The Commonwealth Grants Commission has backed new plans to deliver a greater slice of GST revenue back to Western Australia via an increase in iron ore royalties. From The West Australian:
In an interim decision welcomed by Treasurer Ben Wyatt as a “first good step”, the commission conceded that the way it had calculated the national allocation of WA’s iron ore royalties had harmed the State…
More than 90 per cent of iron ore royalties raised by the State Government have been distributed nationally under GST rules.
Since 2006, $39 billion in WA royalty revenue has gone to other States or Territories.
The commission, in a review of the GST, said the existing system meant mining States such as WA or Queensland could not vary royalty rates without being financially penalised.
It signalled changes that would ensure that after any royalty increase, a State would keep at least 50 per cent of the increased income…
I have previously given short-shrift to Western Australia’s complaints over their GST allotment. However, I do acknowledge that the current distribution mechanism works as a disincentive for Western Australia to raise royalties on its commodity base given that almost all of the extra revenue flows to other states.
In light of this, allowing Western Australia to keep half of its royalty revenue seems like a sensible compromise.
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There is the broader issue, raised by Moodys in April, whereby Western Australia is being penalised in its GST allotment via the Eastern States’ (especially Victoria’s) rapid population growth:
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…
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).
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%… Victoria’s larger increase reflects an larger share of grants and higher population growth…
It’s a bit rich for the big parasitic 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 Western Australia:
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
