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Queensland Economic Advocacy Solutions

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Why Queensland should support changes to Australia's GST distribution arrangements

 

 

Earlier this month the Federal Government released its interim response to the Productivity Commission’s (PC) final report on horizontal fiscal equalisation (HFE) ie how GST receipts are carved up among Australian States. Both the PC Report and the Government’s response were released on the same day.  See here for earlier QEAS discussion on this process.

 

Unsurprisingly the Productivity Commission has found that although the current GST distribution system functions well and achieves high levels of fiscal equity, it has resulted in perverse outcomes when there is a significant shock to our economy. This has been most significant for Western Australia when the effect of the mining boom resulted in a fall in its relativity, which eventually reached 30 cents in the dollar per person of GST and saw its distributions smaller than jurisdictions such as the Northern Territory, Tasmania and South Australia (refer to the above graph).

 

In its final report, the PC proposed moving to a new equalisation based on the ‘average of all States’ (ETA), instead of the current system of equalising to the strongest State. This approach would be disastrous for Queensland robbing us of $1.6 billion each year.  The PC’s recommendation to change the HFE standard to ETA is premised on analysis that this change would provide the greatest incentive for a small number of large States to undertake efficiency-enhancing tax reform, particularly a ‘swap’ of stamp duty revenue for increased land taxes.

 

However, a godsend has been given to Queensland, the Federal Government has chosen not to proceed with the PC's recommendation to equalise to the standard of the average off all states and territories.  Instead, it’s preferred model involves moving to another new benchmark that will ensure the fiscal capacity of all States and Territories is at least the equal of NSW or Victoria (whichever is higher). Great news for Queensland as evidenced in the below table where our relativity (i.e. how much money we get back from each dollar of GST raised) remains effectively unchanged.

 

 

The Federal Government believes benchmarking all States and Territories to the economies of the two largest states will remove the effects of extreme circumstances, like the mining boom but in a way that is fairer, more reasonable, more sustainable, more predictable and in a manner that will ensure all State or Territories are left financially better off.  The Federal Government’s plan seeks to transition Australia’s HFE system over eight years and will ensure all States are better off by making supplementary and untied payments sourced from its other revenues to the GST pool in the interim years. 

 

Pleasingly, moving to a new equalisation benchmark through boosting the GST pool with additional payments, will be actioned by a new Intergovernmental Agreement between the Commonwealth and the States.  This is profoundly important as the new arrangements will not be subject to political decision making year to year and will be set in stone.  A change of this scale will require consultation with all the states and the Federal Government has convened a special meeting of the Council on Federal Financial Relations (ie all the State Treasurers and the Commonwealth Treasurer) in September, with a view to coming to a final agreement on transition arrangements by the end of this year. 

 

The drawback to this solution, as QEAS sees it, is a national one and relates to taking money from other revenue areas of the Federal budget to action the change. This is problematic in that it comes at a time when Government’s from both sides of politics are struggling to deliver a surplus whilst debt is rising.

 

However, given that Queensland was potentially going to see a cut to its GST receipts by up to $1.6 billion under the PC proposal the Federal Government’s response appears a very good one for the Sunshine State and should be supported.  On the face of it Queensland has dodged a massive bullet and should be relatively unscathed from this process for at least a decade.  On this basis, it will be important for the State Government to put politics aside and approach the meeting in September with an agenda based solely on what is best for Queensland. If this occurs our support for the new arrangements should be a ‘no-brainer’.

 

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