For proof of how our federal system is failing, look no further than the election campaign under way in Tasmania. Opinion polls indicate 17 per cent of voters plan to support the anti-growth Greens party. The Greens are committed to stopping the planned $1 billion pulp mill, stopping logging of old-growth forests, banning agricultural biotechnology, phasing out electricity from non-renewable sources, expanding the state's already large stock of national parks, reducing areas allowed for fishing, and restricting large developments, particularly in coastal areas.
If the Greens got anywhere near the share of votes now indicated in the polls they would help form a minority government. And they have promised to push their views to the hilt, including blocking supply.
At the same time both major parties, while committed to private-sector growth, are offering the seductive lure of a large spending splurge without higher taxes or additional borrowing.
Why would so many Tasmanians risk economic destitution? The state already has the country's highest unemployment, lowest rate of job creation, worst rate of poverty and the smallest percentage of young people completing secondary school. Why would Tasmanians, who have limited capacity to pay tax and have recently experienced the cost of previous unfunded spending, fall for the lure of endless government largesse?
In short, it is our federal system, which compensates states for anti-growth action with higher grants. It compensates for policies that reduce the private sector with a larger public sector. And with the introduction of the GST it has pumped billions into the Tasmanian government's coffers, allowing it to spend at little cost to Tasmanians and to generate a false sense of security.
Under our unique system of commonwealth grants to the states, administered by the Commonwealth Grants Commission, funds are allocated to states and territories so as to allow them to provide the same set and levels of services irrespective of their ability to raise revenue, or of the cost of providing these services.
Tasmania, with its smaller private sector and higher levels of poverty and welfare dependency, receives substantially more than all other states. The CGC report released last week recommends that Tasmania should next year receive $3400 per person in GST grants -- or a subsidy in excess of $1500 per person from mainland taxpayers to the Tasmanian government.
While the CGC tries to make the system policy-neutral, it fails to do so. If the Greens get their way and stop industrial development, as they promise and as they have done in the past, Tasmania will eventually be compensated, albeit only in part, with higher grants to make up for these lost opportunities and higher welfare costs.
The distortions of the system are dynamic and cumulative. The system has been in place for decades and its effects have become entrenched. Tasmanians in search of prosperity and opportunities have left the state in numbers, and have been increasingly replaced by people wedded to the state and a low-cost, albeit poorer, lifestyle. This has diminished the constituency for growth and provided scope for the Greens.
The GST has augmented this distortion greatly. When the GST was introduced it significantly increased the volume of funds pumped to the states through the CGC's system, resulting in a windfall for the Tasmanian government. Since its introduction GST receipts have grown at 9 per cent per year, delivering windfalls to the states.
The Tasmanian government has, at least in the last few years, done what all states have done with their GST windfalls -- spend, particularly on more and higher-paid public servants. Over the past two years spending on public service salaries in Tasmania has growing by a massive 23 per cent and much more is being promised in the election.
This massive transfer of wealth has boosted the Tasmanian economy. It is not only a gross misallocation of national wealth, but it has badly distorted the Tasmanian economy and its body politic. Sooner rather than later the flow will wane. When that time comes it will be intriguing to see what the Greens' policy on the pain of economic and political adjustment will be.
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