Prepare for a mighty wail from the West, via Moody’s
On 24 March, the Government of Australia (Aaa stable) announced a revision to annual equalization grant allotments for states and territories in fiscal 2018, which ends 30 June 2018. The Commonwealth collects goods and services taxes (GST) nationally and remits them in their entirety to the states based on an equalization formula set forth by the Commonwealth Grants Commission (CGC). The annual allotments are the largest source of state income, and the revisions will have varied budgetary effects and credit implications for individual states, which back the state treasury corporations.
The redistribution is credit negative for the Northern Territory (Northern Territory Treasury Corporation, Aa2 stable) and Western Australia (Western Australian Treasury Corporation, Aa2 stable). It is credit positive for Victoria (Treasury Corporation of Victoria, Aaa stable), Queensland (Queensland Treasury Corporation, Aa1 negative), and Tasmania (Tasmanian Public Finance Corporation, Aa2 stable). Effects are near neutral for New South Wales (New South Wales Treasury Corporation, Aaa stable) and South Australia (South Australian Government Financing Authority, Aa1 stable).
Although the total grant pool will rise by 5% to AUD62.7 billion, the redistribution will change grant levels on the basis of the state’s fiscal capacity (its relative ability to raise revenues and its cost of providing services) and population. In the Northern Territory, the grant falls 8.4%; in Western Australia it rises 19%. However, both Northern Territory and Western Australia anticipated larger grants in their budget forecasts, so the lower-than-forecast grant adversely affects the states’ budget outcomes. The states’ varied reliance on these grants also affect the magnitude of the actual budget effect (see Exhibit 1).
The Northern Territory will be most negatively affected by the revised grant distribution because of a decline in its share of grants and lower population growth. Equalization grants will fall by 8.4% – the only jurisdiction to experience a drop (Exhibit 2) – and 11.6% below the Territory’s projections in its budget (Exhibit 3).
Given the Northern Territory’s higher reliance on these grants, which are more than 50% of its income, the effect is more pronounced. We estimate using the latest figures in the Northern Territory’s midyear update, that in fiscal 2018 its deficit could double to 14.1% of revenues (Exhibit 4), up from the territory’s projected 7.4%, and according to its projections, it is unlikely to meet its target for budget balance by fiscal 2020.
Western Australia’s grants are to rise by 19.1% because the sharp decline in iron ore prices and NorthWest Shelf liquefied natural gas have adversely affected its revenue raising ability. However, the 19.1% increase is well below the state’s forecast rise of more than 40% because of lower population growth and relatively lower spending on roads maintenance. As a result, Western Australia’s deficit could widen to 13.8% of revenues from the state-projected 11.8%, unless offsetting measures are taken.
The largest beneficiaries are Victoria, whose grant will increase 8.1%; Queensland, whose grant will rise 6.3%; and Tasmania whose grant will rise 5.5%. Victoria’s larger increase reflects an larger share of grants and higher population growth, and could move the state into a small surplus equal to 0.1% of revenues, compared to a minor deficit of -0.3% that it forecast. But Tasmania’s budget, given its higher reliance on grants, would benefit the most of any state and its deficit will potentially shrink to -0.5% of revenues compared to the state’s -1.7% projection in its fiscal 2018 midyear report.
New South Wales’ share of grants will shrink, but this effect is partially offset by a rising population and increase in the pool of grants, which will push their grants up by a small 1.8%, which meets its forecast. South Australia’s grants will rise by a healthy 6.0%, but the state expects this to be 1% below its forecast, which could have a slightly negative effect on their budget outcome.
Readers will know that MB has little sympathy for WA budget woes. However, it’s pretty rich for the eastern states to run population ponzi economies that exacerbate their enormous external imbalances while boosting their own GST allotments at the expense of surplus economies like WA.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
