Since Federation, the States have blamed the Commonwealth for their every budgetary woe. Dr Gallop is at it again, blaming the Commonwealth's stinginess for the recent rises in State taxes.
Is there anything to the Premier's recent claim or is it just another attempted ball pass?
As with all things related to money and taxes, the answer is complicated, but it is mostly "no". While the system by which Commonwealth grants are allocated to the States is rigged against Western Australia and other wealthy States, the WA Government is not being starved of revenue by the Commonwealth.
In the last State budget, the Government announced large increases in stamp duties on house conveyancing and insurance policies over the next four years. These came on top of tax increases in each of the Gallop Government's two previous budgets. These tax increases under the Gallop Government have increased tax receipts by around $400 million -- equivalent to 11 per cent of the State's total tax receipts -- and have pushed WA into the ranks of the higher taxing States.
The Government's official excuse for the tax hikes is the "projected low growth in Commonwealth grants to Western Australia (0.9% in 2003-04) which make up 40 per cent of Western Australia's revenue".
This however gives a distorted indication of the Commonwealth's contribution to the State's revenue. The Commonwealth provides three basic types of grants; general purpose grants, tied grants and competition policy payments.
General purpose grants, which make up 60 per cent of the Commonwealth Grants to the States, are given with no strings attached and can be used for any purpose. These grants are expected to increase by 3.3 per cent in 2003-04 in WA. While the level of growth is not high, it at least keeps up with inflation, population growth and growth in the Commonwealth's revenue. Additional grants are made to the States for on-passing to local government, universities and others agencies.
The tied grants, as the name implies, are tied to specific purposes or transactions. While tied grants in aggregate are forecast to decline in 2003-2004 by around 1 per cent, these cuts are not of the Commonwealth's making, nor necessarily to the State's detriment. The main reason for the decline in tied grants is the forecast reduction in royalties collected from the North West Shelf Project by the Commonwealth and reimbursed in full to the States. These royalties are expected to decline by $100 million as a result of the higher Aussie dollar, not Commonwealth parsimony. There are also a range of projects funded by tied grants, such as the additional First Home Owners Scheme, that have been completed and for which no more spending is required by the States.
Indeed, the Commonwealth has actually been quite generous with the large grants tied to the WA Government's own key priority areas. Grants for public schools, public hospitals, and home and community care are scheduled to increase by 5.8 per cent, 5.4 per cent and 8.8 per cent respectively.
Competition policy payments are scheduled to remain at last year's level as long as the State Government meets agreed reform benchmarks. However, the Gallop Government's failure to do so to date, particularly in respect of trading hours, puts at risk these payments valued at $58.5 million.
While the Commonwealth is not duding the States, Western Australian does have a valid complaint regarding the sharing of Commonwealth funding amongst the States. Untied grants, which have grown as a share of total State revenue -- as result of the GST and the removal of seven State taxes -- are allocated on a basis akin to welfare. That is, the grants are allocated according to need and disability rather than growth and revenue-raising capacity. As a result, slow-growing States such as Tasmania and South Australia get a larger and growing share of the Commonwealth pie, and wealthy and fast-growing States such as WA and Victoria get less. Tasmania, for example, gets $1.75 dollars in grants for each $1 its citizens pay in Commonwealth taxes. In contrast, WA gets back only 98 cents for each $1 paid to the Commonwealth. While WA's disadvantage is not large now, it is getting worse.
The problem is not just one of fairness, it also affects growth. The system compensates Tasmania and other States and Territories for actions that undermine growth. On the other hand, it directs money away from States such as WA, which are growing and which need funds to invest in the infrastructure that underpins that growth.
The system really has outlived its usefulness and needs to be changed. The problem is getting agreement on a replacement. The Victorian, NSW and WA Governments (the States that lose from the system) recently funded an inquiry into the system in search of reform. This, however, achieved little as the beneficiary States refused to co-operate and the Commonwealth Government decided to leave the issue up to the States.
The task is to get Commonwealth leadership on the issue. I suspect this will only come when the States agree to critically examine not just the sharing of the pie amongst themselves, but also how to ensure greater transparency and value for money for the funds they do receive from the Commonwealth.
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