“Every year the average Australian pays around $2,300 in GST. Western Australians will get back $714 per person next financial year, less than a third of what they pay. This transfer from WA mainly goes to South Australia (an extra $1000 per person per year), Tasmania (an extra $2,000 per person per year) and the Northern Territory (an astonishing extra $11,000 per person per year).

The Commonwealth Grants Commission estimates that WA gets $7.2 billion in mining revenues a year but, under the existing formula, they lose about $4.6 billion, more than 63%, to other States.

Some argue that the grants formula is sacred, has not been changed since the early 1980s and therefore should be left alone. That is bunkum. The Commonwealth Grants Commission regularly changes its methodology with major reviews released in 2004, 2010 and this year.”

The author omits mention of the fact that the ACT also is subsidised by the donor States.

It appears that neither the Commonwealth Grants Commission (CGC) nor most State and Territory leaders – mendicant or otherwise -- rate equitable treatment as a key objective in the GST carve-up process.

WA is penalised unconscionably by having to forfeit about 69% of GST and 64% of mining royalties paid in that State.

Cont. in next post

Comments about how the CGC got it so wrong, made in Judith Sloan’s April 18-19 Weekend Australian article, “Crazy distribution formula underlies WA’s GST outrage “, warrant serious consideration for implementing change in the future.

It appears that the CGC’s interpretation of the principle of horizontal fiscal equalisation – where all citizens can expect to have access to equal standards of government services – is so badly flawed that the whole CGC process should be scrapped.

Sloan observes that one of the main problems with the CGC’s methodology is the treatment of royalty income. Essentially, a State that goes to the trouble of facilitating, approving, and funding infrastructure for a new mining development enjoys the full benefits of the royalty income for a short time, after which point the CGC imposes an effective 80% tax on the State earning the royalty income.

Sloan points out that in Canada, minerals royalties are not taken into account when determining horizontal fiscal equalisation across the provinces. In other words, the mining provinces get to keep their royalties without penalty.

It is irrelevant that defenders of the CGC’s methodology argue firstly, that WA was a recipient State, albeit in only three years since 2000-01; and secondly, that the low relativity figure for WA will correct in time, although the figures indicate no significant correction to the anomaly in the future.
Cont. next post

The argument that WA is slow to reform its economy, and should really get on with its task, is a red herring in terms of the debate on GST distribution.

While the advice of the CGC on the distribution of the GST is based on the principle of equalising the fiscal capacities of the States and Territories, there is no obligation on any State or Territory actually to spend the revenue to ensure services are of the same standard.

Sloan argues that “the distribution of the GST as determined by the CGC involves the highest degree of horizontal fiscal equalisation of any federation in the world. It is fatally flawed. And the more complicated it becomes, the more erroneous the results.

There is no point telling the States to sort out this mess. The Treasurer must lead on this issue, as is required under the Inter-governmental Agreement on Federal Financial relations. He is not bound to accept the CGC’s recommendations.

The short-term solution is obvious: freeze the relativities at the 2014-15 levels, and proceed with haste to a fairer, simpler and sustainable solution. This must not involve the present excessive subsidisation of Tasmania and South Australia. ..

The end point should be an equal per capita distribution. If States can make a case for additional funding from the Commonwealth – for the special needs of the indigenous community or disaster relief for example – the money should be made available in a different and hopefully more effective way.”