Time for states to change the script over GST gains

I am a fan of the Netflix series House of Cards, even though it seems implausible that experienced political players would always behave so predictably and often cede power to the protagonist so easily.

However, the recent “stoush” over GST revenue distribution shows that even seasoned politicians will follow the script. So when prime minister Tony Abbott deflected responsibility to the states and territories to sort out the current distribution, unsurprisingly Western Australian Premier Colin Barnett rehashed the parochial and simplistic east-versus-west diatribe.

Like interest rates, the outcome is largely determined by an independent body, the Commonwealth Grants Commission (CGC), although the states and territories are consulted, and the treasurer makes the final formal determination.

Despite treasurer Joe Hockey and finance minister Mathias Cormann’s public sympathies for the WA position, it has not changed the outcome — and rightly so. Australia has arguably a comprehensive and complex equalisation formula that - unlike most federations in the world - fully equalises between states by taking into account a state’s revenue capacity and expenditures.

Its complexity is due the rigorous methodology employed by the CGC, which is transparent and fair. It is near impossible for a state to “game” the system in its favour.

WA did not have a problem when it last formally endorsed the current system in 2008 in signing the Intergovernmental Agreement on Federal Financial Relations. Since 1981, when the current equalisation progress essentially began, WA has been a net recipient state on 19 occasions, compared to only 15 instances beginning in 1997 when it has been a donor state.

Compare that with Victoria, which has never received more than its relative share. Unfortunately for Victoria though, we do not have a Finance Minister or Deputy Leader of a governing party representing our state in public debates.

However while Victoria’s relative share has never fallen below 80 per cent, WA’s is at a record low 37.6 per cent and falling (in other words it is only receiving about 38% of its population entitlement).

This is a stark statistic - but it is partly because only GST revenue is equalised, and therefore the effect is more pronounced than if all grants were equalised. Despite all the rhetoric that broadening or increasing the GST will miraculously fix state finances, it only comprises a relatively small proportion of revenue. In the case of WA, in the last budget it was less than 10% of revenue, and about a third of other unequalised Commonwealth grants, and about a third of resource royalties.

While falling resource prices will take years to be fully accounted in the equalisation process, states like New South Wales and Victoria have experienced the challenges of a high Australian dollar while WA boomed. Yet they have long been “donor” states, and despite the boom, they are still responsible for most of the country’s wealth. Like the Commonwealth government during the boom years, the WA government has not adequately prepared for its end.

Any “freeze” in the redistribution of GST revenue would mean an end to the full equalisation process and a return to the previous system where Queensland, WA, South Australia, Tasmania and the Northern Territory made claims for special grants. The $500 million in “extra” revenue to WA would mean less for other states, which are also facing financial challenges.

To put Western Australia’s special pleading into perspective, in its last budget the WA government allocated $902 million for a new stadium and sports precinct and $616 million for subsidising electricity. The government lauded that fact that WA has the second-lowest “household basket” expenses for services in the country: $5,096 compared to $7,054 for a resident of New South Wales Hardly indicative of a “crisis”.

None of this is to suggest that the states are not facing real fiscal challenges, but rather than turning on each other and playing into the Commonwealth government’s hands, state government leaders need to collectively propose ideas to meaningfully reform the federation.

Shares of GST revenue are nothing compared to looming shortfalls in health and education expenditure, and a lack of policy continuity as changes in government at the federal level affect future funding agreements.

At the moment the Commonwealth is calling all the shots, which it can given its financial power. But it is also generating ideas through its White Paper process on reforming the federation and its previous Commission of Audit.

Rather than fighting over pots of money the states need to make coordinated claims for sustainable revenue bases and for more responsibility. Politically, many state governments are in a better position than the Commonwealth, and with so many crossbench Senators claiming states interests now is a good time to advance an alternative agenda.

Scott Brenton receives research funding from the State Government of Victoria.