This week marks the 10th anniversary of the GST, however there does not seem to be any congratulatory messages from the states.
It may be a statement of the obvious that nobody would want to be seen celebrating such an occasion, such is the political odium surrounding taxation. Yet the introduction of the GST was greeted with great fanfare by premiers and chief ministers eager to gain access to more revenue.
Even Labor premiers at the time, although opposing the federal Coalition's GST in principle, signed an agreement giving their states GST revenue in exchange for abolishing a host of inefficient state taxes.
At the final Premiers' Conference in 1999, former prime minister John Howard promised that "for the first time the states will have enough money to fund all the services that they want to fund".
Despite a temporary reduction in GST revenue due to the global financial crisis, proceeds from the tax have surged from $24.4 billion in 2000-01 to $44.5 billion in 2009-10.
This equates to an average annual growth rate of 7 per cent, exceeding state tax growth of 5.8 per cent.
By comparison, payroll tax, transferred by John Gorton to the states in 1971, was estimated to have generated over $16 billion in revenue last financial year.
Financial institutions duty and debits tax, handed over by Bob Hawke, were abolished as part of the GST deal. If they still existed, they may have raised about $3 billion in 2009-10.
It was not only suggested in the past by the Commonwealth that the states had access to a growth tax, but that the GST was a bona-fide state tax. Treasury even went so far as to stop publishing estimates of vertical fiscal imbalance for a number of years, on the basis that the misalignment of federal and state spending and revenue had finally been resolved by the GST revenue grants.
However, the states are barred from directly accessing the GST tax base by successive High Court judgments, and GST rates cannot be adjusted by an individual jurisdiction.
Even though the abolition of some transaction-based state taxes had a positive effect on economic efficiency, the GST aggravated the perverse incentives surrounding the Commonwealth keeping the fiscal purse.
As foreshadowed by former prime minister Alfred Deakin as early as 1902, the states are firmly entrenched in a position of dependence that has "left them legally free, but financially bound to the chariot wheels of the Commonwealth".
It has been long established in the fiscal federalism literature that an extensive fiscal imbalance across governments blurs political accountability to the electorate. A manifestation of this is the intergovernmental "blame game", a much despised aspect of Australian politics for average voters.
Significantly, the reliance of the states on Commonwealth funding also leaves state constitutional responsibilities prone to capture by federal politicians eager to extend their policy influence. This has been illustrated in no uncertain terms by the Gillard Government's move to exert far greater federal involvement in public hospital governance and funding, which hinges on the clawback of 30 per cent of GST revenues that would otherwise flow freely to the states.
With the key problem of centralised state bureaucracies presiding over a hospital system that heavily restricts access to services left unresolved, the door is ajar for additional future stipulations by the Commonwealth as to how states must expend GST revenues.
It would be misleading to characterise the GST as nothing more than a Trojan horse storming the citadel of state government policy. Indeed, the GST changes coincided with the election of new state governments eager to overcome the alleged spending "neglect" of their predecessors.
State general government expenditure increased from $99.9 billion in 2000-01, the first full year of the GST, to an estimated $187.4 billion in 2009-10.
Instead of a transformative improvement in service delivery outcomes under the GST, such as in education, health or transport, much of the extra money spent has been dissipated in public service wages and salaries.
Over the course of the decade, state general government sector employee expenses rose from $39.3 billion to $73.3 billion. The average annual growth rate of this spending exceeded that of the GST.
This GST-fuelled spending binge ultimately proved to be unsustainable. Annual growth in state general government spending overshot the increase in revenue, which eventually led to budget deficits that must now be reined in.
Rather than fortifying the position of states as autonomous political entities in the federation, the GST reform has effectively extended the reach of Canberra into state affairs.
The influx of additional revenue has also encouraged big-spending premiers and chief ministers to waste a golden opportunity to reform how states are being managed. Most significantly, the product of these two forces has meant that a decade-long promise of a functional federalism has once again been dashed.
The unfulfilled promise of Australian federalism will continue until such time that lower levels of government are equipped with real revenue-raising responsibilities with no federal strings attached.
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