I welcome this opportunity to speak about the very important issue of horizontal fiscal equalisation in this country and the distribution of the GST. 

At the outset, I would like to commend Senator Wang for bringing forward the Commonwealth Grants Commission Amendment (GST Distribution) Bill 2015. This is an area that I think needs change; indeed, I think there needs to be major change to how we calculate fiscal equalisation across our nation. It is not simply an argument about fairness and who deserves more money and who deserves less. It is actually more than that because, in my view, our current system is creating perverse incentives and, particularly, not encouraging our state governments to develop their resources, their industries and their economies. Ultimately, that is what we want our state governments to do because that will create more jobs and more opportunities for all Australians.

I will expand a bit further on that in this contribution. But first I would like to say to Senator Wang that I, too, am one of the senators who have defended WA and tried to point out the inequities. I think I deserve a little bit of credit for that because actually I am, of course, not a Western Australian senator, and I have received some criticism in my home state for standing up for the interests of my western brothers and sisters. I have done so because I think, fundamentally, clearly there is something wrong when a state can receive less than a third of the GST that it raises. At one point, the projections were for WA's share to fall to around 10 per cent of the GST raised in WA. That did not eventuate, given the fall in iron ore prices, but even the fact that that could have potentially been an outcome shows there is something wrong with the system.

While I am in this chamber to represent the interests of Queensland, and regional Queensland in particular, I believe that I am a senator for the Commonwealth of Australia and that we all have a duty to make sure that we try to encourage the Commonwealth of our nation. I do not think our current system, particularly the way it is assessed and implemented, does a good job of keeping us together within that Commonwealth and creating the right environment which ensures we all try to live together as one nation.

I want to turn, though, in particular to the provisions of this bill Senator Wang has put forward. I have to say I will not support the particular provisions in this bill, notwithstanding the fact that I do commend Senator Wang for bringing them forward. I have some questions about the impact of the provisions in this bill. I do not think it particularly deals with the issues with the system that I will expand on later. My understanding of the provisions in the bill is that they will shift our current arrangements from a three-year averaging approach to a single-year approach. While there may be some merit in that recommendation, it does not deal with the fundamental issues that I have with the horizontal fiscal equalisation process. Of course, over time, it will not, by definition, make a difference to what a state receives over a 10-, 20- or 30-year period. It may, of course, correct some things in the short term, in the transition phase, as Senator Wang has pointed out in his contribution. But I actually hope and think that we need to make some changes for the long term in this area which will fix the problems we have in the future and not be just a temporary fix to deal with the anomalies that we have seen during this terms-of-trade boom.

I also have some questions marks over whether it is appropriate to switch from an averaging regime to a single-year regime as quickly as proposed in this bill. Notwithstanding that I think there should be some changes to the way we do things, I recognise that an appropriate transition process should, perhaps, be considered. 

There are, of course, other states and territories that receive large amounts of additional funding thanks to the horizontal fiscal equalisation process, and it would also be somewhat unfair on them if the rules of the game were changed mid-game, leaving them without the opportunity to appropriately adjust to any particular changes.

I want to talk more broadly about the horizontal fiscal equalisation system. It is often remarked that this is a sacrosanct methodology that has almost been given to us on some mountain in the Middle East in the Old Testament: 'We can't change. We can't amend anything to do with this methodology because it is something that has been handed down by our forefathers and it almost has some constitutional merit to it.' In fact, that is clearly not the case. Not only is this particular way of dividing up the different resources of different states relatively new—only a few decades old—but it is also regularly reviewed and changed. There have been reviews in the past decade—in 2004 and 2010, and a review in the last few years that was implemented in the last Commonwealth Grants Commission assessment. Sometimes there are major changes made; it is not just window dressing that occurs at particular times.

Indeed, this year's assessment established for the first time an urban transport methodology for the assessment process. Previously the costs and revenues of public transport services offered by state governments were not included in the process, but this year, for the first time, they were included. Many people probably do not realise or know that that change to include public transport services in the methodology cost Queensland $500 million, because Queensland is a state that is largely dispersed and where large amounts of the population are in regional areas where state governments generally do not provide public transport services. There are often some private services that receive subsidies, but they do not directly provide the services themselves. My understanding of the Commonwealth Grants Commission process is that they have only included the services offered directly by state governments, which are almost invariably in our major and capital cities.

We have a horizontal fiscal equalisation process which was meant to spread the wealth around our nation, yet this particular change has instead concentrated the wealth back in our major cities. I find that rather anomalous, and I asked the Commonwealth Grants Commission about it at last estimates. I have some serious problems with how this is being assessed. We need to take a step back and think about why we have this process and what we are trying to achieve with it. With horizontal fiscal equalisation we are trying to achieve an element of equity across our nation, keeping in mind that this is the Commonwealth of Australia. I have no problem with ensuring that the people of the Northern Territory, Tasmania and the other states receive an appropriate level of public services across our nation. It will often require transfers of money between states to make that happen. Almost every federation in the world has a system like this in some form, so the argument is not against the equalisation process itself; it is about how we achieve that. And in achieving that what we should aim to do is make sure it is as policy-neutral as possible. That is the criterion that the Commonwealth Grants Commission themselves say they apply, but I have serious questions about whether they are actually achieving that objective in the way they are doing it at the moment.

Take this urban transport issue itself. The Commonwealth Grants Commission is meant to say, 'However we transfer money, it should not affect the policy decisions of state governments. It is meant to be policy-neutral. So however we decide to spread money from one state to another, it should not change how state governments do business or what they do.' In fact, what is happening with their urban transport methodology is that they are looking at how much in fares state governments take in. They are looking at the costs of providing bus, train and ferry services. Invariably, in almost all of our states, there is a large gap between those revenues and costs, so there is a net cost to providing these services and, through this process now, state governments receive a subsidy for providing public transport services. The provision of public transport is of course a very important one, particularly for Australians living in major cities. But it is clearly a policy decision. It is not something that state governments have to provide or must provide; it is a policy decision. By providing particular states that have more urbanised populations with greater subsidies for those services they will be subsidising those services, thereby encouraging state governments to provide more of them and clearly breaching the Commonwealth Grants Commission's principle of policy neutrality.

Putting that particular example aside, I have much greater concern that in the area of mining royalties in particular this principle of policy neutral is being breached on an enormous scale. Once again, both the decision to develop a mining industry itself and the decision to apply a royalty to that mining industry are clearly policy decisions of any government. The resources that WA and Queensland have, yes, are God-given. They are given to us by the Lord and we are lucky to live in a country with many of these resources. Senator Wang and I are lucky to live in states where these resources are quite plentiful. But those resources alone do not give anything to the citizens of those states. Just because you walk above some coal or iron ore it does not make you any wealthier. The only way you can convert those natural resources into some form of wealth and prosperity is to exploit those resources. That exploitation requires money, it requires political will and it requires some social and other costs associated with their development. It is also then the case that the actual royalties that apply and are charged to any production of natural resources is a decision for government. Any decision to go higher or lower will be affected by how much revenue that state can retain. Under the current system, they cannot retain much.

Indeed, the Queensland government submission to the recent Commonwealth Grants Commission assessment found that if Queensland were to increase the rate of royalties on a particular thermal or on coking coal, for example, Queensland would only retain its population share of the increase in revenue. Because the assessment is blind to the revenue raised, Queensland would only receive a share based on the population it accounts for in our Commonwealth, which is about 20 per cent. So if the Queensland government increased royalty rates on coal by 50 per cent and raised a few more billion dollars, it would only retain 20 per cent of that increased revenue. Eighty per cent would go back to the other states.

In WA it is worse, of course, because they are a much smaller proportion of our country. They would only retain 90 per cent of the increased royalties raised. In the Northern Territory, sorry, Senator Scullion, because you only represent one per cent of our population, if the Northern Territory decide to increase a royalty they would retain just one per cent. They would lose 99 per cent of the revenues associated with that increase in royalties. That is all on page 34 of the Queensland government's submission to the Commonwealth Grants Commission. How can that be seen as a policy neutral approach? It clearly is not a policy neutral approach.

In the case of Western Australia, which has received lots of attention, the commission estimates that they raised around $7.2 billion in royalties last financial year—and I should say that that includes payments in lieu for some offshore resources from the Commonwealth. They had $4.6 billion of that taken away, if you like, and redistributed to other states as part of the assessment approach. They lost 63 per cent of the total royalties that were raised in Western Australia mainly, of course, from iron ore. Again, how can that be seen to be policy neutral? How can that be seen to not influence the decisions of state governments?

I said before that there are two decisions: there is the royalty rate and then there is the cost of actually developing a mining industry. Mining does require a fair amount of commitment from governments to get off the ground. It often occurs in very desolate and new areas of our country. There are currently proposals for a mine not too far from where I live, in the Galilee Basin, which is very desolate. There is almost no civilisation for hundreds of kilometres around that proposed mine. That will require a significant investment from the state government in terms of new infrastructure for new areas. Just as would be case if there were a new suburb to rise up in a city or a new area of development in an inner-city area, it will require investment. But, in my view, the Commonwealth Grants Commission at the moment seriously underestimates those costs and does not take into account the net revenues that the state would accrue but more the gross revenues that they would accrue from the mining industry—which, again, breaches its principle of policy neutrality. The Western Australian government estimates that the commission takes into account around three per cent of gross royalty revenues to be factored in as the cost of developing a new mining industry.

I think it is interesting for us to note that Canada—a Federation and a large natural resources country like ourselves—have the same issue where those resources are largely concentrated in their western provinces, and they have to account for an equalisation process for that. Canada have recently, in the last few years, decided that they will provide a 50 per cent discount on royalty revenues before they calculate the redistribution or equalisation process—a 50 per cent discount. That is their estimate—a broad estimate, obviously; and only an estimate—of how much it would cost a state government in net terms to establish a mining industry and what they deserve to have to build the infrastructure required to support an industry which still produces enormous amounts of wealth and net wealth to a state and to a country. We only discount it by around three per cent. Canada are discounting it by 50 per cent.

The Queensland government—and perhaps the Western Australian government as well—put in their submission to the Commonwealth Grants Commission that they should consider the Canadian decision and look at a more generous interpretation of mining costs before it calculates an equalisation process. I asked Mr Spasojevic—and I apologise if I have mispronounced his name—the head of the Commonwealth Grants Commission, at Senate estimates:

Are you familiar with Canada's recent changes?

Mr Spasojevic answered:

No.

I asked:

So you have not looked at that at all?

Mr Spasojevic answered:

No.

I asked:

Why not?

And he said:

Why should I have?

One reason he should have is that it was in the Queensland government's submission to his organisation for their assessment process.

The Commonwealth Grants Commission has made an assessment. They are very complex issues. I certainly appreciate that, and I can reasonably appreciate that Australians will come to different views about what the final conclusions would be. But what I cannot appreciate is that the Commonwealth Grants Commission is apparently blind to a very important part of the Queensland government's submission—probably the most important part of their submission—and I am informed that it was in the Western Australian government's submission as well. Two major states raised in their submissions this massive issue in terms of the redistribution process, and the Commonwealth Grants Commission is blind to it, has not looked at it, has not engaged with it and has not even bothered to look at what Canada is doing and what it has changed.

This was pointed out to the Commonwealth Grants Commission by their stakeholders. They only consult with state governments; they do not consult with the wider community. They only have to consult with eight states and territories. It would be pretty simple, but they do not even take the time, seemingly, to get across the detail of their submissions. That is very concerning to me. It is particularly concerning to me given that the next decision that the Commonwealth Grants Commission will be confronted with in this space is how they treats the coal seam gas industry in Queensland.

Once again, Queensland is lucky to have coal seam gas resources in its state, but other states are lucky too. New South Wales has substantial resources, as does Victoria. In both of those states there has not been substantial production; indeed, in Victoria, there is a moratorium on coal seam gas production. But Queensland has made the decision to develop its industry. It has been a difficult decision. It has created a certain amount of political angst in Queensland, and I must say as a representative of some people it certainly has not gone smoothly for many farmers and landowners. But the decision has been made. It has been made because Queensland wanted to generate the jobs, the industry and, of course, the royalty revenue from coal seam gas. Thanks to this industry, the royalty revenue is expected to generate around $800 million over the next decade or so.

The Commonwealth Grants Commission will have a look at this and, going on what they are doing to Western Australia—who will lost 63 per cent of their iron ore revenue—I am concerned. What if we were to lose 50 per cent to 60 per cent of the $800 million to other states? If that were the case, we would therefore be subsidising the states of New South Wales and Victoria, who have not made the decision to develop their industry, as is their right. They have decided to forgo the opportunity to exploit their God given resources and forgo the political pain and other costs with developing those resources, but they will be bailed out by a state that has made that decision and has created thousands of jobs in Queensland and an enormous industry across the state and our nation.

I do not think that is particularly fair. But, more importantly, I certainly do not think it is efficient and I certainly do not think it is what we need to create a productive economy or to create the right environment for state governments to ensure they are making the decisions that promote economic growth in our country—decisions which promote jobs and which promote higher incomes and prosperity for us all.

The current system is failing us; it is failing us as a nation. It needs to change. I think the Commonwealth Grants Commission need a kick up the backside because clearly they are not doing their job at the moment. Something needs to change here.

Once again, I commend Senator Wang for bringing this forward. It is a conversation that we need to continue to have as a nation.