Ms FORREST asked a question of the Leader of the Government in the Legislative Council -

With regard to the Commonwealth Grants Commission - CGC - Review Report, Vol. 2, page 208 regarding health spending -

(1)  (a)   Does the CGC assess Tasmania's health spending needs on a per capita basis; and

       (b    if so, how does the budgeted spending on health as per the 2015-16 Budget compare to the figure derived by applying the per capita CGC figure calculated for 2013-14?

(2)  How does budgeted spending on health over the forward estimates in the 2015-16 Budget compare to the figure derived by applying the per capita CGC figure calculated for 2013-14?

The answer read as follows:

(1)  (a)   As one component of the process of calculating annual horizontal fiscal equalisation -HFE - relativity factors, the CGC calculates relative per capita spending needs on a state by state basis for each of the expense categories assessed (including education, health, housing, justice, welfare, roads, transport, and infrastructure). 

               The process typically involves the CGC deriving a notional average spending per capita for a given expense category in a given assessment year and then multiplying this by CGC-derived needs-related weightings specific to each state and to that year.  These needs weightings, termed disability factors, measure a state's relative advantage (less than 1.00) or disadvantage (greater than 1.00) in terms of the particular needs measure in question (for example, socio-demographic related needs, non-state sector, or location).

               The expense data used is sourced from ABS Government Finance Statistics data for the earlier assessment years and from state Treasuries' final budget outcome data for the most recent assessment year (2013-14 in terms of the 2015-16 Budget year). Expense data may be subject to adjustment for HFE purposes by the CGC.  The population data used is ABS estimated resident population.

               The disability factors applied are typically category-specific and derived from data sources relevant to the category in question. For example, a key source of data for the health socio-demographic composition factors is the Independent Hospital Pricing Authority.

               Notional average health expenses per capita are simply an arithmetic national average of all states' total health expenditure in a given year divided by the national population.

               As the CGC assesses five subcategories within its aggregate health assessments (admitted patients, emergency departments, non-admitted patients, community health and non-hospital patient transport):

               •     national health expenditure is partitioned across these subcomponents;

               •     a notional average per capita health expenditure for each subcomponent is derived (notional expense divided by total population); and

               •     the needs-related factors specific to each subcomponent is then applied.

               The aggregate outcome of these subcomponents assessments for a given assessment year for a given state is the CGC's measure of relative health expense needs per capita for that state in that assessment year.

               Table 19 on page 208 of the Commonwealth Grants Commission - CGC - 2015 Review Report, Volume 2, shows the disaggregated outcome of each of these calculations in dollar per capita terms for each of the five health subcomponent categories.

       (b)   It is not meaningful to compare the budgeted spending on health as per the 2015-16 Budget to the figure derived by applying the per capita CGC figure calculated for 2013-14.

               The 2015-16 budgeted health figure of $1 555.5 million (Table A1.14, Appendix 1, Uniform Government Reporting, page 168, 2015-16 budget paper 1) reflects the Government Purpose Classification used by the Government Finance Statistics reporting framework.

               However, the budget and forward Estimates endorsed by Parliament each year are not determined taking into account any theoretical national benchmark used for HFE purposes. Instead, they reflect an ongoing process of state review and decision making. As part of this process, a wide range of factors are taken into account including the specific revenue and expenditure priorities of the Government, past levels of expenditure, the impact of expenditure indexation, constraints imposed by the level of resources available to the Government, existing levels of service delivery and the expected level of future demand for services.

               In contrast, as outlined at 1(a) above, the CGC 2013-14 assessed health expenditure of $1359.3 million for Tasmania is a purely notional construct made solely to assist with determining aggregate HFE relativity factors. It is made from a 'rear view mirror perspective' using historical national data, in isolation of the factors which actually guide real world state budget considerations.

               The method used to assess health expense needs reflects the CGC objective of recommending relativities which reflect the principle of HFE.   That is:

State governments should receive funding from the pool of GST revenue such that, after allowing for material factors affecting revenues and expenditures, each would have the fiscal capacity to provide services and the associated infrastructure at the same standard, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency.

               The notional average level of service provision defines a 'same standard' based on what states, in aggregate, are observed to spend (notional average policy) but prevents individual state policy choices from determining a state's GST share (policy neutrality).

               Specific state demographic, geographical and other non-policy related influences are recognised as material expense factors which might otherwise affect a state's fiscal capacity to provide services and infrastructure at the same standard, and so are adjusted for via the CGC's assessments.

               In this context, the assessed per capita health expense for 2013-14 is not an observable real world measure of state health expenditure nor does it prescribe a health expenditure objective.  This is consistent with the HFE objective which requires equalisation of fiscal capacities, not fiscal outcomes. That is, GST is untied funding and the CGC assessments reflect this.

               The efficiency or inefficiency of a state in delivering services has no bearing on the determination of the GST relativity factors.

               Conceptually, therefore, the CGC assessed health expenses for 2013-14 do not provide a 'desired' health expenditure benchmark against which to assess a state to be 'underspending' or 'overspending'. A state that is observed to be spending less than the CGC assessed amount may have made a legitimate policy choice to do so; alternatively it may be highly efficient in service delivery and able to provide services at lower cost than the notional average efficiency implicitly assumed by the CGC processes.

               From a practical data perspective, the CGC assessments of fiscal capacities are backward looking historical assessments of past relative fiscal circumstances.  The 2015-16 recommended relativities are a simple average of the three single year relativities derived for the underlying assessment years 2011-12, 2012-13 and 2013-14 and reflect the fiscal circumstances prevailing in those assessment years.  This 'gap' between the 2015-16 application year and its underlying assessment years means that fiscal equalisation will be achieved over time but with a lag.

               This lag is understood and accepted within an HFE context as the necessary trade-off between recommending relativities for a financial year for which data is not yet available and the need to have a reliable data base on which to make the HFE assessment.

               The 2013-14 assessed revenues and expenses are notional measures of states relative fiscal circumstances in 2013-14.  The 2013-14 health needs assessments do not provide a base from which to reliably project future health expense assessments.  There is no simple formula to reliably forecast category level HFE assessment outcomes for years for which national data does not yet exist.

               Third party forecasts of future CGC outcomes are high-level projections of future final relativities and are typically heavily caveated - refer for example to the 2015-16 Commonwealth Government budget paper number 3, page 81 for Commonwealth Treasury discussion of its projections.

               The CGC assessment of states' 2015-16 relative health needs will become available when this becomes an assessment year for CGC purposes in the 2017 Update Report (2017-18).

(2)  For reasons outlined above in the response to question 1(b), budgeted spending on health over the forward Estimates in the 2015-16 Budget cannot be meaningfully compared to forecasts derived by applying the per capita CGC figure calculated for 2013-14.