The Federal Financial Relations Framework
On 29 November 2008, COAG agreed the Intergovernmental Agreement on Federal Financial Relations (IGAFFR). The IGAFFR established a new framework for the Commonwealth’s financial relations with the States and Territories. The federal financial relations framework came into effect on 1 January 2009, representing the single most significant shift in Commonwealth-State relations for decades.
The framework provides the States and Territories with flexibility to deliver quality services where they are most needed, while increasing governments’ accountability to the public. This new framework focuses the attention of all parties on the achievement of policy objectives, including those that are part of the COAG reform agenda, which aim to improve outcomes for all Australians.
A key objective of the framework is increased accountability of Commonwealth and State and Territory governments to the public, underpinned by clearer roles and responsibilities in respect of each jurisdiction. Clearly specified roles and responsibilities are important so that the community understands which government is responsible for particular outcomes and outputs.
Rather than seeking to control how States deliver outcomes, the IGAFFR aims to improve the quality and effectiveness of government services by reducing Commonwealth prescription, aligning payments with the achievement of outcomes and/or outputs and giving States the flexibility to determine how to achieve those outcomes efficiently and effectively.
Under the IGAFFR, all payments are processed centrally by the Commonwealth Treasury and paid directly to each state treasury. State treasuries are then responsible for distributing the funding within their jurisdiction.
Payments under the new financial framework consist of:
- National Specific Purpose Payments (National SPPs), made annually on an ongoing basis, to be spent in the key service delivery sectors of health, schools, skills and training, disability services and affordable housing. From 1 July 2012 the National Healthcare SPP will be replaced by National Health Reform (NHR) funding, which will be subject to the terms and conditions agreed in the NHR Agreement;
- National Partnership payments for major reforms or projects, including payments made to support projects, facilitate major reforms and reward jurisdictions that deliver on nationally significant reforms; and
- General revenue assistance, including Goods and Services Tax (GST) payments, to be used by the States for any purpose.
The new framework gives greater flexibility to the States and Territories, recognizing that States and Territories have expertise and experience in service delivery, and know how their local communities work. At the same time, it increases the accountability of all governments for what they have committed to do.
Offering Incentives for Performance
Governments are not only bound to make their best efforts to achieve reforms, they are also provided with financial incentives for doing so. Some of the National Partnerships established under the framework include funding which is specifically linked to achievement against ambitious reform targets.
Under the IGAFFR, there are two main types of agreements: National Agreements and National Partnerships.
National Agreements define the objectives, outcomes, outputs and performance indicators, and clarify the roles and responsibilities that will guide the Commonwealth and the States and Territories in the delivery of services across a particular sector.
There are currently six National Agreements covering key service areas:
- National Healthcare Agreement
- National Education Agreement
- National Agreement for Skills and Workforce Development
- National Disability Agreement
- National Affordable Housing Agreement
- National Indigenous Reform Agreement
Each National Agreement, except the National Indigenous Reform Agreement and the National Healthcare Agreement, is associated with a National Specific Purpose Payment. These payments are required to be spent in the relevant sector. States have budget flexibility to allocate funds within that sector in a way that ensures they achieve the mutually agreed objectives and outcomes of the associated National Agreement.
National Partnership agreements define the mutually agreed objectives, outcomes, outputs and performance benchmarks or milestones related to the delivery of specific projects, improvements in service delivery or reform.
Project Agreements are a type of National Partnership used to implement projects that are considered low-value and/or low-risk. Project Agreements are simple, standalone, outputs-focussed documents that are generally bilateral although they may be multilateral in certain limited circumstances.
Implementation Plans are subsidiary documents to some National Partnership agreements that outline how an individual jurisdiction intends to achieve the outcomes and outputs specified in the overarching National Partnership.
For more information on the federal financial relations framework, see the Council on Federal Financial Relations website.