Allocate the GST more simply

If the states and territories are in effect chariot wheels bound to the commonwealth, as former prime minister Alfred Deakin presciently suggested soon after Federation, then let’s ensure they are attached rationally so the national chariot can move forward as efficiently and effectively as possible. Right now, it’s struggling to achieve much pace. An excessively complex formula built on the naive idea that Canberra can engineer payments to the states so they all have the same “fiscal capacity” — whatever that means — has hobbled their incentives to enact reforms that would boost productivity and economic growth.

States such as Victoria and NSW are being partly compensated by Western Australia, which is compelled to send GST revenues east, for the economic damage caused by sealing up their gas reserves. The arcane formula has seen WA’s GST share, for instance, plummet to 34c, while the Northern Territory’s share has surged to $4.66 for every per-capita dollar of GST revenue generated.

In its interim review into this byzantine system known as horizontal fiscal equalisation, released yesterday, the Productivity Commission has made sensible suggestions to simplify and boost confidence in a process that it says is “beyond comprehension by the public and poorly understood by most within government”.

While the commission has endorsed the principle of HFE — it may be simpler to distribute the GST according to population shares and let the commonwealth top up states as it sees fit — it recommends “significant simplification” of the formula used to distribute the $62 billion a year in GST raised, with a view to ensuring states achieve an “average” level of fiscal capacity.

Any shift from the status quo would be fiercely resisted by South Australia and Tasmania, though. Even if the Turnbull government were able to corral the states into agreeing to reforming HFE, the bigger problem would remain: the fiscal imbalance between the states and Canberra that muddies the lines of responsibility, especially in health and eduction, which is at least as big a problem.