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3.3 The current Intergovernmental Agreement on Federal Financial Relations

In recent decades, the operation of the Federation has been characterised by a proliferation of small payments from the Commonwealth to the States, with increasing numbers of conditions imposed by the Commonwealth on how the money should be spent.

The number of Commonwealth agreements with the States now stands at more than 140, blurring the roles and responsibilities of the Commonwealth and the States and leading to duplication, overlap and high administration costs.

Under the auspices of the Council of Australian Governments, the 2008 Intergovernmental Agreement on Federal Financial Relations, agreed between the Prime Minister, premiers and Territory chief ministers, was designed to partially address this through an improved framework for the operation of the Federation.

The Agreement was intended to significantly simplify arrangements through a smaller number of financial transfers from the Commonwealth to the States with fewer prescriptions on how funds could be used.

It sought to foster collaborative working arrangements, with more clearly defined roles and responsibilities. It was also intended to improve the transparency with which the States reported on the outcomes of their programmes that were funded by grants from the Commonwealth. Reducing administrative and compliance costs was an associated objective.

Under the new arrangements a wide range of specific Commonwealth-State agreements were subsumed into six National Agreements across the key areas of health care; education, skills and workforce development; disability services; affordable housing; and Indigenous reforms.

The intent of the arrangement was to provide the States with greater flexibility to spend the money provided by the Commonwealth in a way that produces the best results.

In addition to the key national agreements, a number of separate agreements — National Partnership Agreements— were developed to support the delivery of specified programmes identified as having whole of nation implications.

Greater accountability for the results was supposed to be achieved through improved public reporting by the newly formed COAG Reform Council.

The new arrangements did not deliver expected results. While there was an initial decrease in the number of funding agreements with States, the number grew again as Commonwealth ministers sought to prescribe particular policy directions or categorise policies and projects as being of significant national importance.

As noted by the Productivity Commission, by the end of 2010 the Intergovernmental Agreement and associated Council of Australian Governments architecture had created a catalogue of over 300 documents, including six National Agreements, 51 National Partnership Agreements and 230 Implementation Plans.

This proliferation of agreements increased administrative costs through the burden of negotiating and managing agreements, including the reporting required from the States to qualify for payments.

For example, the Victorian Government advised the Commission that the number of reports it had to provide under National Partnerships and Project Agreements doubled from 90 in 2008-09 to 180 per year in 2012-13.

Chart 3.4 summarises the structure of federal financial relations under the current Intergovernmental Agreement.

Chart 3.4 Current structure of federal financial relations

This diagram shows the current structure of federal financial relations.

Source: Department of Treasury.