0.0%	0.0%	0.0%

OVERALL DESCRIPTION: Australia’s subnational finance system is characterised by a high degree of vertical fiscal imbalance. Grants and subsidies from the Commonwealth Government represent 47.3% of subnational government revenues (high by international comparisons: 41.2% across the OECD and 35.3% in OECD federal countries on average in 2020). However, this does not reflect the level of fiscal autonomy of state and territory governments as approximately a quarter of subnational government revenue is through the independent allocation of all revenue from Goods and Services Tax (GST). While the share of taxes in subnational government revenues (32.5%) is lower than in the OECD (42.4%) or in OECD federal countries (45.8%), the share of tariffs and fees (12.8%) is in line with the OECD average (13.3%). Property income is particularly high (9.0% vs 1.2% on average in the OECD), highlighting the importance of revenue from mining activities.

At local level, the share of tax in local government revenue is higher than at state level (39.5%), while the share of grants and subsidies is lower (31.0%). Among local governments, local councils located in rural and remote areas typically have fewer own-source resources than urban counterparts, and are less reliant on user charges. Overall, local governments raise almost 70% of revenues from taxes and other own-source revenues.

TAX REVENUE: Subnational government tax revenue in 2020 in Australia (5.3% of GDP and 19.1% of public tax revenue) is lower than in the OECD on average (7.2% of GDP, 32.3% of public tax revenue), especially when compared to federal countries (9.3% of GDP, 44.5% of public tax revenue). The bulk of subnational government tax revenues are collected at the state and territory level, which accounts for 81.4% of the total.

Except for the land property tax, there is limited overlap of tax bases between the federal government and the states, unlike in other federations. There are no shared taxes in Australia but only own-sources taxes.

State and territory government tax revenue comprises a mix of taxes on the provision of goods and services (42.5%), payroll taxes (26.5% of revenue, decreased from 33% in 2011-12), property taxes (15.5%) and taxes on the use of goods and activities (15.5%). The main taxes levied are stamp duties on conveyances or property transactions (26% of state government tax revenue), land taxes (12%), taxes on motor vehicles (13%), taxes on insurances (8%) and taxes on gambling (8%). States have the right to set their own tax rates and bases for the taxes they control.

The types of property tax used by state and territory governments include both land taxes and stamp duties, which when combined represent 41% of total state and territory government tax revenues (approx. 13% of total state revenue). Land taxes are typically only levied on properties valued above a certain threshold, and the principal residence is typically exempt from land taxes. A number of states and territories are considering reforming property taxes to improve the efficiency of the housing market and provide a more equitable base for taxation. In 2012, the Australian Capital Territory embarked on a 20-year reform process to transition to better leveraging land tax and reducing reliance on stamp duties. The NSW has also recently proposed a similar transition.

There is only one tax for local government: municipal rates. It accounts for 39.5% of their revenues. Each piece of state or territory government legislation sets out a framework within which local governments can levy rates within its jurisdiction. In most cases, local governments have some discretion as to the rates they set. In the states of Victoria and New South Wales, council-proposed rates increases cannot exceed caps set by the state governments.

Overall, total subnational government taxes on immovable property accounted for 30% of subnational government tax, 9.7% of subnational government revenue and 1.5% of GDP, which is higher than in the OECD on average (1.0%). Local governments accounted for 58% of recurrent property tax receipts (through municipal rates), and states for the remaining part (excluding stamp duties on property transactions, which are entirely collected by state governments and are classified as a taxes on the provision of goods and services).

GRANTS AND SUBSIDIES: Grants and subsidies are the primary source of funding for subnational governments on average (46%), but especially for states and territories. They represented around 48% of state revenues, compared to 31% of local government revenues on average. Transfers to state governments have increased in recent years from 6.6% of GDP in the financial year 2016-17 to 7.3% of GDP in the financial year 2021-22. According to the 2022 Commonwealth budget, transfers to state governments are expected to fall from 7.3% of GDP to 6.7% by 2025-26.

The current system of intergovernmental transfers from the federal governments to states and territories is defined through an Intergovernmental Agreement on Federal Financial Relations (IGA FFR). The IGA FFR is based on two main types of transfers: for "general revenue assistance” to be used by the states for any purpose, which mainly includes the Goods and Services Tax (GST); and specific-purpose payments for particular sectors (National Specific Purpose Payments-NSPP) or projects or outputs (National Partnership Payments-NPP). NSPPs are allocated to the states based on population shares, and are earmarked in agreement with the Commonwealth government. NPPs are usually entered into for a fixed period of time, and are contingent upon the nature of the project or reform involved. Other transfers from the federal government to states and territories include National Health Reform funding.

General revenue assistance provided through the GST reallocation is used for almost full horizontal equalisation between the states and territories. Although the Australian Constitution does not refer to fiscal equalisation as such, it is a core element of the IGA FFR. This agreement sets out to ensure that all states have the same opportunity to provide a comparable level of services to their residents. The equalisation system is based on asymmetric vertical grants composed of VAT transfers (i.e. GST) calculated on per capita “relativities". Allocation is made through the Commonwealth Grants Commission (CGC), an independent advisory body created in 1933. In 2018, the Commonwealth Parliament legislated a new way to distribute GST revenue among states and territories that included a new benchmark linked to the fiscally stronger of NSW or Victoria (rather than the strongest state), Commonwealth funded top-ups to the GST pool, and a GST ‘relativity’ floor.

The main federal transfer to local governments are Financial Assistance Grants to Local Government, which include a local roads component and a general-purpose component. Grants are paid to state governments on a per capita basis (but not on a fiscal equalisation basis), for distribution to local government via state grants commissions. Allocation is then to be based on a full horizontal equalisation principle, in line with the National Principles for the Allocation of Grants under the Local Government (Financial Assistance) Act 1995. The total amount of grants allocated in 2021-22 is AUD 2.70 billion, (compared to AUD 1.14bn in 2015), which represents about 5.5% of total local government revenue on average; however, this can represent up to half of revenue in some small and remote councils. In addition to Financial Assistance Grants, the federal government created an AUD 3 billion Local Roads and Community Infrastructure Program in May 2020. The program allows local governments to apply for funding for local infrastructure that is then assessed against eligibility requirements. Other transfers to local governments include small earmarked grant programmes for infrastructure, capacity building and other areas. Local government also receive grants and subsidies from state or territory governments, often in the form of Disaster Resilience Funds, support for fast growing local councils and funding to support indigenous councils and their communities.

OTHER REVENUE:

Tariffs and fees: The level of tariffs and fees in subnational government revenues (12.83% in 2020) is close to the OECD average (13.3%), but there are large difference between state and local governments. Tariffs and fees accounted for 27% of local government revenues, which is particularly high compared to the average for local governments in federal countries (13.9%). At local level, these revenues largely come from charges for council services (planning, building, parking, child care, sewerage, garbage collection, animal registration and council hall hire).

Property income: The share of property income in subnational government revenue is particularly high in Australia compared to the OECD, particularly at the state level (10% of revenues, 1.4% of GDP). A large part of these revenues come from mining activities, as all states but one collect royalties from the extraction of mineral and energy resources. The majority of royalties are calculated and collected based on the value of minerals produced (only two states collect royalties on the basis of mining profits). According to the CGC, mining revenue covers approximately 24% of state government expenditure in Western Australia and 8% in Queensland. In most other states and territories mining revenue covers 0-2% of expenditure. This mining revenue is partly off-set during the full horizontal fiscal equalisation as part of the distribution of GST revenues. Revenue from government‑owned corporations are another source of revenue for states and territories, which can be higher for jurisdictions that have mandated increases in the dividends paid by the corporations.

Subnational, state and local government fiscal rules and debt
2020	Dollars PPP / inh.			% GDP			% general government debt			% SNG debt			% SNG financial debt
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total outstanding debt	13949	13367	582	26.6%	25.5%	1.1%	27.9%	26.8%	1.2%	100.0%	100.0%	100.0%	-	-	-
Financial debt	6170	5847	323	11.8%	11.2%	0.6%	22.4%	21.3%	1.2%	44.2%	43.8%	55.4%	100.0%	100.0%	100.0%
Currency and deposits	174	155	18	-	-	-	-	-	-	1.2%	1.2%	3.1%	2.8%	2.7%	5.6%
Bonds / debt securities	1303	1303	0	-	-	-	-	-	-	9.3%	9.8%	0.0%	21.1%	22.3%	0.0%
Loans	4693	4389	304	-	-	-	-	-	-	33.7%	32.8%	52.3%	76.1%	75.1%	94.4%
Insurance pensions	4693	4693	0	-	-	-	-	-	-	33.7%	35.1%	0.1%	-	-	-
Other accounts payable	3085	2826	259	-	-	-	-	-	-	22.1%	21.1%	44.5%	-	-	-

FISCAL RULES: Fiscal rules in Australia are defined through legislation and agreements between the Commonwealth, and state and territory governments. Borrowing was originally overseen by the Australian Loan Council, includes both federal and state governments, and was set up in 1929 to co-ordinate and monitor government borrowing on the basis of fiscal positions and infrastructure needs. The role of the Loan Council changed as part of a Financial Agreement between the Commonwealth, states and territories on 25 February 1994 (incorporated as a schedule to the Financial Agreement Act 1994). This change reduced restrictions on state borrowing and established current rules. In particular, the agreement removed the requirement for Commonwealth and state borrowings to be approved under the agreement, removed the Commonwealth’s explicit power to borrow on the states’ behalf and abolished restrictions on state borrowing through the issue of securities in their own name. Most information about state loans is captured by reporting mechanisms such as Australia’s Uniform Presentation Framework, which supports each governments fiscal reporting. The current Intergovernmental Agreement on Federal Financial Relations (2008) has aimed to enhance the transparency of public performance reporting, but does not define fiscal rules. Following the 2008 Agreement, a Council on Federal Financial Relations comprising all Commonwealth and state and territory treasurers, has been responsible for overseeing the financial relationship between the Commonwealth and states. Since 2018, Australia’s Uniform Presentation Framework has been administered by the Council on Federal Financial Relations.

Fiscal rules for state and local governments vary from state to state, and tend to be self-imposed and non-binding. State and territory governments typically have their own financial management legislation, which outline the framework for managing fiscal objectives and risks. Councils may be required to prepare and publish detailed corporate and management plans, quarterly reviews and annual reports, updated corporate plan and draft budgets. Performance indicators and comparative data for local councils are published annually.

DEBT: The Australian states can borrow on their own account with no limits imposed by the central government. Jurisdictions may be requested to make adjustments if borrowing plans are at odds with the Loan Council's macroeconomic objectives. Financial markets and rating agencies act in this case as important discipline mechanisms. Nowadays, the Loan Council is primarily responsible for enhancing the transparency and accountability of public sector finances (including through comprehensive data reporting requirements), rather than, as it was used to in the past, securing adherence to strict borrowing limits. The Commonwealth and each state government are required to submit their net financing requirements (so called, Loan Council Allocations) for the coming year.

Australian subnational government debt as a share of GDP is lower than the OECD average (26.6% of GDP in 2020, up from 24.5% in 2016), especially when considering the OECD average for federal countries (36.6% of GDP). As a share of public debt, subnational government debt in Australia (27.9%) is higher than the OECD average (20.2%), and slightly higher than the OECD average for federal countries (26.5%). Subnational government debt is mainly composed of state and territory debt, as local government debt is modest despite the fact that local governments in all jurisdictions have access to flexible and cost-effective borrowing arrangements. Insurance pensions represent 33.7% of total subnational government outstanding debt (down from 45% in 2016), whereas subnational government financial debt accounts for 44.2% and other accounts payable 22.1% (commercial debt, arrears). Financial debt is almost exclusively composed of loans (76.1%), although bonds have an increasing share of debt (21.1%). Despite the low share of bonds in total outstanding debt, it is important to note that Australian states are very active on the capital markets. However, these actions are carried out by their corporations (e.g. New South Wales Treasury Corporation, Treasury Corporation of Victoria, Queensland Treasury Corporation, etc.), which issue debt for the states and in turn guarantee their debts.

TERRITORIAL MANAGEMENT OF THE CRISIS: In response to the outbreak of the COVID-19 crisis, the Commonwealth Government announced the creation of a new National Cabinet on 13 March 2020. This intergovernmental decision-making forum is composed of the Prime Minister, and state and territory premiers and chief ministers. Since its creation, the role of the National Cabinet has evolved and been formalised. On 29 May 2020, the National Cabinet agreed to the creation of a National Federation Reform Council (NFRC) and the cessation of the previous intergovernmental decision-making forum, the Council of Australian Governments (COAG). The NFRC includes the members of National Cabinet and the President of the Australian Local Government Association. A number of additional committees have now been created under the architecture of the National Cabinet. During the COVID-19 crisis, the National Cabinet met regularly (at least monthly, and weekly during the most intense periods). The National Cabinet was advised by the Australian Health Protection Principal Committee, a parallel group composed of all state and territory Chief Health Officers and chaired by the national Australian Chief Medical Officer. National Cabinet discussed and agreed plans and strategies to respond to the crisis. While decisions of National Cabinet were made collectively, each jurisdiction implemented decisions in the most appropriate way. Australia fared well throughout COVID-19 crisis as compared to many other countries, although elements of the coordination of the response were subject to frictions.

Health care is a shared responsibility in Australia. The Commonwealth and state and territory governments signed a cost sharing arrangement at the start of the COVID-19 crisis to cover public health costs related to the pandemic. In addition, in May 2020, an addendum to the 2011 National Health Reform Agreement was agreed, providing funding certainty for public hospital and health services for the next five years. In November 2020, a COVID-19 Vaccination Policy was released that helped to define the roles and responsibilities of the national government, and state and territory governments. The Commonwealth Government was responsible for selecting and purchasing vaccines, and handling their transportation from suppliers to administration storage sites, defining priority groups and specifying vaccination sites minimum requirements. State and territory governments were responsible for developing their own COVID-19 vaccination jurisdictional implementation plans: this included selecting the workforce and vaccination sites, and enforcing safety, ethical and reporting regulations. The Commonwealth and state governments coordinated vaccination for federal aged care facility residents, indigenous communities and people with disabilities. Dose allocation was managed by the federal government, and depended on the proportion of priority groups in the local population as well as on the dynamics of local outbreaks.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: State and territory governments were responsible for managing many of the emergency measures to control the spread of COVID-19. This included introducing domestic border closures, establishing international-arrival quarantine facilities, determining physical distancing and mask rules, and implementing lockdowns. Until international borders reopened (managed by the Australian Government, in late 2021 and early 2022), each state and territory government had aimed to avoid the entry and spread of COVID-19 in their jurisdiction. This was implemented through a combination of an international border closure (managed by the Commonwealth), strict state and territory border controls and quarantine facilities, and timely lockdowns in response to COVID-19 outbreaks.

There was significant variability in the duration and intensity of emergency measures implemented by governments linked to the frequency and spread of COVID-19 outbreaks in each state and territory. While some Australian states managed to almost completely avoid long lockdowns and public health measures besides state and territory border controls (Tasmania, Northern Territory, Western Australia), other states had to implement some of the longest lockdowns in the world.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: Between 2019 and 2020, subnational government revenue decreased by 1.9% (nominal value, data from IMF GFS), which was a sharp change from the 5% annual increase recorded between 2016 and 2019. This was driven by a 1.1% decrease in grants and subsidies, and a 3.4% decrease in payroll tax.

The main driver of changes in subnational government tax revenue between the Australian Financial Year (FY) 2018-19 and FY 2020-21 was a 21.6% increase in stamp duties on conveyances, linked to an increase in property transactions and prices. Subnational government taxes on gambling remained stable in FY 2020-21 even though there was a 90% decrease in casino tax revenue, as this was compensated by an almost 50% increase in revenue from taxes on race and sports betting. Grants and subsidies to subnational governments decreased by 5.14% between FY 2018-19 and FY 2019-20, and then increased by 10.04% between the period 2019-20 and 2020-21 (calculation based on nominal values, ABS data). User charges and fees decreased by 1.7%, and then increased by 3.4%.

Subnational government expenditure increased by 3.6% between 2019 and 2020, which is in line with the average 4% annual increase for the period between 2016 and 2019. Subnational government expenditure on public order and safety increased by 6.2% (above the 5.3% average from 2016 and 2019, nominal terms) and expenditure on economic affairs was stable. Subnational government expenditure on health and social protection both decreased in 2020 (-1.6% and -2.8%).

Subnational government debt increased by 4.8% between 2019 and 2020 (nominal value, data from IMF GFS), which is above the average annual increase of 2.2% between 2016 and 2019. This was driven by a 3.4% increase in loans and a 6.5% increase in accounts receivable/ payable. According to data from the Australian Bureau of Statistics, the GFS net operating balance for state and local governments was approximately -5.6% of expenditure in 2019-2020 and -3.63% of expenditure in 2020-21 (the average between 2016 and 2019 was +6.2%).

The net operating balance of state and territory governments showed strong regional variation. Western Australia was the only state to record a positive net operating balance in almost every quarter of 2020 and 2021, due to continued strength in revenues from royalties and stamp duties on conveyances. NSW and Victoria recorded the largest declines of net operating balances in most quarters, partly due to larger COVID-19 outbreaks.

ECONOMIC AND SOCIAL STIMULUS PLANS: The Commonwealth Government’s Economic Recovery Plan for Australia, outlines a range of programs including AUD 14 billion of infrastructure stimulus (over 4 years). An AUD 1 billion COVID-19 Relief and Recovery Fund was established to support regions, communities, and industry sectors most strongly affected by the crisis. This included a regional package of more than AUD 550 million, mainly targeted at regional tourism, the improvement of broadband and health services in rural areas, primary industries, and agriculture. Among other benefits, this initiative has already provided AUD 4.8 million for the delivery of free financial counselling services to small regional businesses facing hardship and AUD 100 million to fund Regional Recovery Partnerships, which will coordinate investments with other levels of government to support recovery and growth in 10 regions. In June 2020, the Australian Government announced an additional AUD 1.5 billion stimulus package for local road and community infrastructure projects to be delivered by local governments.

State and territory governments have also committed significant funding to support the recovery. According to the IMF, state and territory governments have announced fiscal stimulus packages amounting to AUD 50 billion (2.5% of GDP). This has included payroll tax relief for business and vulnerable households, support for health spending, construction, infrastructure and green investment. For example, the NSW Government Recovery Plan outlines an AUD 100 billion for infrastructure investment over four years to help drive employment growth (both additional and existing projects). The Queensland economic recovery plan included more than 14.2 billion of initiatives, including hydrogen industry development funds, renewable energy funds and a building acceleration fund.