In a recent post about the Budget I mentioned that Treasury has previously over estimated the taxation take for the federal government and therefore seem to be underestimating the pressure that large amounts of private sector debt is exerting on the economy under the current fiscal and monetary settings. This led me to make the following statement about the flow-on effects of the Federal government aiming for surplus in such an environment.
… the problem however is that there are major flow-on effects from this forecast success. The natural disasters in Queensland, NSW and Victoria have led to significant budget issues for the State governments. On top of that we have the slow down in housing sales which again adds to the state’s woes. Victoria has been served a double whammy in regards to this but they are not alone. In my own State of Queensland I am aware that government departments have been asked to find significant savings ( 15% + ) in next year’s budget. I suspect this will mean large falls in corporate expenditure.
Western Australia has threatened to blow a hole in Wayne Swan’s predicted budget surplus after announcing it would raise iron ore royalties by $2 billion over three years. The move could prove to be a major headache for Mr Swan, who has promised major iron ore producers that any future royalty increases would be rebated as part of the Mineral Resource Rent Tax from next July.
Delivering a budget which also included $600m for social services, Treasurer Christian Porter said he had acted in response to WA’s “rapid and massive” decline in GST share. Starting from 2012-13, royalty rates on iron fines would be increased from the current 5.625 per cent to the 7.5 per cent iron ore lump rate to remove an historical anomaly.
Mr Porter said he had written to Mr Swan to tell him of the state’s decision.
“You can expect that of that figure of ($2bn), most of it is going to apply to very profitable resource companies so that will no doubt cause some rethinking by the federal government in respect to their budget because they have promised to rebate that money to iron ore companies,” Mr Porter said.
He acknowledged there was a possibility the commonwealth would carry out its threat to penalise states which increased their royalties but WA had no choice. He said the redistribution of GST, where the state currently receives 68c in the dollar, was grossly unfair, as the review of the tax, led by former NSW Premier Nick Greiner, demonstrated. Mr Porter said in a worst case scenario, current estimates were that WA’s share of GST would fall to a “previously unthinkable” low of 33 per cent by 2014-15, potentially costing the state $12.3bn.
“I don’t think (Mr Swan) will be well pleased,” he said. “And it will cause a difficulty for his budget but we have a $12.3bn difficulty in our budget and we are forced to go and find additional revenue sources because the system the commonwealth government manages is pointing to a catastrophic result for our state. This is the fight of this government and this state’s political life, make no mistake about it.”
The state government’s annual budget has projected a blow-out in state debt to more than $22 billion over the next four years but is based on revenue estimates that treasurer Christian Porter admits are not realistic.
The budget shows the state government will keep its “net operating balance” in surplus over the next four years, starting with $784 million in 2010-11 and $442 million in 2011-12. However an increase in government borrowing to fund its capital works program will lead to state debt rising from $13.4 billion in the current financial year to $22.4 billion in 2014-15.
A key estimate underlying the projections is that WA’s GST relativity will fall progressively from 68 per cent this financial year to 33 per cent by 2014-15; i.e. WA will get back just 33 cents for every dollar of GST collected in the state.
“It is certainly a worst-case scenario, I don’t expect it will happen,” Mr Porter told a media briefing today. Asked why the government and its treasury advisers did not adopt a “likely” scenario, he said “we tried to do what was best practice, fair and proper”.
Mr Porter said “there is no bigger issue” than improving the distribution of GST revenue, which is the subject of a major national review.