OPINION: The perverse incentives created by the application of horizontal fiscal equalisation emerged clearly during a recent Productivity Commission inquiry.
I am feeling a bit self-righteous this month. Having analysed much of the debate around the Productivity Commission’s inquiry into horizontal fiscal equalisation, two key messages (from very different players) are echoing views I have expressed many times in the pages of this publication.
One is how Treasurer Scott Morrison poked the bear on states that have locked their gas resources away from exploitation; the other is how various voices from around the country are understanding that this gas issue is just one of the many perverse incentives created by the way our Commonwealth Grants Commission applies HFE, the mechanism by which the GST is distributed to the states.
Like all good theories, its practical implementation leaves much to be desired.
There has been much bleating about Western Australia failing to get its fair share without a suitable explanation of why.
Personally, I think there is little chance of bashing the GST back into shape as though we are in some form of 19th century blacksmith’s workshop.
But I do believe a more subtle presentation of the facts will provide the groundwork for change.
For a long time I have highlighted the perversity of this system, including the fact that some actions are penalised when others are not.
As I have stated previously, and it appears Mr Morrison agrees, it is simply wrong to have a situation where Western Australia’s mining royalties are weighed against the state when it comes to divvying up the GST, yet states such as Victoria face no penalty for leaving their gas in the ground.
It is a view former Nationals WA leader Brendon Grylls expressed earlier this year. Clearly elections and polls have a way of focusing politicians’ minds on this.
Because states’ gambling revenue is not considered when it comes to calculating the GST, WA’s choice to limit gambling for the social good has a clear financial cost.
In contrast, Victoria’s decision to suppress gas development brings no similar penalty to that state.
Why is one ideological position penalised by the grants commission when another is ignored?
So while WA pays a GST price for forgoing gambling revenue, Victoria is rewarded with a greater slice of GST at a time when its policies are pushing up energy costs for its own citizens.
How can the GST system reward such behaviour? As I have said before, every state has the right to make such choices, but WA is being punished for its decision to forgo gambling monies, while Victoria is not for taking a similar decision on gas.
And herein lies the biggest problem with the GST system. Apart from the exploitation of resources, which seem oddly to fall outside the remit of equalisation, the system in practice only incentivises states to increase taxes where they have the opportunity to apply them.
As it is with gambling, so too it is with payroll tax, royalties on resources that are being exploited, stamp duty … the list goes on. In each case, the average is deemed to be collected by the states on the possible tax base, even if it isn’t actually collected. The GST is distributed on that basis, after calculating what the states collect themselves.
That means a state that has high taxes has no incentive to lower them. High taxes are dropped to the theoretical mean, providing a windfall gain for those states with the top bracket and double loss for those at the bottom (both taxes and GST forgone).
As the Chamber of Minerals and Energy of Western Australia pointed out in its submission, the perversity of this equalisation was writ large during the mining boom.
As WA earned more royalties, its slice of the GST was reduced and redistributed to other states. The poorest-performing states got the most per capita.
So instead of a rich state drawing people to it with the opportunity to reap rewards, the money was instead redirected to other places where economic issues were greatest – incentivising people to stay put.
“By delivering equitable government service delivery in every state, regardless of local economy and workforce participation, the HFE policy provides no incentive for people to move to areas of economic growth or for governments to enact policies to attract investment and encourage growth,” CMEWA said.
I could go a step further. With immigration being a national issue, the very people who are paid to stay put can vote against the only other option for a state like WA – allowing foreigners in to fill the jobs interstate residents are being paid not to take.