The arcane world of Commonwealth-state financial relations is, in many ways, like the 1993 movie Groundhog Day. The question as to how GST revenue should be shared among jurisdictions is relived over and over again.
In Australia, a federal statutory agency called the Commonwealth Grants Commission recommends to the Treasury the appropriate GST entitlement for each state. The GST intake is split between the states on the principle of ''fiscal equalisation''.
This is meant to ensure that each jurisdiction has the same capacity to provide government services, regardless of the cost of those services or the ability of each state to raise its own revenue.
As it stands, every few years, the commission reviews its own methodology of calculating the share of GST for each state. In between quadrennial reviews. it provides annual updates based on the latest available demographic, economic and social data.
However, these in-house reviews are usually insufficient to quell the concerns of the eight states and territories. The richer donor states, such as NSW, Victoria and, more recently, Western Australia, complain vehemently about being unfairly squeezed out of their fair share of GST, while poorer recipients such as Tasmania and the Northern Territory claim that not enough is being siphoned out of the large jurisdictions.
This widespread dissatisfaction process invariably leads to political pressure for more navel-gazing reviews of the equalisation process.
In 2003, the larger states commissioned economist Professor Ross Garnaut to suggest improvements to the way in which GST is shared. In 2005, the Commonwealth and state heads of treasury undertook their own review to simplify the commission's methodology of calculating the state-by-state GST split. A year later, the NSW government appointed economist Professor Neil Warren to compare Australia's federalism arrangements, including fiscal equalisation, with other comparable federations.
Now, Prime Minister Julia Gillard has announced that former premiers Nick Greiner and John Brumby, with businessman Bruce Carter, undertake something of a ''root-and-branch'' review of fiscal equalisation.
It is fair to suggest that, based on the numerous studies already available, the problems surrounding the commission's slicing and dicing of GST are well known, even to the point of being grudgingly acknowledged by supporters of the current equalisation process.
Perhaps the most telling criticism of this process is that the formula applied by the commission effectively penalises states that either achieve economic success or undertake reforms that so happen to yield a ''growth dividend'' of extra government revenue. As noted most vocally by West Australian Premier Colin Barnett, the growing loss of his state's GST share, due to the mining boom filling state coffers, can have implications for the West's ability to fund the necessary infrastructure to accommodate looming capacity constraints. It is cold comfort that the West Australian mining boom benefits the entire nation by improved terms of trade flowing through to real income gains.
Western Australia is enjoying economic growth, yet the commission's formula implies the state must be effectively ''penalised'' through a lower GST share.
More importantly, as the late Victorian Treasury secretary, Ian Little, once explained, if a state grows its economy through tax reform or cutting government costs, then the equalisation model will tend to redistribute more GST to other, possibly non-reforming states. The equalisation system promotes an attitude of mendicancy among the states, as the GST redistribution formula is centred upon jurisdictions actively submitting claims of disabilities in collecting revenue and delivering services to the CGC adjudicator. This presents another roadblock to active economic reform at the state level, particularly for the smaller states which tend to have relatively large, efficiency-draining public sectors.
Another perennial complaint is that, while grounded on the basis of promoting equity by ensuring a reasonably standard level of services throughout the country, the equalisation formula spectacularly fails to achieve such an objective.
For example, most of the GST funds redistributed to the Northern Territory, the main beneficiary of the present system, are spent in Darwin and its surrounds as opposed to in remote areas for the benefit of indigenous populations.
It would not be of any surprise if Greiner, Brumby and Carter find that the current system of distributing grants is long overdue for wholesale reform. The crucial question is what should be implemented in its place?
Ultimately, the best formula is the simplest one, which removes any taint of perverse incentives inherent in the funding formula. This suggests a system whereby states receive grants according to the amount of GST revenue generated within each jurisdiction.
Transitional arrangements, say over a 10- to 15-year period, could be put in place to help states adversely affected by such a change to radically simplify the GST distribution methodology.
Despite the defenders of the status quo colourfully suggesting that the commission and fiscal equalisation is the ''glue of federalism'', the fact remains that the present system originated as a political solution to a perceived problem in state public finance. After all, the commission itself was established in 1933 as the ultimate fix to discourage Western Australia seceding from the federation.
With the western state once again growing restive for change, it remains to be seen whether Gillard and Treasurer Wayne Swan have the stamina to prevent future groundhog days by acting on any fix proposed by the newly appointed three wise men of intergovernmental relations.
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