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Review of GST arrangements represents clear and present danger to Queensland

Today has seen the Productivity Commission release a draft report on Horizontal Fiscal Equalisation (HFE) in Australia ie how GST revenue is carved up among the States. 

So is this Review a hawk or a dove for Queensland given that for every dollar we raise in GST we receive a $1.19 back?  My opinion is that this Review and its current findings and recommendations are a threat to the Sunshine State but represent a greater good for Australia as a whole.

To back track a little, the Productivity Commission was asked to undertake this Inquiry to consider the influence the current system of HFE has on:

  • productivity, efficiency and economic growth, including the movement of capital and labour across state borders
  • the incentives for the States to undertake fiscal (expenditure and revenue) reforms that improve the operation of their own jurisdictions, and
  • the States’ abilities to prepare and deliver annual budgets.

Moreover, the Inquiry seeks to answer whether the current system of HFE is in the best interests of national productivity and whether there may be preferable alternatives.

The distribution of the GST has frequently been a point of contention among States, as each State has vied for a larger share of the GST pool. This friction has increased in recent times as Western Australia’s share of the GST has fallen to an unprecedented low.

The draft recommendation with the most profound implications is HFE should no longer be to the highest state, but instead to the average or to the second highest State.  So is this a hawk or a dove? On the basis of this particular recommendation Queensland will continue to be a net beneficiary of GST distribution however the extent of our benefit will be reduced by $729 million if to the second highest state or by $1.6 billion if to the average.

This will pose a significant challenge for the next State Government and future State Budgets given in the last carve up Queensland scored big time. In 2017-18 Queensland will receive close to $15 billion in GST or close to 24 per cent of all money available despite having only 20 per cent of Australia's population. This was courtesy of NSW, Victoria and especially Western Australia.  See here for more details.

The only thing that may counter this, is whether as a State we are deliberately baulking on key reforms that drives economic activity, on the basis that we will not be better off overall if we are penalised GST payments in doing so.  In reality I don't think this is occurring at present.

So the question Queenslanders really have to ask ourselves is, are we prepared to sacrifice money payable to us from the GST carve up for the sake of a greater good in seeing national productivity and economic growth lift?  That’s a really interesting question!

Key findings from the Draft Report include:

  • The basic premise of HFE — fiscal equity in the Australian federation — has broad support.
  • While the specific practice of HFE has always been debated, it is now under significant strain as Western Australia's share of the GST has fallen to an extreme low.
  • The practice of HFE has evolved over time, and now embodies an undeliverable ideal: to give States the same fiscal capacity. In other words, all States are brought up to the fiscal capacity of the fiscally strongest State (currently, as assessed by the CGC, Western Australia).
  • Notwithstanding anomalies, the current system of HFE has good points.
  • It achieves an almost complete degree of equalisation — unique among OECD countries.
  • The independent and expert CGC is well placed to recommend GST relativities. It has well-established processes that involve consultation and regular methodology reviews.
  • And HFE does not result in significant distortions to interstate migration or economic growth.
  • But the pure may be the enemy of the good: the current HFE system struggles with extreme circumstances, and this is corroding confidence in the system.
  • Equalising comprehensively and to the fiscally strongest State means that the redistribution task is too great for any jurisdiction to bear; and is volatile at times of significant cyclical and structural change.
  • There is scope for it to discourage desirable mineral and energy resources policies (royalties and development) and State policy for major tax reform (a costly first-mover disadvantage).
  • The system is beyond comprehension by the public, and poorly understood by most within government — lending itself to a myriad of myths and confused accountability.
  • The Australian Government should articulate a revised objective for HFE. While equity should remain at the heart of HFE, it should aim to provide States with the fiscal capacity to provide a reasonable level of services.
  • Equalisation should no longer be to the highest state, but instead the average or the second highest State — still providing States a high level of fiscal capacity, but not distorted by the extreme swings of one State.
  • By contrast, relativity floors or discounts for particular revenue streams do not resolve HFE’s deficiencies and must prove arbitrary, and likely have unintended consequences.
  • Any material change to HFE in the current extreme environment will lead to significant redistributions of the GST. Timing and careful transition are paramount, especially to ensure the fiscally weaker States are not significantly disadvantaged.
  • The Commonwealth Treasurer should ask the CGC to recommend relativities consistent with a revised objective. The CGC should also be directed to pursue significant simplification of its assessment process, even if it results in slightly less — or less precise — equalisation.
  • Reforming HFE will deliver benefits to the Australian community. But ultimately, greater benefits will only come from more fundamental reforms to Australia’s federal financial relations: namely, to spending and revenue raising responsibilities and accountabilities.

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Good summary Nick. Thanks.

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