Swan only has himself to blame for royalty pain

WAYNE Swan's blank cheque to the premiers to increase royalties is now seriously threatening the surplus.

Wayne Swan

WAYNE Swan's blank cheque to the premiers to increase royalties is now seriously threatening the surplus -- as if it wasn't already under enough pressure, with job losses in the manufacturing sector and a global economic downturn imminent.

To help get mining companies onside with the second incarnation of the super-profits tax, the Treasurer was forced to guarantee that the commonwealth would cover the cost of any increases in state royalties. It was a hastily cobbled together agreement with Julia Gillard shortly after she took over from Kevin Rudd.

It was an election fix, the full implications of which clearly had not been fully thought out by those agreeing to the deal.

The problem was that in so doing the deal, Swan and Gillard had no guarantees of their own that premiers would be discerning when lifting royalties. What each of them may have said at the time did not constitute certainty.

First, the West Australian government decided to increase state royalties with repect to iron ore, costing the commonwealth $2 billion over four years in projected rebates to be paid out to the mining companies affected.

Tasmania moved next but its mining sector is not large enough to cause too much angst for the commonwealth.

Yesterday, the NSW budget lifted coal royalties, costing Canberra just under $1bn over the next four years.

The NSW budget is facing serious pressures, so it's no wonder Treasurer Mike Baird went looking for pain-free ways to help make the books balance.

That's the thing about blank cheques: they usually get cashed. Swan clearly is not a student of history. If he were he might have thought twice about issuing blank cheques to cash-strapped state governments, especially ones with partisan complexions hostile to the commonwealth.

After the 1914 assassination of Archduke Franz Ferdinand, heir to the throne of Austria, by Serbian nationalists, Kaiser Wilhelm II of Germany gave Austria-Hungary a blank cheque to respond as they saw fit. The message was that Germany would stand by Austria-Hungary no matter what.

World War I followed.

The 1964 Gulf of Tonkin Resolution passed by the US congress gave the then president, Lyndon Johnson, the power to take all necessary measures to prevent aggression in Southeast Asia. That particular blank cheque was the precursor to the Vietnam War.

Swan's blank cheque won't have repercussions like these, but it will cause pain for the federal government, that's for sure. The Treasurer has been quick to retaliate, indicating that he might cut infrastructure funding to NSW. Similar threats were levelled at WA, including threats to withhold GST funding.

The problem, however, is twofold. Firstly, the pool of GST funding goes to the states in its entirety. If all states end up increasing royalties (Queensland has specifically reserved its right to do so), GST allocations will roughly level out. Second, withholding infrastructure funding only matters if it is substantial. In the case of NSW, 20, per cent of the national population is currently receiving only about 2 per cent of infrastructure spending.

How much lower can the commonwealth drive funding if it hopes to retain marginal seats in NSW at the next election?

It's not hard to see why NSW is lifting royalties and expecting the commonwealth to pay for it. Treasury modelling shows that the proposed carbon tax will drive up state costs in areas such as electricity generation, without compensation. While privatised electricity generators in Victoria are slated to receive hundreds of millions of dollars in compensation, the ageing state-owned assets in NSW receive little.

Yesterday, federal infrastructure Minister Anthony Albanese at a press conference tried to make political mileage out of a commitment Barry O'Farrell made at the time of the mining agreement that he had no plans to increase royalties in NSW. At about the same time, Albanese's boss -- the Prime Minister -- was pledging in more categorical terms "there will be no carbon tax under a government I lead". Promises, promises.