07/04/2011 - 00:00

State grants review a good start

07/04/2011 - 00:00

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A review into the distribution of state grants is encouraging but it could end up like reviews of the mining tax and carbon tax.

PREMIER Colin Barnett’s campaign to improve the distribution of goods and service tax (GST) revenue to the states seems to have paid dividends.

Last week, Prime Minister Julia Gillard announced a major review of GST grants and in the process acknowledged Mr Barnett’s criticism of the current system.

The review is undoubtedly a win for Western Australia, but there is no certainty it will deliver a better outcome for the state.

The shortcomings of the current system, administered by the Grants Commission in Canberra, are apparent for all to see.

In particular, WA has suffered a sharp decline in its share of GST grants as its self-sourced revenue has increased, and Mr Barnett has rightly highlighted the problem.

“We are not prepared to cop a return of just 68 cents for every GST dollar we pay, let alone the scenario we face in 2014-15 when we are forecast to receive less than 40 cents back for every dollar,” he said last week.

The amount of money coming back to WA is just one part of the problem; the lack of predictability is another.

State Treasury had been anticipating that WA’s share of GST grants would fall in 2011-12; under the planned review it will increase to 72 cents in the dollar.

Announcing the review in Perth, Ms Gillard said there were fundamental structural problems with the current system.

“Instead of states facing penalties for economic growth and rewards for economic underperformance, the GST distribution process should encourage economic reform and better delivery of services,” she said.

Without naming WA, the prime minister also acknowledged the specific issues affecting this state.

“We recognise growth in the mining sector is increasing the discrepancy in the amounts of revenue raised by states and territories, as well as making it more difficult to anticipate GST distribution from one year to the next,” Ms Gillard said.

However it wasn’t just WA the PM sought to appease.

She said the government would ensure that smaller states and territories – Tasmania, the Northern Territory and South Australia, which get extra money under the current system – continue to receive a “fair share” of GST revenue.

And she added that states with larger economies – such as NSW and Victoria – would not be “unfairly penalised for success”.

In other words, she wants to keep everyone happy. That just isn’t realistic.

The lack of reality was highlighted by Ms Gillard’s claim that the review will lead to a “simpler, fairer, more predictable and more efficient” system.

Wouldn’t it be nice if all of those goals could be met simultaneously. Clearly they can’t. In particular, there is an inevitable tension between promoting fairness and efficiency.

It will be some time before the review, led by former NSW premier Nick Greiner, former Victorian premier John Brumby and SA business executive Bruce Carter, bears fruit.

They will provide a final report by September 2012, which means the distribution of GST revenue in 2011-12 and 2012-13 will not be affected.

Having welcomed the review, Mr Barnett will have to bite his tongue when WA gets a lower share of GST grants in 2012-13.

In the interim, other states will be mounting their counter arguments, no doubt referring to the fact that WA has been a beneficiary of the Grants Commission process for most of the post-war years.

That is countered by WA’s willingness to use its financial strength to continue helping weaker states; WA simply wants more certainty and a floor of 75 cents in the dollar.

Despite this, there is a distinct lack of sympathy on the east coast for WA’s position. This was highlighted by Financial Review columnist Alan Mitchell, who said “Julia Gillard could hardly have found a less deserving case for her concern than WA”.

“The WA and Queensland governments are like pensioners who have struck it rich and are whingeing about the loss of their welfare payments,” he wrote.

Rhetorical flourishes aside, Mr Mitchell also questioned the PM’s critique of the current system, saying differences in efficiency across the states play no role in the current process.

The launch of this review is clearly good news for WA; its announcement in Perth signals the federal government’s awareness of WA’s perspective.

However, could WA end up with a result like the mining tax or the carbon tax? Both emerged from federal government reviews, and are improvements on their predecessors, but neither can be considered a good policy for WA.

 

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