04/03/2010 - 00:00

Fiscal equalisation or fiscal favouring

04/03/2010 - 00:00

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No Australian is exempt from paying their 10 per cent tax on goods and services and no state generates more good and services tax revenue than Western Australia.

No Australian is exempt from paying their 10 per cent tax on goods and services and no state generates more good and services tax revenue than Western Australia.

It is no surprise then that the Commonwealth Grants Commission’s (CGC) recent recommendations for the allocation of GST revenue for 2010-2011 have ruffled some Western Australian feathers.

The CGC, an independent commission charged with the job of advising the federal government on GST revenue distribution, recently altered the assessment criteria for the allocation of GST revenues in Australia.

Those changes are set to hurt WA’s hip pocket should federal Treasurer Wayne Swan adopt the recommendations at a meeting scheduled in Canberra with his state counterparts later this month.

The CGC has suggested a cut in WA’s share of the GST revenue pool by $222.9 million this year, lowering the state’s share from 8.1 per cent to 7.1 per cent.

Of the $45 billion of available revenue, WA will receive just $3.19 billion, down from $3.413 billion last year.

The main aim of GST revenue distribution, and the purported reason for the cut to WA’s allocation, is to achieve ‘horizontal fiscal equalisation’.

Simply put, the commission aims to put all states on the same economic level giving them equal opportunity to provide services of the same standard whilst enabling them to acquire the necessary infrastructure.

Assessment criteria or ‘revenue sharing relativities’ are used to determine how GST revenue should be distributed between the states and territories.

It would be impossible for the CGC to distribute the GST revenue without first making some assumptions.

One is that states are considered to have the same fiscal capacity if they have the same net financial worth.

Another is that each state makes the same effort to raise its own revenue and operates with equal efficiency.

In September last year, amid consultation with the CGC, WA Treasurer Troy Buswell expressed concern that changes to the assessment criteria would distort the distribution of GST revenue.

The biggest change to the review process is the time frames – the CGC has proposed that a review of the assessment criteria is done every three years as opposed to the current system of every five.

WA Treasury projections showed that changing the data period to three years will reduce WA’s GST grants by about $600 million and $700 million between 2010 and 2015.

State treasurers last year expressed concern that by punishing states that perform well by cutting their GST allocation and rewarding those states that underperform by increasing their funding, Canberra is giving states the idea they can ride on the coat tails of other state economies, not having to develop their own revenue capacity.

For WA this is of particular concern given the state’s recent economic performance in boosting Australia’s recovery from the global financial crisis.

The CGC report explains that the difference in GST revenue distribution on a per capita basis is necessitated by the circumstantial differences between residents in each state.

Circumstances such as differences in per capita revenue and the cost of providing any given level of service can affect how much GST revenue a state is allocated.

States receive less GST per capita if their costs of providing services are low or they are better able to raise their own capital.

The report highlighted the growth of WA’s iron ore royalties, which have strengthened its ability to raise revenue and, in turn, reduced the state’s recommended GST share.

WA’s high revenue raising capacity is offset by the state’s higher than average service delivery expenses, infrastructure and net lending requirements and below average Commonwealth payments in health care and transport.

CGC chairman Alan Morris said because of the strength of WA’s revenues, the state would now share the cost of raising the fiscal capacities of the four weaker states.

Under the CGC’s recommendations WA will receive the lowest level of GST per capita at 68 per cent of the average compared to the highest level for the Northern Territory at 5.03 times the average.

A backlash inevitably arose after the CGC’s report with Mr Buswell, Premier Colin Barnett, opposition spokesperson for state development Mark McGowan and the Chamber of Commerce and Industry WA all expressing concern for the outcomes of CGC’s recommendations.

Mr McGowan pointed the finger, saying “the state’s financial position is under threat and the Barnett government must be held accountable.”

“Like Queensland, WA has a rapidly growing population and enormous infrastructure demands. Treasurer Buswell must now explain why our state has missed out while Queensland has secured additional funding,” Mr McGowan said, calling for an explanation from Mr Buswell.

While the Labor Party has been playing the blame game the premier has been lamenting the impact the recommendations will have on WA, should they go ahead.

“The severe cut places pressure on the state’s finances and, as a result, our capacity to deliver services in areas like health, education and other social services,” Mr Barnett said last week.

CCI has remained impartial, releasing a statement focused not on who to blame but the disappointment in lost opportunities for WA.

“As the economy gears up for the next wave of growth and prosperity, now is the time for further investment in infrastructure,” the statement said.

“It needs to be recognised that what's good for WA, is good for the nation.”

The CGC acknowledged in its report that actual GST revenue allocation will vary from the figures it recommended, to be decided upon at the meeting later this month.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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