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Mathias Cormann’s GST joke falls flat – Judith Sloan

Cormann shouldn’t think that West Australians have put away their baseball bats

  • The Australian
  • March 14, 2017

Malcolm Turnbull would say: “It was a West Australian state election; it was fought on state issues. It was decided on state issues and the result was pretty much as had been expected for quite some time.”

However, the Prime Minister’s unhelpful intervention last year didn’t help. He travelled to Western Australia promising that he would fix the GST distribution issue. He left telling disgruntled Sandgropers that more time was needed before their state could receive any more revenue.

That sort of mealy-mouthed non-response was reinforced by Finance Minister Mathias Cormann telling us on the day after the election: “We have to be realistic on what a national government can do in relation to these sorts of issues. (Can he be serious?)

“The timetable is determined by what happens with the GST sharing arrangements moving forward. There is a flow-through effect, principally from the prices for iron ore and the royalty revenue that is generated on the back of iron ore exports.

“That will play out over the next few years and there is an expectation, in the not too distant future, WA’s share of the GST will start increasing again and, if and when that happens, there are certain options available where the floor can be established without actually taking money away from any other state.”

That pitiful explanation surely would have been one reason many West Australians reached for their baseball bats. But Cormann then added: “That is the way it should happen.”

It’s not just his political tin ear that should worry everyone. It is his complete lack of understanding of the damaging economic consequences of the way GST revenue is distributed.

Just to remind you, Western Australia receives only 30c of every dollar of GST revenue raised in the state. Every West Australian hands over $1736 to the other states and territories. By contrast, every South Australian receives a net $1052 and every Tasmanian receives $1953. Every Northern Territorian receives $10,734 while, wait for it, every ACT resident receives $400. That’s right — the place in the country with the highest incomes and the lowest unemployment receives more money than it hands over.

There is no doubt our system of horizontal fiscal equalisation is broken and has been for some time. It is the most extreme version of the principle implemented in any federation in the world. But all that the risible Finance Minister can say is: “That is the way that it should happen.”

Let’s just run through some of the problems with the system whereby the GST revenue is distributed as run by the arcane Commonwealth Grants Commission, a body that deserves abolition.

• The CGC consistently overstates the real tax bases of the donor states by failing to recognise that their high wages are offset by high living costs.

• Instead of thinking about an overall tax base (and capacity to pay) that the states and territories can tap into, the CGC considers each tax separately. There is no consideration of the impact that levying high taxes on one activity has on the scope to levy taxes on other activities.

• The CGC treats mining royalty income as the equivalent of other state recurrent tax income when clearly royalty income is highly dependent on variable, uncontrollable commodity prices.

• The CGC fails to take into account gambling taxes, so states that chose to limit gambling, such as Western Australia, are disadvantaged. This is just wrong.

At its heart, the system disadvantages states such as Western Australia that go to all the trouble of facilitating a mining boom, for example, but see 70 per cent of the proceeds handed to other states that didn’t lift a finger. So states such as South Australia and Tasmania, which deliberately run anti-business strategies — such as ridiculous renewable energy targets — benefit financially notwithstanding.

The idea this system can continue until Western Australia’ s GST share begins to rise — with the recent resurgence in commodity prices, this will not occur before 2020-21 at the earliest — is political nonsense. No doubt, premier-elect Mark McGowan will have a thing or two to say on the matter.

Even if West Australians were to have the patience of Job, the solution offered by Cormann — just wait — is unworkable. What he thinks can happen is that some sort of collar-and-cap can be imposed on GST relativities — say 0.75 to 1.25 — when the West Australian relativity falls within this range. The trouble with this “solution” is what happens to the Northern Territory because its relativity is above 5 and has been for years. Such a collar-and-cap would involve enormous redistribution away from the Territory.

Here’s a hint, Mathias: the system of GST distribution is broken, beyond repair. Busted. The idea that some states can be compensated to deliver the same standard of services to their citizens but are not required to do so must surely make him realise some political courage is required to fix the system now.

He should not think that West Australians have put away their baseball bats. In all likelihood, those bats will be within easy reach at the next federal election.

Original article here

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