Ruth Forrest says long-awaited new rules for the carve-up of tax revenue will fail

THE possible benefits that may flow to Tasmania from the new rules for dividing GST revenue between states suggested, at first glance, a win for the state and a win for a rules-based system that, if nothing else, gives future certainty.

But the crass insult from having large amounts of pork being thrown at electors of Braddon from the Magic Barrel suggest to me that the problems of seeking fair and efficient ways to distribute Australian government funds to states and territories will always rank a distant second to the political needs of whatever party has control of the treasury purse.

Sadly, we have wasted yet another opportunity to give the community a much better understanding of the economic cornerstone of our federal system, the way federal and state governments raise and spend money on our behalf.

The federal government raises more than it needs for its own purposes. The reverse is true of the states. They spend much more than they raise themselves. If you want to use jargon, there’s a vertical fiscal imbalance.

When the federal government distributes funds to the states it does so in such a way to ensure each state is able to deliver similar services as every other state in the federation. To use jargon, it seeks to achieve horizontal fiscal equalisation.

That’s what the recent Productivity Commission review, the review which preceded the recent federal government GST carve-up decision, was all about.

The review was not just about how to divide GST. It was about how to achieve equalisation. All grants were considered. As much is distributed as specific purpose grants among states as is distributed as general purpose grants from the GST pool. A specific purpose grant is, as its name indicates, a grant that must be spent as specified, whereas general purpose grants can be spent at the discretion of each state.

We’ve all heard how WA’s share of the GST pool has been as low as 30 per cent of what it would have received had its distribution been on a per capita basis.

While that’s true it’s also a little misleading. 

When all grants are considered WA’s per capita entitlement was 60 per cent. It received 100 per cent of its per capita entitlement to specific purpose grants and 30 per cent from the GST pool — together that meant it received its overall 60 per cent entitlement.

Tasmania on the other hand was assessed as requiring 147 per cent of our per capita entitlement. We get 100 per cent, just like WA, from specific purpose

grants and about 170 per cent from the GST pool, making 147 per cent, or thereabouts, overall.

The GST carve-up is the balancing amount after the specific purpose grants are considered. The carve-up is not done in isolation.

Paradoxically, if all states received extra specific purpose grants on an equal per capita basis, Tasmania would get a larger balancing amount from the GST pool.

Tasmania gets 170 per cent from the GST pool, in part to make up for the fact it only gets about 100 per cent of its per capita entitlement from specific purpose grants. More specific grants to Tasmania, if distributed on an equal per capita basis, which has been the past pattern, will mean a greater share from the GST pool. However reduced specific purpose grants across all states may well see Tasmania’s share of the GST pool fall, which would further compound the hardship.

Most specific purpose grants are often clawed back via reduced GST so we should not get too excited about promises made in the heat of election battle.

Some specific purpose grants are partly quarantined from the horizontal fiscal equalisation calculation. Roads for instance. Even so, we should not get too mesmerised by promised funding to fix roads in Braddon because future GST reductions may adversely affect the rest of the state more than improved roads may benefit Braddon.

Some grants are completely quarantined from the equalisation, the most memorable being the forestry IGA that sent almost $400 million to the forestry industry without affecting our GST. Had that occurred, the effects on the state would have been devastating.

The federal government’s own purpose expenditure can directly benefit a state and bypass the equalisation process. One of the Braddon election carrots is a promise of 50 extra Centrelink jobs. That is unlikely to be considered in any  equalisation calculation. This is quite different from the promise of extra funds for a mental health facility in Burnie, which will surely affect our GST share.

The old horizontal fiscal equalisation system was tolerated by the major parties because they knew they could fund pet projects and avoid equalisation scrutiny.

The new set of rules is designed to bring smaller states up to the NSW/ Victoria level thereby allowing a state like WA to benefit more from its mineral riches rather than sharing them with the rest of us as strict adherence to a horizontal fiscal equalisation regimen would require.

It is a political solution that does nothing to encourage states, especially larger ones, to make any reforms to their revenue raising because the stark reality is that any gains will have to be shared with other states. State Treasurers always talk about making their states the most competitive in the federation. The reality is that the current system and its recently announced successor do nothing to encourage reform. They both exhibit high levels of built-in inertia.

If ever we needed confirmation that the horizontal fiscal equalisation system was open to abuse and intervention for political purposes, the Federal Government’s decisions about the new rules left no doubt.

We have wasted a golden opportunity to have a sensible discussion about our federation.

The drawn-out review process was largely done behind closed doors. The body politic was largely ignored.

The changes made are cosmetic. There will always be ways around the rules if necessary. It will be business as usual. Just like the shabby pork-barrelling in Braddon.

Mercury 19 July, 2018