Introduction 

1.   Federal financial relations shape the NSW Government's capacity to fund services and infrastructure for the people of the state, through a complex mix of Commonwealth and state and territory (state) based funding arrangements.

2.   With limited taxation powers, states have traditionally relied on revenue streams that can be volatile and less efficient, making the sustainability and reliability of Commonwealth funding critical to the states' capacity to deliver services and infrastructure.

3.   As the New South Wales economy and society grow and evolve, it is necessary to review the state’s revenue system, with a focus on the way it interacts with the Commonwealth, to ensure it remains fit for purpose and capable of meeting the needs of the people of New South Wales into the future.

4.   As the nation’s largest economy, it is incumbent on New South Wales to drive a renewed national conversation on a “bottom-up” vision for federation that encourages dynamism, reform and opportunities to build a stronger economy, and supports the sovereignty of states in respect to funding decisions.

Objectives and scope

5.   The NSW Review of Federal Financial Relations (the Review) will:

  • consider the interactions between different levels of government in regards to state funding arrangements

  • examine the New South Wales revenue system with a focus on Commonwealth funding arrangements including the design, complexity and number of funding agreements with the Commonwealth

  • develop options for reform that improve the capacity of New South Wales to meet its funding needs sustainably over the long term, informed by the objectives of encouraging a more dynamic form of federalism, rewarding state-led economic reform, and securing greater flexibility and autonomy for New South Wales, and

  • provide government with a realistic assessment of feasibility and implementation issues, as well as a road map to overcome practical obstacles to successful reform

6.   The Review will acknowledge the importance of all Commonwealth and State governments working together to develop more sustainable and predictable funding mechanisms.

7.   The Review will recommend options for governments to deliver state funding arrangements in line with following principles:  

  • Distributed fairly across jurisdictions: that provides states with adequate financial reward for policy effort while ensuring that there are no ongoing competitive or fiscal disadvantages.

  • Sustainable: to enable the efficient provision of services and infrastructure that is in line with community expectations, reflective of fundamental cost drivers, and in a way that allows states to use their experience and autonomy to delivery on reform goals.

  • Predictable: for recurrent expenditure that is stable over the economic cycle and provides certainty where there is an ongoing service need.

8.   In examining the interactions between Commonwealth funding and the state tax system, the Review will be guided by the following principles:

  • Lower: The objective of taxation is to raise the revenue needed to fund necessary services and infrastructure. Taxation imposes costs on both individuals and the economy as a whole. A lower tax burden would support economic growth and alleviate cost of living pressures.

  • Simpler: A tax system that is easy to understand would reduce complexity and compliance costs for individuals, households and business, freeing up taxpayers’ time and resources for more productive activities.

  • Fairer: A tax system needs to consider who pays taxes and whether the distribution is fair and equitable. Taxation changes should consider transitional impacts and the case for providing compensation if appropriate.

  • Efficient: An efficient tax system minimises impacts on economic growth by lowering reliance on taxes that distort decision making, discourage economic activity and impose high compliance costs.

  • Sustainable: A sustainable tax system has the ability to raise the revenue required to fund essential government services and critical infrastructure. This means that it is sustainable, stable and resilient to changes in market and industry structures. 

Composition and consultation

9.   The Review Panel will be chaired by Mr David Thodey AO and comprise Ms Jane Halton AO PSM, The Rt Hon Sir Bill English KNZM, The Hon John Anderson AO, Professor Anne Twomey and Professor John Freebairn. The Review Panel will be supported by a Secretariat from within NSW Treasury.

10.  The Review Panel will consult the public and consider feedback from a variety of stakeholders, including but not limited to community groups, business groups and those advocating on behalf of the vulnerable.

11.  The Review Panel will consult with other states.

12.  The Review Panel will, where necessary, draw on external expertise.

Review timing

13.  The Review Panel will deliver a discussion paper in the second half of 2019 to support the consultation, a draft report following consultation and a final report in the first half of 2020. 

Last updated: 21/10/2019