The Fallout for Western Australia Grants from the Commonwealth make up about half of the State's total revenue from all sources. Grants may be:
general revenue grants, to be spent as the States decide, or
special purpose or tied grants, grants with conditions attached.
Under section 96 the Commonwealth may make grants to the States in any manner it sees fit. It may attach almost any conditions it likes to these grants even in areas for which it has no constitutional responsibility. Key areas of funding include health, housing, urban development, education and roads.
Thus, tied grants enable the Commonwealth to specify what the States must do with the funds, and in many instances, involve matching arrangements requiring States to contribute. This has greatly reduced the freedom States have to choose how they spend funds within their budgets.
Since Federation, State Governments have been unable to collect revenue that matches their expenditure responsibilities. This situation is termed vertical fiscal imbalance. As responsibilities increased, more reliance has been placed on Commonwealth financial support.
Impact of the GST
The Commonwealth raises revenue through the GST which will all go to the States. These GST revenues have been assigned to the States by the Commonwealth in place of the Commonwealth's general purpose grants. This gives the States access to a more reliable and a more generous source of funds. It does not diminish the Commonwealth's use of tied grants to influence policy in areas of State responsibility.