WA Has a Valid Claim on More GST Revenue

You learn early as a parent that young children have only a concept of themselves, every toy is “mine”. 

It is a phenomenon that the Premiers attending last week’s Council of Australian Governments meeting would be well-familiar with. The selfishness and parochial bickering of state Premiers risks doing serious harm to our national fabric.

The major sticking point last week was the distribution of the GST. The distribution of the GST is meant to be “policy neutral”. States should not be able to affect their distribution of the GST simply by changing their policy settings. It’s a nice theory but hard to achieve in practice.

Reading Commonwealth Grants Commission reports is to enter into a dense, almost-Rawlsian, philosophical world. The “veil of ignorance” descends: what if we did not know whether we were a rich Western Australian or a poor Tasmanian? What would be the fairest rule to divide wealth?

Would we seriously design the scheme that the Commission ends up with?

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.

This year changes to methodologies changed the direction of payments by $640 million. The method changes actually reduced payments to Western Australia because the Commission decided to use specific royalty calculations for different minerals rather than a grouped approach.

Queensland and Western Australia have long argued that there are two main flaws with the approach as it relates to mining.

First, coal and iron ore royalties are assessed separately from many other royalties. Because Western Australia and Queensland dominate these two products, any changes they make to their royalties can have a large impact on their GST share. For example, if Queensland were to increase its coal royalty rate it would lose somewhere between 30 to 50 per cent of the increased revenue. So much for policy neutrality.

Second, the GST calculations fail to properly factor in the costs of developing a mining or gas sector. Queensland is the only state to have had the guts to develop a CSG industry. It’s been politically difficult but the decision is meant to deliver $850 million in royalties every year.

Under the current formula, however, Queensland stands to lose around half of this amount. What incentive then is there for a state to develop its gas industry? New South Wales has just as good CSG resources as Queensland but it will get bailed out thanks to a subsidy from Queensland CSG royalties.

This is not a “veil of ignorance” it is simply plain ignorance.

I live in central Queensland. The CSG industry has brought many jobs and investment but it has also brought housing stress, road damage and inflated costs for local governments.

Western Australia and Queensland have been arguing for years that these costs need to be factored in when splitting up the GST. In 2005, Canada adopted a 50 per cent discount to mining royalties in response to similar concerns in their federal division of revenues.

The current approach is in effect a mining tax by stealth and reduces incentives for states to develop their own industries. This makes us poorer as a nation with fewer good job opportunities.

Tony Abbott has pointed out that we have 16 months until another state or federal election in Australia: a unique opportunity to put political squabbling aside and come together in the national interest. He has invited Premiers to come together for a “Camp David” style retreat in July to work matters out. For our interests, let’s hope that the Premiers use the next few months to grow up.

Originally published on On Line Opinion 22 April 2015.  

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