Council on Federal Financial Relations

The COAG Council on Federal Financial Relations (the Council) oversees the operation of the Intergovernmental Agreement on Federal Financial Relations, which provides the overarching framework for the Commonwealth's financial relations with the States and Territories. The framework provides a solid foundation for COAG to pursue economic and social reforms to underpin the future growth, prosperity and social cohesion of Australia.

Further details on the purpose and scope of the Council are outlined in the Council's Terms of Reference.

Federal Financial Framework

Overview

On 29 November 2008, the Council of Australian Governments (COAG) reached an historic Intergovernmental Agreement on Federal Financial Relations (Intergovernmental Agreement) [PDF 39KB] which establishes the overarching framework for the Commonwealth's financial relations with the States and Territories. The framework represents the most significant reform to Australia's federal financial relations in decades.

The framework commenced on 1 January 2009 and provides a strong foundation for COAG to pursue economic and social reforms to underpin growth, prosperity and wellbeing into the future. It also provides clearer specification of the roles and responsibilities of each level of government so that the appropriate government is accountable to the community.

The framework for federal financial relations

The objective of the federal financial relations framework is to improve the quality and effectiveness of government services. It seeks to do so by providing clarity about who is responsible for the delivery of those services, flexibility in the delivery of services and increased accountability to the public, as well as by providing incentives for reform.

Intergovernmental Agreement on Federal Financial Relations

The Intergovernmental Agreement [PDF 39KB] provides the overarching framework for the Commonwealth's financial relations with the States. It establishes a foundation for the Commonwealth and the States to collaborate on policy development and service delivery, and facilitate the implementation of economic and social reforms in areas of national importance.

All financial relations between the Commonwealth and the States are governed by the provisions of the Intergovernmental Agreement. The Commonwealth's financial relations with the States come under the umbrella of one piece of legislation, the Federal Financial Relations Act 2009.

Federal Financial Relations Act 2009

The Federal Financial Relations Act 2009  implements the payment arrangements of the framework. The Act provides a standing appropriation for the Commonwealth to make ongoing financial contributions to the States through four National Specific Purpose Payments and National Health Reform funding, and for the Treasurer to determine GST payments to the States. The Act also provides for the Treasurer, through a written determination, to credit amounts to the COAG Reform Fund for the purpose of making grants of National Partnership payments and general revenue assistance to the States. For the first time in decades, the complexity of all the Commonwealth's financial relations with the States is contained in one piece of legislation. This improves the public transparency of these payments and the ability of the Parliament to scrutinise the payment arrangements.

Key features of the framework

Funding

The Commonwealth currently provides financial support for the States' service delivery efforts through:

  • National Specific Purpose Payments (National SPPs) and National Health Reform funding to be spent in key service delivery sectors;
  • three types of National Partnership payments - project payments, facilitation payments and reward payments; and
  • general revenue assistance, consisting of GST payments to be used by the States for any purpose, and other general revenue assistance.

The framework rationalised a number of payments made to the States, centralised payment arrangements and provides greater funding certainty and flexibility to the States.

Greater flexibility

The federal financial relations framework gives the States greater flexibility to direct resources to areas where they will produce the best results in each State. In the Intergovernmental Agreement [PDF 39KB], the Commonwealth has committed to move away from prescriptions on service delivery in the form of financial or other input controls, which inhibit state service delivery and priority setting. Rather than dictating how things should be done, the framework focuses on the achievement of mutually agreed outcomes, providing the States with increased flexibility in the way they deliver services to the Australian people.

Under the framework, the States are required to spend each National SPP in the relevant sector - for example, the States are required to spend the National Schools SPP in the schools sector - but they have budget flexibility to allocate funds within that sector in a way that ensures they achieve the mutually agreed objectives for that sector.

Improved public accountability

While the States have increased budget flexibility under the federal financial relations framework, they are also subject to greater accountability, through new reporting arrangements. Commonwealth and State governments have committed to improving service delivery, by ensuring that the appropriate government is accountable to the community, not just for its expenditure in delivering services, but more importantly, for the quality and efficiency of the services it delivers and the outcomes it achieves.

Under the Intergovernmental Agreement [PDF 39KB], National Agreements aim to establish what the Commonwealth and the States expect to achieve from their co-operation, the role of each jurisdiction and the responsibilities for which they undertake to be accountable, and performance indicators and benchmarks which will inform the Australian public on progress towards achieving the outcomes and objectives of the agreement.

Opportunities to drive reforms

A central element of the framework is National Partnership payments, which are a mechanism to drive reforms or improve service delivery standards. National Partnership payments are provided to the States to:

  • support the delivery of specified outputs or projects;
  • facilitate reforms; or
  • reward those jurisdictions that deliver on nationally significant reforms.

Each National Partnership payment is supported by a National Partnership agreement which defines the mutually agreed objectives, outputs and performance benchmarks or milestones.

As part of the Heads of Treasuries Review of National Agreements, National Partnerships and Implementation Plans, a new form of National Partnership agreement called a Project Agreement will be used to implement projects that are considered low value or low risk.

National Partnership project payments are a financial contribution to the States to deliver specific projects, including improving the quality or quantity of service delivery, or projects that support national objectives.

The Government also recognises the need to support States to undertake priority reforms. Consequently, in areas that are a national priority - for example, implementing the seamless national economy - National Partnership facilitation payments may be paid to the States in advance of progressing or achieving nationally significant reform, in recognition of administrative and other costs of initiating those reforms or pursuing continuous improvement in service delivery.

National Partnership reward payments are provided to States that deliver nationally significant reform. Reward payments are structured in a way that encourages achievement of ambitious performance benchmarks detailed in a National Partnership agreement. Reward payments are contingent on the achievement of performance benchmarks, with achievement for each jurisdiction assessed by the independent COAG Reform Council .

Centralised payment arrangements

A key feature of the framework is centralised payment arrangements which simplify payments to the States, aid transparency and improve the States' budget processes.

Previously, payments to the States were made by Commonwealth portfolio departments to the relevant state agencies, and each payment had its own administrative arrangements. Under the current arrangements, all National SPP, National Partnership payments and general revenue assistance are processed centrally by the Commonwealth Treasury and paid directly to each state treasury. State treasuries are responsible for distributing the funding within their jurisdiction.

National health reform funding commenced from 1 July 2012 under the National Health Reform arrangements, replacing the National Healthcare SPP.

National health reform funding is paid into a national funding pool to support public hospital and public health services.

In the Commonwealth, the Treasurer is accountable for the appropriations, estimates and payments under the framework. These arrangements are implemented through the Federal Financial Relations Act 2009 .

Having state treasuries distribute Commonwealth sourced funding to state portfolio agencies helps reinforce that state agencies are primarily accountable to their respective parliaments and public for their service delivery performance, including their delivery of programs for which the Commonwealth provides a financial contribution.

Policy and payment accountability arrangements

Under the framework, policy outcomes and objectives have been separated from funding arrangements to ensure that the policy focus is on achieving better services for all Australians and addressing social inclusion.

National Agreements establish the policy objectives in the key service sectors and are not funding agreements. Funding is provided separately in National SPPs, which are specified in the Intergovernmental Agreement [PDF 39KB]. The provision of funding under National SPPs is not contingent on achieving the outcomes or performance benchmarks outlined in National Agreements. The only condition on National SPPs is that the funding be spent in the sector for which it is provided.

National Agreements may be associated with a National SPP, but this is not a requirement. For example, the National Indigenous Reform Agreement outlines the mutually agreed objectives for Indigenous reform, with the Commonwealth and the States each having flexibility in funding the achievement of those reforms. There is no associated National SPP.

National Partnership agreements also outline the mutually agreed policy objectives to deliver specific projects, achieve service delivery improvements, or nationally significant reform.

For both National Agreements and National Partnership agreements, the primary responsibility for policy is with the relevant portfolio minister. The Treasurer is responsible for ensuring that National Agreements align with the design principles described in Schedule E - National Policy and Reform Objectives of the Intergovernmental Agreement.

Information on the Federal Financial Relations framework is also available in Appendix A of the 2011-12 Budget Paper No.3 - Australia's Federal Relations. This can be found online on the Budget website .