From The Australian:
Malcolm Turnbull has picked another GST fight with premiers by promising Western Australia’s Liberal leader Colin Barnett that he would fix the formula so that each state was guaranteed a minimum share of their biggest source of tax revenue.
The Prime Minister’s commitment, made at the WA Liberal Party’s state conference on the weekend, was intended to assuage concerns that the state was not getting its fair share of the goods and services tax, but the proposal immediately put him at loggerheads with other states.
Tasmania’s Liberal Premier Will Hodgman responded angrily, saying “we don’t support any changes to the GST, full stop”, while Queensland Treasurer Curtis Pitt complained that “once again, we have the Prime Minister floating a major tax change as a thought bubble with no detail or consultation”.
South Australia’s Premier Jay Weatherill, who has been willing in the past to consider Mr Turnbull’s proposals for tax reform, also rejected the latest initiative, which could leave his state worse off.
…Victorian Treasurer Tim Pallas warned that Victorians would “once again be collateral damage as Malcolm Turnbull short-changes our state, and cravenly pursues votes at the WA election”.
The basic problem is that over the time WA is a net beneficiary of the system and it can’t have its cake and eat it too just because Colin Barnett is inept.
For the first few years of the GST, the distribution process worked in Western Australia’s favour, with its relatively weak economy meaning that it received an over-sized share of GST funding. The same goes for the distribution of special purpose grants, which overwhelmingly benefited Western Australia throughout most of the years since Federation. The situation only changed with the mining boom, culminating in more recent calls for a ‘fairer’ distribution of GST revenue from Western Australians.
The key problem for Western Australia, however, is that the system of “horizontal fiscal equalisation” (HFE) is lagged. The Grants Commission calculates state GST shares based on a three-year rolling calculation that includes their revenues from other sources. This system worked in Western Australia’s favour during the first years of the commodity price boom, since GST revenues took longer to be adjusted down, but will also work against it as commodity prices (and state revenues) fall.
Not surprisingly, it is this lagged system that the Western Australian Government has attempted to change, arguing to the Grants Commission that:
“…implementing HFE without lags could substantially improve state budgeting by spreading revenue volatility, ups and downs, across all states…
This would be more equitable by ensuring states share in the volatility costs as well as revenue benefits from, for example royalty and conveyance duties.”
While the arguments about volatility may hold some merit, why was the Western Australian Government silent when it was receiving too much GST during the commodity price boom period? Moreover, the rest of the nation “made room” for a WA boom exaggerated by fiscal profligacy by shrinking their economies. Based on the WA experience, if it were to happen again, the Turnbull reforms will make volatility worse not better by ensuring any boom state has even more money to waste.
There are also practicality issues in changing the GST distribution process from a lagged system.
In any event, with the mining boom unwinding fast, Western Australia will soon revert to its historical position of being a net beneficiary of this HFE system.
We at MB sympathise with the folks of WA, which does have the only decent export economy in the country, but if it wants change then it should sack its inept leadership.
