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The campaign to destroy the GST.

Australia’s GST system – despite some serious mutilation by WA – remains one of the most effective and fairest in the world. That’s why the NSW government wants to blow it up.

Paul Keating knew it from hard experience: “Never stand between a premier and a bucket of money”.

That was in the old days of Premiers’ Conferences, the embarrassing annual bunfight in which the states brawled with the federal Treasurer and with each other about how much cash the Commonwealth was going to hand out. The end was always the same: they went home with what they were given, each complaining bitterly that they should have got more and the others should have got less.

Prime Ministers and federal Treasurers, wisely, have removed themselves from the premier-bucket interface. That place is now occupied by the Commonwealth Grants Commission, a genuinely independent and highly professional crowd of econocrats who, being public servants, can’t hit back.

They are the quintessential soft target. People like Michael Callaghan, the eminent economist who chairs the outfit, just have to cop the flak and stay silent.

Taking aim this year was the NSW Premier, Chris Minns. “The NSW government claims it has been short-changed by about $1.65 billion based on what it would have received using the previous year’s formula,” reported The Sydney Morning Herald.

“I think the taxpayers of NSW need to understand why we’re currently in a situation where so much money has been withdrawn from Australia’s largest state and instead sent down to Victoria,” Minns told reporters.

“I just want to make a really simple request to the Prime Minister and the Treasurer. Is this accidental or is it deliberate?”

The state Treasurer, Daniel Moohkey, invoked a ghost of budgets past. “I agree with former treasurer Perrottet when he railed in 2018 against the ‘black magic GST distribution formula’ which was ‘seeing the hardworking taxpayers of NSW being ripped off by a perverse and unfair distribution model’.”

Not much has bipartisan support in the NSW parliamentary bear-pit but this does. But Anthony Albanese and Jim Chalmers have the perfect alibi: nothing to do with us.

The independent Grants Commission, standing in the way with no armour, can’t defend themselves. So let me do it for them.

The basis of GST distribution is the notion that all Australians are entitled to the same levels of government services, regardless of whether they live in a poor state or a rich one. It’s known as horizontal fiscal equalisation. Without it, some of our citizens would endure substandard healthcare, die sooner, have poorer education, and worse roads and public transport.

But people in another state would have none of those problems. They’d get their surgery quickly, they’d live longer, and they’d have much better schools and transport.

The GST system doesn’t solve all those inequalities – but without it, things would be much, much worse.

The Grants Commission examines how much money a state can raise from its own taxes and charges, assuming an average level of effort. If a state decides it wants lower taxes than everyone else, the rest of the country doesn’t bail them out.

If one state has a poorer population than others, they’ll need more to be spent on things like health and education to overcome some of those disabilities.

To smooth things out, GST entitlements – called relativities – are calculated on the average of three years, so there’s a lag between when circumstances change and relativities are adjusted. That lag means any state treasury can calculate their likely relativity: the only wildcard is the amount of GST being paid into the national kitty.

It’s necessarily complex, but that’s often used as a reason for abandoning it.

“The way money is allocated is so oblique and so difficult to understand that it is broken,” wrote the usually more sensible Shane Wright of the SMH and The Age.

“No state or territory can properly budget for coming years.”

Wright suggested chucking the system out altogether, handing GST money out on a per-head basis and topping up particular states that had specific needs. This, he said, would be simpler and easier to understand.

It would be neither: far more complex, far less transparent, no more predictable and much more subject to political and sectional pressure.

Just because you don’t understand something is not a good enough reason for changing it. Well, I don’t understand brain surgery but I don’t want to simplify all the textbooks on neurosurgery.

Any premier or treasurer who says they don’t know how the system works is either incompetent or lying. They have whole departments to tell them. And anyone wanting to know can look on the Commission’s website, where the process is clearly and comprehensively explained.

The problem with the GST is that it doesn’t raise enough. John Howard and Peter Costello designed it as a “growth tax” that would fund state services adequately forever. But it turned out to grow less than they thought it would. Now, no state has enough money to do its job properly. And unless the whole funding base for the states is increased, that will remain the case.

For state governments, the GST is a zero-sum game. If one state succeeds in browbeating its way to a bigger share, others lose out. And if Chris Minns wants to play that game, so can the others.

That has already happened. Successive Liberal and Labor governments in Western Australia conducted a campaign – very similar to the one NSW has embarked on – claiming it didn’t get a “fair share” of GST revenue and demanding reform. The federal government, under Malcolm Turnbull and Scott Morrison – and in the enthusiastic embrace of WA’s Labor Premier, Mark McGowan – introduced a scheme which would give that state billions of dollars more, at the expense of all the other states and territories.

To prevent a peasants’ revolt, Morrison also undertook to compensate all the loser jurisdictions with federal cash. When the deal was announced, the government said its “no-worse-off guarantee” would be a minor hit to its budget and would cost $2.3 billion over the first four years and nothing from then on. Instead, the bill – and the massive windfall to WA – has blown out to $13 billion since the beginning and is on track to rack up $50 billion by 2030.


When Dominic Perrottet, then the NSW Treasurer, complained about WA’s deal, Mark McGowan, accused him of whinging. Okay, but look who was talking.

The political cost to the federal government of getting out of this deal is far greater than any electoral benefit from getting into it. The Liberals got nothing: at the 2019 federal election, no WA seats changed hands. And in 2022, their representation from that state slumped from 11 to 5 and delivered government to Labor.

Pork barrelling, even on this extraordinary scale, doesn’t work. Voters take the bribes and then vote the way they would anyway.

No federal government without a death-wish would get into that sort of thing again.

Anthony Albanese has no such suicidal intent. “I recognise the NSW Treasurer is new to his job – but the system has been there for a very long time,” he said. “We have not changed the system. Every year, there is a debate about this. Every year. This is not anything new.”

It won’t stop Minns and Moohkey from trying. It looks good to their own electors, shifting blame from their own budget management to someone else.

So what are they complaining about?

In last year’s carve-up, NSW got 29% of the money in the GST pool; this year, they will get 27.1%. But because the tax raised more cash than last year, the state’s actual payout fell by only $310 million. That’s 0.26% of the government’s estimated total revenue.

The relativities of all states changed this year, as they always do. NSW is a mining state, and royalties from coal have soared so NSW, always a rich state, became quite a bit richer, widening the gap between themselves and other states with fewer advantages.

There was a big windfall from property taxes – but NSW chooses to levy land tax at lower rates than the rest of the country. And the rest of the country doesn’t bail them out for that choice.

Demographic details from the census revealed that Sydney’s population density grew more slowly than other cities – particularly Melbourne. So they don’t have quite as much need for urban transport and infrastructure. Overall, NSW’s population increased more slowly than other states – again, particularly Victoria.

Other categories improved their situation. According to the Commission: “Strong growth in national urban transport investment between 2019–20 and 2022–23 increased the urban transport investment needs of states with large, densely populated cities, including NSW.”

That was worth a top-up of $241 million.

Unlike NSW, Victoria’s capacity to raise its own revenue – relative to the other states – fell, and its relative needs for investment increased.

Victoria’s property sales and land values were down. And population density, particularly in Melbourne, increased sharply – and, with it, the need for more public investment.

All up, Victoria’s share of GST went from 21.9% last year to 24.8% this year. The increased size of the GST pool also helped a lot. All up, Victoria's payout went from $18.5 billion last year to $22.2 billion this year. That $3.7 billion increase amounted to 4.2% of expected government revenue.

No state lost out in this GST round. And no state won – except, as usual, WA.

Under the old system – the one every other state and territory still works with – each person in WA would have got about 12% of the average per capita amount. That’s because of their massive mineral royalties, particularly from iron ore. In 2022-23, royalties contributed $11.2 billion to the state budget, or 26% of total revenue.

But because of the Turnbull-Morrison deal, no state can now get less than 75% of the average per-capita amount. That means that instead of getting $1.15 billion in GST (which they’d have got under the old scheme) they will now get $7.26 billion. That’s a nice boost to the state’s already overflowing coffers: 17% of total budgeted revenue.

It’s the only state or territory government with a budget surplus, estimated to be $3.3 billion this financial year.

If Minns and Moohkey got their way, the GST system would evaporate. WA’s deal means no state can get less than 75% of its per capita share. NSW’s share is now 87%, and they want a higher floor than that.

They’re not likely to get it. If they did, the idea that all Australians should be treated equally would finally die and the fabric that binds us all as a nation would be torn irrevocably apart.

 

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