Grants commission proves there is not a fair go for all

Reading a report of the Commonwealth Grants Commission is a bit like leafing through a Latin textbook: you recognise a few words but none of it really makes sense.

Australia has the most extreme form of horizontal fiscal equalisation of any federation in the world. We over-subsidise Tasmania and South Australia on a seemingly permanent basis and the overfunding of the Northern Territory is out of this world: a relativity of more than five compared with the baseline of one of GST revenue.

Even the ACT, with its vast army of overpaid bureaucrats, gets over one. Go figure.

The commission defines horizontal fiscal equalisation as the principle whereby “state governments should receive funding from the pool of goods and ser­vices tax revenue such that, after allowing for material factors affecting revenues and expenditure, each would have the fiscal ­capacity to provide services and the associated infrastructure at the same standard, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency”.

The organisation likens it to a level fiscal playing field.

In fact, the system has been broken for years, but it has come to a head only as Western Australia’s relativity sunk to below 0.3 and has stayed there for several years. It is not anticipated to rise above 0.75 until 2019-20.

Some commentators, who ­obviously don’t understand Latin, blame the lags in the system and incorrectly assume that the problem will go away in due course. But using moving averages to calculate relativities is sound practice; excessive annual volatility of revenue from the GST is not favoured by any state or territory.

Other commentators will point out that Western Australia has traditionally been a mendicant state. But if you look at the vast area that the state occupies, it is hardly surprising that its relativity has been greater than one given the significant cost disadvantages the state faces in providing services to its citizens.

But the point today is that Western Australia has missed out on many billions of dollars of GST revenue because of the rise in royalties income associated with the mining boom, 70 per cent of which are redistributed to the other states and territories. But these ­recipient states and territories haven’t needed to lift a finger ­to ­facilitate and accommodate a surge in mining activity.

It will be many years before Western Australia’s loss of GST revenue is recovered, if ever.

A committed Tasmanian first and foremost, economist Saul ­Eslake has likened Western Australia to a grandmother who has won the lottery and wants to keep the Age Pension.

It’s a bit like granny winning the lottery and having her ne’er-do-well relatives take away 70 per cent of the winnings. She hasn’t received the Age Pension for years and she won’t for many more years. But the relatives will be casting around for other sources of money in the meantime ­because they have spent the lottery windfall. That’s Tasmania to a T.

The problems with the way in which the GST revenue is distributed are legion:

● The commission fails to ­acknowledge that the high wages in NSW and Victoria are offset by higher living costs, including property prices;

● This means the commission consistently overstates the real tax base of those states;

● NSW and Victoria will ­always be donor states because of this mistake;

● Instead of thinking of some global tax base, the commission treats each tax separately as if levying high taxes on one activity doesn’t affect the capacity to levy high taxes on another;

● The commission misrecords minerals royalty income as being the equivalent of other states’ recurrent tax income, which it is not;

● The commission fails to redistribute gambling taxes so those states, including Western Aus­tralia, that opt to limit gambling are disadvantaged.

The biggest problem is this: the distribution of the GST is based on the notion that the states and territories provide the same standard of services to their citizens but there is no requirement that the states and territories actually to do so because the GST monies are untied. Indeed, they don’t even have to try to provide the same standard of services.

The advocates of our extreme horizontal fiscal equalisation can’t have it both ways: if the principle is based on giving the states and territories the scope to deliver the same standard of services, there must be accountability that this objective is actually achieved. But what happens is that, year after year, the mendicant states take the money and the governments use it according to their current whims. Wave pool in Darwin, anyone?

Additionally, the GST distribution creates a series of perverse incentives; most particularly, for people to hang around in the mendicant states when they would otherwise be better off moving.

I can only presume that South Australia Premier Jay Weatherill was having a lend when he claimed on the weekend that ­“numerous expert studies have shown the existing method of distributing GST is the fairest and most efficient”. It is neither, and numerous expert studies do not confirm his understandable support for the over-subsidisation of his mendicant state.

Where once there was an idea that the cohesion of the federation would be imperilled if each citizen were not treated in the same way, we are now at the point where the cohesion of the federation is imperilled because South Australia, Tasmania and the Northern Territory get too much of the pot, at the expense of others. It is not seen as consistent with a fair go, with the laggard states getting more than their just share year after year.

As for the Turnbull government’s support for a collar and cap (relativities between 0.75 and 1.25) down the track, good luck with that. And for those states and territories that are still reliant on ­granny to subsidise their unproductive ways of life, expect a lot of bellyaching — it is one of their special skills.