The review of the GST grants system should be accelerated if Canberra is serious about delivering genuine reform.
PRESENTING the state budget last week, Treasurer Christian Porter said the distribution of GST grants was the single biggest issue he had to deal with.
Based on updated WA Treasury estimates, he said the state could end up getting back just 33 cents for every dollar of GST paid.
This possibility arises because, under the complex formula for distributing GST grants, WA is judged to have high revenue raising capacity in its own right.
As if to confirm this, Mr Porter also announced a lift in iron ore royalties, to bring in an extra $1.9 billion over the next four years.
This move brought a swift response from Canberra, with Prime Minister Julia Gillard, Treasurer Wayne Swan and Resources Minister Martin Ferguson all lining up to say the premier had kicked an own goal, and was “playing politics with the mining boom”.
They pointed out that the Grants Commission, using its existing formula, would revise-up its estimate of WA’s revenue raising capacity, resulting in a lower GST allocation to the state.
More pointedly, they were upset because the royalties move highlighted one of the major issues with the planned Minerals Resource Rent Tax. Specifically, the Commonwealth will need to provide a tax credit to companies liable to pay both iron ore royalties and the MRRT.
The result, Mr Swan says, will be lower infrastructure grants for WA.
Premier Colin Barnett insisted WA was simply exercising its long-standing right to determine mineral royalties, which he describes as the fee the state levies mining companies for exploiting a finite resource.
He said WA was just removing the concessional rate applying to iron ore ‘fines’, which have gone from being a low-value minor product to the point where they account for 60 per cent of Pilbara output.
“Wayne Swan has made some extraordinary allegations that I’m playing political games,” Mr Barnett said last Friday.
“I can tell you ... the implications for the MRRT were not a factor considered at any stage by the state government, it is not relevant to us.”
Mr Barnett may be correct when he says that, but he should have known the state move would cause ructions in Canberra.
Judging by comments he made to journalists on Friday, Mr Barnett seems to prefer the certainty of state royalties compared to the uncertainty surrounding GST grants and infrastructure grants. The challenge that still lies ahead of him is to negotiate a better deal on GST grants.
The system for allocating GST grants is currently under review, by a panel that comprises former NSW Liberal premier Nick Greiner, former Victorian Labor premier John Brumby, and SA business executive Bruce Carter.
They will provide a final report by September 2012, which means we have a long wait until any changes are implemented.
Given the escalating stakes at play, surely the review can be accelerated.
All parties to the debate seem to agree the current system is not working well; that is why the prime minister set up the review in the first place.
A new system is needed so that the current problem can be avoided.
It is also needed so that each state can plan ahead with some certainty, instead of being left with the possibility of getting back as little as 33 cents in the dollar.
As part of the current debate, Mr Swan and his federal colleagues have repeated the view that the profits-based MRRT is better than production-based royalties.
This line of argument would be more convincing if the industry accepted the MRRT was an efficiently constructed tax that only hit highly profitable miners. That is not the case.
And it would also be more convincing if the states were offered some assurance that they would retain effective control of their own finances.
That, also, is not the case. There is a long-term move in Australia, going back to the 1970s, to lift Canberra’s influence over state finances.
It’s a trend that has never been accepted by Western Australians, and that will not change.