The good oil on grants

Published: 22nd August 2019

A fortune for an acronym. FAGs, HFE and VFI. Because they are so important to councils here is a crack at explaining it all.

As a lead in to help everyone’s understanding of this subject matter let me begin by saying that all three levels of government in first world nations (bar the USA) have one or two levels of grants commissions to determine the funding needs of both state governments and councils.

There is a global orthodoxy regarding how national governments, the most financially secure sphere of government, fund lower levels of government. It hasn’t changed in the best part of 75 years, and politicians and bureaucrats use the VFI and HFE terms with gay abandon, some without truly knowing what they mean. Let me return at the column’s end to a true but hilarious faux pas from 35 years ago.

FAGs stands for Financial Assistance Grants and is the annual untied payment made by the Federal Government to all councils in Australia on the recommendation and determination of state based local government grants commissions.

This year the payment to Queensland councils amounts to $494.5 million.

Now to slay a few myths, since their inception in 1974-75 as PITS (Personal Income Tax Sharing) grants what we now call FAGs has been determined, as required by federal law, by state-based local government grants commissions. These commissions make an assessment of every council’s revenue raising capacity and expenditure needs, deduct one from the other, then factor back to the money available for distribution, subject to a 30 percent per capita minimum guarantee. Roads aside, FAGs takes no account of infrastructure needs. It’s all about services and rating levels - myth one skewered.

The whole grant assessment model is “Effort Neutral”. That is, it has no regard to what revenue councils actually raise and spend. Raising more or less rates or spending more on roads will not affect your FAGS grant one iota. That’s myth two put to the sword.

The last myth is that the so-called disability factors used in the expenditure side of the equation make a big difference to your final grant. They don’t. They make some difference, but road length (and revenue raising ability assessment) is the dominant driver in the Queensland calculation resulting in much larger grants to rural and remote councils than occurs in other states.

VFI stands for vertical fiscal imbalance, the reason that FAGs grants around the world exist in the first place. National governments collect the lion’s share of revenue in federated systems. The numbers in Australia are stark. Canberra raises 83% of all taxation, the states, 14% and councils, 3%. For that reason alone, every state government and council in the nation gets a FAGs grant. Imagine the uproar if NSW or Victoria didn’t get a FAGs grant and all their money ended up in Tasmania or the Northern Territory. The nation as we know it would break up pretty quickly. VFI is the first and foremost element in any system of intergovernmental financing.

Now to HFE, or horizontal fiscal equalisation. That is the principle that stipulates that, once VFI is taken care of in some shape or form, all remaining monies should be allocated to the less financially capable states and councils. That is what the State and Commonwealth Grants Commissions do annually, largely around the same revenue and expenditure calculations I touched on earlier.

Back to my humorous observation about mixed metaphors. When the new FAGs system was rolled out in the mid-1980s, I attended a meeting in Canberra between my then federal minister and the LGAQ president to usher in the new order. In an attempt to display their profound knowledge of VFI and HFE, one of them raised the wicked problem of “congenital equity”. I had to be restrained by the first assistant Treasury secretary such was my mirth. Economic theory was rewritten that day. Better still the now two deceased gentlemen nodded wisely in agreement.

I’m off on a month’s leave today, my biggest break in ages. After a truly crazy end to last year and a peripatetic first seven months of this year I need to recharge the batteries. I will be working unpaid in my horse trainer’s stables to clear my head. Like my council colleagues I’ve been through all nature of man-made and natural disasters and online attack over the past year, topped off by unrelenting travel. Assist general manager Glen Beckett will be the Acting CEO for the first two weeks, and advocacy general manager Sarah Buckler will mind the fort after that.