First up there are all kinds of figures going around. The big one – $9 billion dollars – is over 10 years. So the annual figure of less than a billion is a mere rounding error in a Commonwealth budget of around half a trillion. Nevertheless all dollars are accounted for, so Annastacia Palaszczuk is right to ask where the money is coming from.
As to GST and the states, according to this article by John Freebairn, state and territory governments get about half their funds from the Commonwealth government. Half of the Commonwealth funding is in the form of special purpose grants, such as education, health, housing and infrastructure. The other half is the GST, which states are free to spend as they desire.
However, the purpose of the GST is to allow citizens, wherever they live, to receive similar levels of state government services. So some states get more back than the GST collected in their domain, some get less. The Northern Territory, I heard, gets back more than four times what is collected there. Western Australia has received as little as 30%. That is because their access to mining royalties boosts their state revenue stream far ahead of the rest in per capita terms.
It’s a fact that Western Australia comprises about a third of Australia’s land mass, but has only around 10% of its population.
At present Freebairn says that NSW, Victoria and Western Australia are net contributors. South Australia, Tasmania and the Northern Territory are net recipients. He does not mention Queensland. I don’t think that is an oversight, they probably get back what they contribute.
Three issues are behind the current changes.
First, the Commonwealth Grants Commission in deciding state capacity looks at their average revenue over the previous three years. WA has been caught short by a dip in mining revenues, which is not immediately fully reflected in the formula.
Secondly, there is a danger that Western Australians would be sufficiently aggrieved to vote against a party that did not give them a better deal. So there is politics to think about.
Thirdly, a notion has crept in that it is unfair for the fortunate not to profit at least to some extent from their fortune. So they look for ‘reforms’ to allow the better off to keep their wealth.
If you go back to Saul Eslake in May last year, he said we were world champions at ‘equalising’ across a federation. So in an article WA’s economic mismanagement is not a reason to review how the GST is carved up he says:
- Australia has long gone much further than other federations in seeking to “equalise” the way state and territory governments provide public services to their citizens. That’s one of the principal reasons why the disparity in living standards between Tasmania (Australia’s poorest state) and WA (our richest), is a lot less than that between, say, Mississippi and Massachusetts in the United States or even Mecklenburg-Vorpommern and Bavaria in Germany.
This seems to be offensive to Chris Richardson from Deloitte Access Economics. If you look at this video, he says that rich states supporting small states is dumb because it is not smart. He also says that an unequal Australia is a stronger Australia, so ultimately a fairer Australia.
Saul Eslake did the sums of what would happen if you threw all the GST gathered into a big pile and then doled it out to states on a per capita basis:
The graph shows how many billions would be lost or gained by each state against what happens now.
Eslake points out that WA worker productivity averaged almost 50% above that of Australia as a whole, a margin without precedent in Australia’s history. Not because they work harder or are more clever. Those big machines and ore trains do the work.
In fact, Eslake says the WA (Liberal) government has been profligate and has mismanaged the state’s finances. He concludes:
- There is room, to be sure, to make the Grants Commission’s procedures less complex and more transparent. But the principle which has underpinned the Grants Commission’s recommendations for more than 80 years has served Australia well, and shouldn’t be tossed aside merely to salve the self-inflicted wounds of Australia’s richest state.
An inquiry five years earlier chaired by Nick Greiner had found the system OK and the criticisms over-stated. However, Scott Morrison simply declared the present system broken and set up a Productivity Commission inquiry to find a fix.
There is detail in Michelle Grattan’s article, but the simple version is that the Government did not like the Productivity Commission’s suggestions, so they varied them to come up with a magic pudding to satisfy everyone, while outlaying less money than the PC recommended. The PC version would have cost the Feds $3-4 billion each year.
All states and territories are to get “at least the equal of NSW or Victoria, whichever is higher”. That would form the benchmark.
Transition arrangements would be instituted so that a:
- “floor” would also be set, below which no state could fall. From 2022-23, this would be 70 cents per person per dollar of the GST, rising to 75 cents from 2024-25.
The Commonwealth Government would chuck in extra funds, so that “no state will be worse off and indeed every state will be better off”.
Dennis Atkins in the Courier Mail, who has access to calculations by KPMG, says that WA will get just under 70% of the $9 billion, Tasmania, SA and the Territories get 11%, leaving the three most populous states to pick up the scraps.
Apparently the Productivity Commission was keen to use the scheme to incentivise ‘reforms’, which, according to PriceWaterhouse via Dennis Atkins, include:
- “asset privatisation, private-public partnerships, trading hours liberalisation and stamp duty reforms, to ensure these (smaller) states are as productive as possible.”
Under the scheme the government has chosen, these incentives are not included.
Chris Richardson regrets that the toxic nature of our politics makes these reforms impossible, so he reckons the “smaller bribe, smaller reform” route is the best on offer.
Grattan says the Commonwealth would like the states to agree, but since it’s all theirs to dispose, they don’t actually need agreement.
So they all lived happily ever after. I’ve not seen what Saul Eslake thinks now.