A very good point Saul. But one aspect of this GST carve up that does not appear to have been considered is whether the richer states are adequately discharging their obligations to their own regional communities.

We know that neither Bracks nor Carr ever recognised the legitimacy of this distribution and one must wonder if this perceived lack of legitimacy extended to the needs of regional NSW and Victoria? Beattie is clearly spending most of his windfall on infrastructure in SE Qld.

And this raises three very interesting consequences of the formation of new regional states in a rejuvenated federalism.

1 The metropolitan states will gain certainty that the money allocated to the new regional states by the Commonwealth will actually be spent there.

2 The delivery of services to the regions from new state capitals will eliminate many of the costs that are currently incurred by trying to deliver the same services from a distant metropolitan capital.

3 The overheads and congestion based inefficiencies involved with service delivery from greenfield sites in the regional state capitals will be much lower than the overheads and congestion costs currently incurred in metropolitan based service delivery.

Consequently, many of the additional costs of service delivey in the regions will be eliminated so the total amount of equalisation tranfers will diminish over time. The regional economies will consolidate around their new capital and maximise the improved purchasing power of their share of GST funds.

The cost of the diseconomies of scale in our major cities are all growing to the point where each additional resident costs more than the average $6,000 per head of state outlays on services. Each new metropolitan resident now generates $6,000 in new GST and other revenue, $6,000 in new expenditure on services and, according to the Bureau of Transport and Communications Economics, another $6,000 cost to the community in congestion costs or infrastructure costs to avoid that congestion.

So there is now a significant national interest in forming new regional states to increase the proportion of service delivery from lower cost regional capitals.

Both article and first respondent make good points and Horizontal Fiscal Equalisation is an important geographical equaliser in the Australian Federation. But it is not without its many, complicated nuances that often serve to stimulate new forms of inequality. One is that the redistribution formula aggragates the taxation tolerance of states' populations but doesn't account for individuals. On average, NSW anc Victorian citizens are able to tolerate higher levels of taxation because of greater income generation capacity across the state compared with poorer jurisdictions.

However, an equity problem of generalising the average income generating capacity of businesses and earning capacity of individuals in states is that it doesn't take account of the individual position. In other words, poor people and low income generating businesses in NSW and Victoria are assessed as having an equal capacity to pay tax as high income earners and generators.

This means that poor people and businesses in NSW and Victoria pay proportionately more tax than rich people and businesses in the, on average, poorer states. So while HFE achieves geographically averaged equality, it also produces greater individual inequality across states.

This equation then perpetuates the problem over time by encouraging low margin businesses and low income people (often retirees) to flee to the poorer states which then enhances the income inequality between the states, makes the flow of taxation even greater and makes the position of the poor individuals in rich states even worse.

Saul Eslakes example of indigenous people - given the relative income poverty of indigenous Australians - provides a wonderful illustration of how this affects the individual. While the Northern Territory (a subsidised jurisdiction) has the highest proportion of indigenous (read poor) people, New South Wales (a donor state) has the highest overall number of indigenous (read poor) people. Thus a very large number of poor indigenous people in NSW effectively subsidise infrastructure for a moderately wealthy population in SEQld via paying higher petrol and gambling taxes, public transport and registration costs, etc, - even if they're not buying houses and paying higher stamp duties.

Not the simple story that Eslake tells.

There are some circular arguments raised in Saul Eslake's article. If NSW & Vic have the highest income from property taxes, high property prices also have a negative effect on state budgets when there is a need to acquire land to build infrastructure such as roads, schools, hospitals etc. This is the reason road & rail tunnels are commonplace now in Sydney when they are not seen much in other cities. As for reliance on payroll taxes, is there any argument for keeping them apart from the financial dependence of the states? If everybody agrees that payroll taxes should be reduced and phased out, it cannot be argued that their greater value in NSW & Vic is an excuse to offset that by redistributing GST revenue to the smaller states.

I think you have missed the point a little. State governments do not need to worry about Australia as a whole as this is the role of the Federal government. State governments are only responsible for what is best for their state and giving money away to other states when there is no surplus for what they want to spend in their state, is not in the best interest for their state.

I don't have sufficient knowledge to comment on the 'fairness' or otherwise of the distribution of NSW State Government expenditures between metropolitan and rural areas in that State. However in Victoria the Bracks Government has been assiduous in attending to the interests of regional Victoria, not least because of the role that regional Victoria played in delivering Labor's unexpected election victory in 1999.

The Australian constitution does provide for the formation of 'new States', and there has been on some occasions since Federation strong support for the creation of new States in northern NSW, the Riverina and far North Queensland. In the end, however these have come to naught.

In response to the points made by 'Shell' and 'PK' I would re-iterate that the Grants Commission's assessments are not solely based on the capacities of the different States and Territories to raise revenue, but also on the relative demand for, and costs of providing, public services. Thus, the Commission recognizes that salaries and land costs are higher in NSW than in other States, and takes that into account in determining NSW's share of GST revenues - however these 'disabilities' on the expenditure side in NSW are outweighed by NSW's 'advantages' on the revenue side.

I doubt that 'poor' Indigenous people in NSW pay much, if anything, by way of State taxes since they typically don't own businesses which pay payroll tax, don't buy or own properties which attract stamp duty and land tax, and probably don't pay a lot of petrol tax either. Hence I don't accept that they are 'subsidizing' relatively affluent people in SE Queensland or elsewhere.

NSW has a higher incidence of tolls on its roadways because the NSW State Government has chosen to provide this type of infrastructure through 'private-public partnerships' and the like rather than by borrowing on its own account. That's a political choice on the part of successive NSW Governments, not something that's been forced on them by the Grants Commission.

My concern with horizontal equalisation is its effects on incentives for economic and fiscal management. Under this process, a state which implements sound economic policies that promote economic growth and expand the tax base loses almost all of the fiscal benefits through a reduced share of the GST pool. Such a state would gain far more revenue by exploiting its tax bases harder than trying to grow the tax base.

A state that implements dumb economic policies that cause its economy to stagnate (think Tassie in the 1990s) does not suffer the full consequences of its incompetence, because its share of the GST pool increases to offset its losses in own-source revenue.

Sauls says:

“At the federal level, no one seriously suggests that those who pay the top marginal income tax rate are entitled to have their tax payments returned to them in the form of an equal amount of federal government spending on them or their families.”

This is quite true, but no serious economist would advocate setting the marginal tax rate at 100% for incomes above the average, and redistributing all the revenues to those on below-average incomes - the effects on incentives would be too perverse. Yet this is pretty much what horizontal fiscal equalisation does to the States.

Why should anyone be surprised that State politicians act like politicians everywhere in seeking to advance (or at least appear to) the interests of their constituents. " we would have loved to do more for you voters but that mean Grants Commission forced us to subsidise those other States with your money even though they are raking in the dough and we are doing it tough'

I find the article and several of the comments here distasteful, because they are founded on a corrupt morality which presumes or argues that robbery is fine when it’s of the rich to pay the poor, but not when it’s the other way around. That, and the fact that all these decisions about re-distribution boil down to value judgements made in the name of socialism to appease the mob.

Apart from denying freedom, forced wealth re-distribution systems lead directly to a general overall lowering of living standards, as Australia’s fall in living standards relative to other countries over the last few decades bears witness. Now we’re seeing the same thing happening at a state level.

We need to start again, this time with a constitution that recognises that robbery is wrong, regardless of who is being robbed. As any student of basic economics should know, general prosperity can only be achieved through respecting private property rights.

I am grateful to the writer for introducing me to the concept of Horizontal Fiscal Equalisation - I had naively assumed that it was just another one of those horse-trading deals between the State and Federal Governments.

But it does seem terribly anachronistic.

The original idea was, according to Professor Peter Groenewegen in "Public Finance in Australia: Theory and Practice" that "equalisation grants should be large enough to allow the poorer states to provide the same standard of services as the more wealthy ones"

But that was before the entire process was overtaken by the principle of “user pays”.

We live in a substantially different world to the one that created these rules.

As Mr Eslake himself points out, different governments take different views on what is a "service", which surely renders the entire process a lottery.

One government may decide to build roads for its citizenry, while another takes the view that it is the responsibility of commercial enterprise. PPP may be a "political choice", as he puts it, but wouldn't it be more consistent to take this under consideration when passing the loot around, instead of simply saying that it is "not something that's been forced on them by the Grants Commission".

The entire process is a hangover from the days when it was considered the duty and responsibility of governments to provide services to their populace. I suggest we simply disband the committees that oversee all this, together with the legions of public servants who spend their lives in the minutiae of "reducing [NSW's] share of the 2006-07 GST pool by 1.1 per cent and 1.5 per cent respectively", as if this were something meaningful.

But maybe I have this all wrong, and it isn't simply a hangover from the time when WA threatened to secede from the Commonwealth if they didn't get some money. Maybe it isn't just another example of over-regulation and over-government that eats away at the country's foundations. And just maybe it isn't the mishmash of cargo-cultism and political patronage that it appears to be.

I have only one correction to Saul's later comment. That is, the new state movements in Northern NSW, The Riverina and North Qld didn't come to naught, they simply haven't completed the job, yet.

And we need to get these payments into perspective. Thye are a major part of the funding for NT but make up less than 4% of the Qld budget. And in total, amount to a much smaller portion of NSW or Victorian outlays.

The total so-called drain on these states' revenue is insignificant compared to the benefits gained to their circular flow of money from their share of other federal outlays.

'Perseus' makes a good point when he notes that the share of GST revenues 'redistributed' to the NT, Tasmania and SA represents a much larger share of their budgets than it does of the NSW and Victorian budgets.

I think 'Rhian' is arithmetically incorrect in suggesting that the Grants Commission effectively imposes a 100% marginal tax rate on the above-average incomes of the richest States; among other things this ignores the fact that (as I noted in my earlier post) the Grants Commission's assessments have regard to the relative demand for and cost of providing services in each State as well as to each State's revenue-raising capacity.

'Pericles' is correct in stating that the Grants Commission was set up in the aftermath of the Western Australian secession referendum in the early 1930s, although the Commonwealth Government had been making 'Special Grants' to Tasmania, South Australia and Western Australia since 1910, and the establishment of the Grants Commission was intended to put the payment of these grants on a more transparent and independently-determined basis. I would readily acknowledge that the 'transparency' objective has become lost in the mists of time, and today very few people outside of the Commission itself and State Treasuries really understand how the Commission arrives at its precise recommendations.

However, while I agree with 'Pericles' that the 'user-pays' principle has become much more widespread than when the Grants Commission was first established, I think that most Australians still expect State governments to provide (or, at least, to finance the provision of) 'core' public services such as education, health, law & order, and public transport; and that most Australians would not want to see disparities in access to these services between different parts of the country as wide as those evident in the US or Canada. The distribution of GST revenues - which are today the most important single revenue source for State and Territory Governments - is a major factor in ensuring that access to these services is reasonably equal across this country.

Saul,
I'm not sure that the fact that "averaging" is needs-adjusted and takes account of expenses as well as revenues renders the income tax analogy entirely invalid (though I’ll grant it’s not exactly equivalent). Allowing for these factors it's still the case that state governments do not get to keep any fiscal dividend that might be generated by sound economic policies, and are rewarded for bad policies that erode their tax bases with an increased share of the GST pot

Yes ,and some Labor states like Tasmania have used the GST to create bloated bureaucracies that add nothing to private productivity or services to the public.

When the resources bubble bursts,so will Australia's present prosperity.Time to cut Govt waste and taxes.

All this argument just goes to show it makes little sense to live in NSW, let alone Sydney, where you need to be in the highest personal income tax bracket, to enjoy a lifestyle equal to those paying less than half the tax elsewhere.

When one also considers the various vertical equalisation schemes in recent abundance, I guess the government is trying to move us all out to less populated areas, no longer wants us to marry or even reproduce.

Non-GM farmer makes a good point – we have got to expect complaints from Labor politicians in NSW and Victoria, as they have a vested interest in not divulging wealth beyond their constituency. It is the Federal Government’s role and the Grants Commision’ s role to hear their arguments and weigh them up against opposing arguments.

.
I like the idea of a separate state for north Queensland – Capricornia – but I can’t see the advantage in it.

Perseus pushes this idea of new states, with the prime motive of better services and quality of life for regional people. This is an honourable motive. But…

“The metropolitan states will gain certainty that the money allocated to the new regional states by the Commonwealth will actually be spent there.”

It seems to me, with past or current residence in regional north Queensland, central Qld and WA, that funding is spent pretty well equally, on a per-capita basis, in regional and metropolitan areas. So I can’t see that getting certainty that monies will be spent in smaller areas (new states) would be significant. I can’t see that regional states would necessarily help rural people.

“The delivery of services to the regions from new state capitals will eliminate many of the costs that are currently incurred by trying to deliver the same services from a distant metropolitan capital.”

But new states would require the duplication of bureaucracy and service infrastructure, which would pretty well cancel out any current inefficiencies inherent in distant administration.

"The overheads and congestion based inefficiencies involved with service delivery from greenfield sites in the regional state capitals will be much lower than the overheads and congestion costs currently incurred in metropolitan based service delivery."

Would they? What about the costs of setting up those services? What about less efficient economies of scale for smaller operations?

Quality of life in NQ for example is on par with SEQ, as is life in Mt Isa, Hughenden or Riversleigh station and in the coastal cities. I am inclined to feel that the very notion of an underprivileged rural sector is flawed.

Scrap the G S T. Problem solved

Saul, you underline a couple of points that concern me, but appear to shrug them off at the same time.

>>I would readily acknowledge that the 'transparency' objective has become lost in the mists of time<<

Does this not raise a critical problem that we - and pretty well every government in a Western democracy - have yet to come to grips with? That there seems to be no mechanism whatsoever to regularly assess whether a particular law or government practice has outlived its usefulness?

There should be a mandatory sunset clause on every financial initiative, one that recognizes that governments so quickly rely upon the revenue streams available to them, that they lose sight of both the original objective, and also the reasons behind the terms of the agreement in the first place.

In this particular case, it is not the need for some form of equalization that concerns me - it is always possible for relative disadvantage to be cited, witness the phalanx of charities and beggars that clutters every city pavement - but the obligatory manipulation of the rules that immediately follows any settlement. And then continues, even after the rules lose their relevance.

You state that the objective is that "State governments [should] provide (or, at least, to finance the provision of) 'core' public services such as education, health, law & order, and public transport"

- which sort-of assumes that this is the destination of the funds "equalized" from rich to poor.

But if a State decides that it doesn't need to provide roads any longer (or schools, or hospitals) and that the private sector should take the strain instead, why should the Grants Commission not have some kind of say in the relativities involved... or put it another way, if not them, who?

The way I hear it from the comments so far is that they are highly constrained in their terms of reference, which pretty well ensures the status quo.

Those of us who live in North Qld need a seperate State. While others haggle over GST distribution Qld's decentralised population has tried coalition and Labor government to achieve infrastructure for North Qld, without much success since the building of the Burdekin Falls Dam in 1987. All our schools and hospitals have been allowed to run down over a 40 year period.

If the New South Welshmen here would like more of the GST funding, that's fine with me, so long as you and your hoard's of immigrants stay in NSW. So many people from NSW and Victoria come up to and already under resourced Noth Qld for what it believed to be a seachange, our infrastructure such as it is has almost completely broken down under the strain. There is no tropical paradise here, as there once was, keep your GST money and your people.

Shonga, why do we need a new state in NQ?

What about the points I raised in my last post, questioning whether the mooted advantages of a new state are real or just wishful thinking?

In what way is infrastructure in the north worse than in SEQ or NSW? Our schools and hospitals are no more run-down or overstressed than in the populated south. The same with water supplies.

I don’t think the state of our roads, or services and infrastructure in general, are any worse than in SEQ, or WA with which I can make personal comparisons. Of course less money is spent in the north. But it should be spent roughly on a per-capita basis, which means that the lion’s share of Queensland’s budget should get spent in the southeast corner.

It is an interesting paradox that we have such a population influx in the north, with the vast majority of new residents being quite happy with their new lives. If infrastructure and services were any worse here, then surely there would many new residents letting it be known long and loud. If it was really significantly worse over along period, as you imply it has been, then surely prospective new residents would stay away in droves.

The very fact that the north has a rapid population influx is an overwhelming indication that quality of life factors, basic infrastructure and GST expenditure here are not significantly worse than elsewhere.

“There is no tropical paradise here”.

Yep. Following cyclone Larry and with Wati poised off the coast, maybe this message will sink in a little.

It is time you took a little walk down reality street, Ludwig. If you think the money is evenly spread all over the state then lets just take a look at police expenditure.

The police budget for Queensland works out at about $300 per person and there is one officer for every 415 people. So with this in mind I would like you to check out a small shire near you, check the population, and multiply that by the $300 to get what that shire is paying each year for police services.

You can then divide the population by 415 to determine what the pro-rata police entitlement should be. And then compare that with the actual police establishment.

If you can get back to us here with that information we can then determine exactly how evenly these public funds are distributed. Are you game?

Perseus, you won’t get any disagreement from me regarding terrible underpolicing in Queensland. But as with health and various other services and infrastructures, it is the same across the state, and then not greatly different to other states.

You are bound to find variations across the state, but can you really assert that all rural or regional communities are at a significant disadvantage, or that they are on average at a significant disadvantage, or that ANY are at a significant disadvantage?

One thing we need to be aware of as far as policing is concerned is that crime rate and general strife is not only greater in larger population centres, but is greater on a per-capita basis. So it makes sense that there should be disproportionately more police in larger centres and more populated regions.

Would you like to do the research, as you are semi-retired and are a numbers man?

I’m certainly interested to see what you come up with.

Could you also address the three points from my second last post. Thanks.

Ludwig, it is a bit hard for me to determine the police staffing levels of a country shire from Brisbane. I will certainly do the work but the least you can do is provide me with some police numbers in a shire near you. I have the pop. stats for each shire so can do the rest. In the mean time it would be prudent to curb your opinionating until the data is in.

Ah! Winston you have returned, mate why not save time and simply type "It's a communist plot" to every article, lets face it, it would help you save time, and it would help us save reading, a win, win situation.

We have to look on the bright side of Cyclone Larry,if Kim Beasely becomes our next Prime Misister,we can't become a "Banana Republic".

Yes ,we have no bananas,we have no bananas,hooray!

As long as we retain the right to determine who’s bananas we allow into this country …

Saul, have you forgotten tobacco tax? Indigenous Australians might, in the main, escape payroll tax, but they are disproportionately high payers of tobacco tax. Not such a good idea, I grant, but worth considering as a not-insignificant factor in the Indigenous tax take.

Perseus, there is nothing wrong with expressing opinions even if we have no evidence whatsoever….. as opposed to making assertions without a solid foundation.

It is no easier for me to research this, by phone or internet, than it is for you.

I would have thought that you would be only too happy to put this data together, given that you very strongly think it will support your argument.

However I’ll see what I can do, given that you seem reluctant for some unknown reason.

.
Shonga, why do we need a new state in NQ?

.
That’s funny Arjay, despite the seriousness of the situation. But what is just as funny is your total of 12 grammatical or textural errors in a 35 word post! That must be some sort of record!

Envy's a curse Ludwig.

Arjay,
If I were you I wouldn't worry yourself concerning Beazley, the choice is "chips" or "straws" until a centre party emerges I can't see any change on the horizon.

Shonga why do we need a new state in NQ?

I don’t understand how some people can make impassioned statements on this forum and then ignore direct questions asked of them.

This is not the first time Shonga.

Why are you apparently so reluctant to debate the matter?

Surely you would see any questions of this nature as good opportunities for you to elaborate on and thus strengthen your expression on the subject.

Perseus

I have been unable to find the info that you request. I have tried a number of sites. The ABS site looked promising. It seemed that I could request the exact info that we need. But all I got in response was a automated reply, which didn’t in any way address the issue.

The Victorian Competition and Efficiency Commission is conducting an inquiry into transport congestion. The Commonwealth has decreed that Fuel Tax revenue has no relevance to funds it allocates for roads although that was the purpose for which it was introduced. Most of the cost associated with congestion arises from grid locked road traffic. If these costs can be quantified, those who benefit from alleviation of this problem can also be identified. Few outside the metropolitan area have registered any concern at the potential impact on the funds that they need to maintain roads and other services to country people should State/Commonwealth funds be so allocated as less than 100 submissions have been made..
The problem for country people is that the terms of reference were drawn up by city people, the Commissioners and staff are almost certainly city people, the bulk of the evidence will be given by city people, many submissions coming from highly paid consultants or staff employed by very wealthy municipal councils. Those who will be most disadvantaged are trying to deal with other issues, such as bushfires and drought, and local government rates four times that of their city competitors. For them, congestion is not a daily problem.
The most likely argument is that Melbourne's congestion can be solved or alleviated by improving its public transport network. It has been stated by governments in the past that the purpose of the public transport subsidy is to relieve the pressure for more money to be spent on roads. The fact that Melbourne's train and tram network already costs Victorians $2,146,000,000 per annum to run is unlikely to be mentioned. (N.B. See Victorian Auditor General's Report to Parliament in Sept 2005. A search of media outlets a month later returned 0 hits on this fact.) To have this enormous amount allocated year after year and then demand more funds for freeways is double dipping into taxpayers' funds. There is strong evidence that Melbourne is not only getting a far larger share of the cake than it deserves, it is grabbing all the cream as well.

Shonga

Oh Shaaaaahhhhnga

Why do we need a new state of NQ??

Shonga

oooh Shaun

whydoweneedanewstateforNQ?

Shonga

ahoy Shauneee

whydaweneedanustateforNQ??

Ahoy Shonga (:>{})

WhydaweneedanewstateforNQ?

http://forum.onlineopinion.com.au/thread.asp?article=4283#36429

http://forum.onlineopinion.com.au/thread.asp?article=4283#36555

Hey Shonga, here’s an interesting question for you;

What on earth are the advantages of having a new state for north Queensland!!??

Shonky

Why on this confowwwwwnded planet would anyone want a new state for norf qweenslayand?

Why dear Shonga would we ever want a new state for North Queensland ?? ??