Productivity Commission proposes changing benchmark for GST distribution – October 2017

Filed under: Politics, Australian Politics,

A draft report from the Productivity Commission says the formula for distributing the GST needs updating to deal with “extreme circumstances”, but should not discount mining revenue as urged by some resource-dependent states.

The Commission acknowledged that the current Commonwealth Grants Commission (CGC) formula was “under significant strain”.

The study was commissioned by the Treasurer earlier this year amid intense pressure from states, particularly Western Australia, which has seen a massive decline in the amount of GST revenue it receives from the Commonwealth.

The Productivity Commission concluded that, while the carve-up between states and territories has broad support, it “now embodies an undeliverable ideal”.

The report found that the current system of equalising to the level of the strongest state “is too great for any jurisdiction to bear” and can be volatile at times of significant and structural change.

The objective of the current GST carve-up is to ensure states and territories are funded to ensure the “same standard” of services and infrastructure across the country, benchmarked against the nation's strongest economy.

The draft report suggested that the Commonwealth outline a new objective for the GST distribution that would give states and territories the capacity to provide a “reasonable level” of services, possibly by benchmarking to the second strongest state.

“The system is beyond comprehension by the public, and poorly understood by most within the government — lending itself to a myriad of myths and confused accountability,” the draft report observed.

“Reforming horizontal fiscal equalisation (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.”

While urging a review of the system's objectives, the Productivity Commission rejected one of the key proposals put forward by some opponents of the current formula.

These critics had argued that the current system gave states and territories incentives to both under-develop and under-tax natural resources, given that much of any revenue raised from these activities would be offset by losing federal grants.

A common proposal from this group was to apply a 25-50 per cent discount on mining revenue in the grants assessment, similar to Canada.

Such a discount would deliver significant benefits to Western Australia, Queensland and the Northern Territory, due to their large resource reserves.

“The Productivity Commission is not attracted to this option,” it responded. “Mining revenue is a prime example of a source-based advantage — one a state benefits from by virtue of where its borders happen to be drawn — and should prima facie be included in the equalisation process.”

Treasurer Scott Morrison speaking at the release of the draft report said, “It is true that Western Australia had been receiving an unfair and far too low share of the GST. But we also had to determine - was this a national problem or just a Western Australian problem? That's why it was important to undertake the work from the Productivity Commission. “

He said, “the perfect has become the enemy of the good, when it comes to how we distribute GST. A false sense of precision. Having, in such an enthusiastic way tried to equalise things, we have created a situation the PC refers to as “unfair equality”. We have got the point where there has been insufficient flex in how the system deals with quite significant shocks like we have seen in the post mining boom period. The variability, the volatility in those distributions means that the system has not been responding well. Up until about 2012, the relativity stayed within a relatively tight band. After that period, the rubber band has stretched right out and is close to snapping. When that occurs, you obviously have a major crisis of confidence in how the system works in states particularly that are adversely impacted. So that needs to be fixed.

“Secondly, it is finding that the current way we do this is holding our economy back, that it does mean that states and territories have a disincentive to undertake positive changes to their tax systems, to make the most of the resources and minerals that they have that sit within their states and territories. As a result, it is not just a Western Australian issue, it's a national issue.”

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