The federal Grants Commission system for sharing Commonwealth revenue between larger and smaller states and territories seldom attracts good press in southern states, and appears to be little understood even by quite knowledgeable observers. When I raised the issue obliquely in a recent post, our wise, funny but sadly infrequent Troppo contributor Geoff Honnor said:
Always with the Territory whinge”¦now give us back our NSW GST money.
And inveterate Bracks apologist Nabakov quipped:
And you NTies also owe Victoria a billion or so in GST fiscal imbalances too. I’m happy to arrange the pickup. Small unmarked bills will be fine.
The reason why so many “southerners” are so sensitive to the issue at the moment is that both NSW and Victorian Premiers have been beating it up for all it’s worth, as an attempted excuse for their under-pressure health and education systems and chronic failure to maintain state public infrastructure. But the Grants Commission system has been around for a very long time, including under successive Labor federal governments. The real reason for the current plight of the NSW and Victorian governments is that they chose for no sensible economic reason to use the GST windfall to virtually eliminate state debt, and then relied on the stamp duty windfall from the housing price bubble to maintain ordinary services. It was a stupid strategy that was never going to be sustainable, because the housing bubble was always going to burst, but Bracks and Dilemma are never going to admit that, hence the Grants Commission scapegoat.
I’ve intended for a while to write a post explaining the operation and rationale for the Grants Commission system, not only because it’s so poorly understood but because it’s actually a unique and egalitarian aspect of Australia’s federal system, and makes a substantial contribution to nation-building (despite the cynical, self-serving parochial whinging of Bracks and Dilemma to the contrary). Fortunately, ANZ economist Saul Eslake has beaten me to the punch:
The recent release of the Grants Commission’s annual update of the relativities used to distribute GST revenues among the states and territories was accompanied by the usual litany of complaints from New South Wales and Victoria: that they are unfairly subsidising the rest of Australia.
Although making such complaints has long been part of the job description for the treasurers of these states, it nonetheless always comes as a surprise to hear Labor politicians complaining about the redistribution of taxes from the rich to the poor.
For that is precisely what the Grants Commission’s assessments are all about.
The commission is required by its terms of reference to recommend a distribution of GST revenues that would allow each state or territory to provide services to its population at the same standard as the average of all of them (after taking account of differences in the usage of various services and the cost of providing them in each state and territory) if each made the same effort to raise revenues from its own sources (after taking account of differences in the capacity of each state and territory to raise revenue) and operated at the same level of efficiency.
In other words, the distribution of GST revenue recommended by the Grants Commission recognises that some states or territories have a lesser capacity to raise revenue from the typical array of state taxes because they have, for example, lower average wages or lower average land values than others; and that some states or territories face proportionately higher levels of demand for services typically provided by state governments, or higher unit costs of providing them, because of the characteristics of their populations (for example, a higher proportion of Indigenous inhabitants) or their dispersion. …
The redistribution (over many years) of revenues collected by the Federal Government in accordance with the Grants Commission’s principles is one of the reasons why the differences in living standards – including access to services such as education and health – are much smaller between, say, Tasmania and NSW than between, say, Alabama or Mississippi and Connecticut or Vermont in the United States, or between Newfoundland and Alberta in Canada.
In that sense, the Grants Commission’s principles are part of the glue that holds the Australian federation together. It is thus both surprising and disturbing once again to hear Labor politicians, especially from Australia’s richest states, suggesting that these principles should be jettisoned.
Hear! Hear!
A severe case of self-serving, Ken. The small States and each of the territories have it all over the larger States. For a start they each have a much larger per capita representation in the Senate than NSW and Victoria (in the case of Tas and NSW, a vote in the former is worth FOURTEEN times that of a vote in the latter). The relative land values between the States is also a furphy, as land tax is not dependent on absolute land values but on the relative land values WITHIN a State. NT and Tas can raise the same amount per capita of land tax simply by adjusting their scales of tax. I repeat, it’s land tax per capita that determines the severity of land tax, not the rate per dollar of land value.
Queensland has always had much better State services than NSW because of their much greater federal assistance. As a result State taxes are much lower (you only have to drive north to see the difference in petrol prices!).
I agree that NSW and Victoria have been very badly governed since the arrival of their ALP governments. I certainly don’t have a brief for the undeserving Mexicans either, since they obviously didn’t learn their lesson for long from the Cain-Kirner disasters. Serves them bloddy right. There’s more excuse for the NSW population as it has only become obvious since the last election just how badly we have been governed, such was the master spinner Carr.
I mean bloody.
whyisitso is generally right. But I do take issue with both of you in claiming that the “use the windfall to wind down debt” strategy was bad.
I agree it was *politically* stupid (its always good politics to leave your successors with a nasty fiscal problem; you get the benefit of the tax cut/spending spree and they will probably be your opponents anyway. Vide GWB), but *economically* saving it is surely exactly what governments *should* do with windfalls, in order to give breathing space for the tough times.
After all, economists take for granted that economically rational individuals will tend to save transient additions to income while spending permanent ones (the fact that, just like most governments, most real life individuals tend to take one-off windfalls as an excuse for a piss-up doesn’t mean they’re being economically rational).
DD
I agree that a substantial amount of debt reduction was a good idea, but many economic commentators whom I respect have argued that they went too far. This 2005 article by Ross Gittins explains it better than I could. If they’d spent part of the windfall on debt reduction and part on maintaining infrastructure and the health and education systems, they wouldn’t be having the political problems that NSW in particular faces, nor would there have been any need to embark on unpopular and apparently unwise public-private partnerships for infrastructure development.
I don’t have a problem with public-private partnerships per se, but the fiasco about the cross-city tunnel is largely about withdrawing public access to roads that had always been in the public sphere. It’s about to be repeated (but much worse) in the Lane Cove tunnel whereby Epping Highway is about to have the number of lanes in each direction halved and in some places even worse. And the supremely arrogant ALP mob have pressured the operators, who are well ahead of schedule, to delay the opening several months until after the March 2007 election! Capitalism isn’t about trying to remove all risk from private operators, which is what the road closures are all about. Well it didn’t work and risk is well and truly coming home to roost for the cross-city tunnel operators who’ll probably go belly-up sooner rather than later. Ha ha!
Strangely enough, if the tunnel operators do their dough it will be a vindication of the deal the govt did – they made them, not the taxpayer, carry the risk. But I suspect it ain’t gonna happen: the Sussex St operators won’t have been so harsh on their mates in negotiating that contract.
And the politics of PPPs are such that I just don’t believe that given a less tight budget constraint they would have used it for direct government transport infrastructure investment rather than continuing with these sort of cosy deals. Its much more likely they’d have used the money to outbid the Libs in the regular Laura Norder auction at the elections.
Did you mean “invertebrate Bracks apologist Nabakov”
It’s all about Queensland and WA. No one in either state government is concerned about SA, NT, ACT or Tasmania. And it’s rarely mentioned here in Victoria (I can only recall one example in the last year, when the reserve bank guy said something, and even then the goverment made no response, it was simply on Channel 9 news), so I suspect those with a strong viewpoint on the issue have come to the conclusion that it is unfair all on their own.
Most critics probably feel that it’s unfair for Vic/NSW to pay for the more expensive service provision in Qld/WA when individuals chose to reside there, and gain advantages such as cheaper land, better environment etc. If the payoff isn’t worth the more expensive services, then move somewhere else (I know it’s idealistic to suggest people move from their homes, but so is uniformity in living standards across Australia).