Rudd planted seeds of GST reform move

IT was late February last year when Kevin Rudd realised the system of distributing GST revenues among the states was a political dog.

IT was late February last year when Kevin Rudd realised the system of distributing GST revenues among the states was a political dog.

Western Australia's feisty Liberal Premier, Colin Barnett, was on the warpath after learning his state would receive only 68c of every $1 paid by its residents under the Commonwealth Grants Commission's carve-up for 2010-11. It was unacceptable, he thundered.

What was not known then was that prime minister Rudd was just days from announcing his plan for a fundamental shake-up of the health system.

It would involve a partial commonwealth takeover of state-run public hospitals, to be funded in part by Canberra quarantining about 30 per cent of state GST receipts.

He was about to rub salt into the wounds of a Liberal premier already behaving as though he had been seriously wounded.

So Julia Gillard's much-heralded plan to shake up the method of GST distribution, announced on Wednesday, was not a new idea.

And while the Prime Minister emphasised the value of her plan as a driver of economic reform by rewarding states for efficiency, one of the key motivators at play is her need to placate WA and other states as she seeks to implement her broader tax reform agenda.

Wayne Swan, Treasurer to both prime ministers, has been privately conceding for nearly a year that Barnett has a fair point. While Gillard finally pressed the reform button, it was Rudd who set the ground for change.

For decades, state and territory leaders have been at each others' throats over the distribution of commonwealth funds. NSW and Victoria have been particularly offended by the notion that the most populous states would receive less per capita than theirs.

But the power of the mining boom has turned the tables.

In the 2010-11 CGC carve-up, handed down on February 26 last year, WA would receive 68c out of every dollar of GST collected in the state. NSW would receive 90.5c, Victoria 93c and Queensland 91c.

Barnett, at the time the only Liberal premier, was furious, labelling the formula "an absolute rip-off" that would strip his budget of $400 million.

Although Barnett's outburst seemed like just another bout of the incessant complaints and arguments that have raged for decades, Rudd, quietly planning his GST carve-out to fund health reform, understood the difficulty.

A month later, having announced the health plans and attracted Barnett's opposition, Rudd set the stage for the changes Gillard announced this week.

The longer-term financial needs of resources states, including Queensland, were "a key question to be worked through", Rudd told Sky News.

"I'm a Queenslander, I kind of understand some of these questions of geographical distance and separation, but also the intensity of the infrastructure which underpins major resource states as well," he said.

After a Council of Australian Governments meeting held to discuss the health reforms, he was even more diplomatic.

"Obviously WA has copped a significant hit as a result of the CGC determination," he said. "This is something the Treasurer continues to work through with those individual states."

Rudd's health reforms fell over, partly because Barnett refused to sign on or even consider signing on until the commonwealth addressed his concerns about his state's dwindling GST revenues.

Barnett's disquiet about GST also played into Rudd's subsequent, doomed effort to introduce a 40 per cent tax on mining profits.

As a Liberal leading a state that relies on mining, Barnett savaged the proposed tax and remains resistant to Gillard's less onerous replacement - the mineral resources rent tax.

WA sources told The Australian yesterday that while they welcomed the GST review, the MRRT issue was separate, and there would be no package deal.

The question left hanging is why Labor did not act to placate Barnett months ago. It is understood Gillard resisted for fear of further cluttering the agenda for commonwealth-state relations.

She is also playing a longer game, hopeful her review of GST distribution will make states more likely to come to October's tax summit more kindly disposed toward genuine reforms, such as eliminating state taxes.