Features Australia

GSTea Party

The current system of financing the states should be thrown overboard

18 April 2015

9:00 AM

18 April 2015

9:00 AM

Je suis Western Australian. I stand with them and against my own Queensland and all the other States. I refer to WA’s ‘Boston tea party’ complaints about the carve-up of GST receipts. In no sensible world in which a country is purporting to run a federalist system of government does it make sense to say to a constituent State ‘we are going to take over 7 in every 10 dollars raised in your State and give it to others’. That’s a tax rate that would be rejected even by the über-socialist M. Hollande in France. It is patently ridiculous. But it gets worse. You will have heard all of these Commonwealth politicians talk of the GST being a ‘State tax’. False. It is a Commonwealth tax that is then distributed in whole to the States. Why? Well, in part this is because we are pretty much the only federal system in the world where the States have no income tax powers. Our States, for all practical purposes, can’t tax income. They can and do in the US. And in Canada.

In fact it’s that fiscal independence, that ability a State has in a sane set-up to raise the money that it will spend, that creates the competition that makes federal systems wealthier and less bureaucratic (surprisingly, I know) than unitary systems like France’s, say.

Yet here in Australia we killed off that golden goose. Our High Court has what can only be called a ‘God awful record’ in terms of overwhelmingly siding with the Commonwealth over the States on virtually all the big ticket constitutional cases that have come before it. Compared to Canada or the US our judges are considerably more ‘favour the centre’. And that includes killing off the States’ ability to levy income taxes, in a case during the Second World War and then another shortly after it ended.

This has turned our States into mendicants. They have no ability to raise anywhere near the money they have to spend on schools and hospitals and more. In legal jargonese this is called ‘vertical fiscal imbalance’ or VFI. Australia has pretty much the worst VFI going in the world. The GST was an attempt to get the States an income stream of their own.


But notice this. When States can set an income tax they get to keep what they raise. All of it. This works perfectly well in Alberta, Ontario and Quebec in Canada, and the US. Yet with a GST the money is legally the Commonwealth’s. Canberra gives it to the States on a grace and favour basis, and could take it away or put strings on it if it wished, as was mooted by the Gillard government. And no single State by itself can change the formula on which the money is distributed, which more or less locks in the status quo. That is not what any impartial person would call a ‘State tax’. Worse, the distribution of the GST money kills the incentive for individual States to make their economies better. Adopt failed policies, kill off investment in your State, and that failure – in and of itself – will get you a larger slice of the GST pie. Isn’t that bizarre? Of course make equality across States a high enough priority and such a result is inevitable, while destroying all of the benefits that make federal systems wealthier than non-federal ones.

Can you imagine running a family where you said to your kids: ‘Paul, you’ve saved nothing and spent all your money on candy bars while Peter has saved towards a bike and got a job cutting the neighbour’s lawn. So Paul, I’m giving you more pocket money this month to even things up. Heck, I’m taking some from Peter to give you.’ If you believe in incentives, this is bonkers. Yet that is precisely how we divide up the GST in this country.

For every dollar raised in WA the proposal for next year is that they can keep under 30 cents. Meanwhile for every dollar raised in Tasmania they will get $1.81 and in South Australia they’ll receive $1.35. Consider ours the world’s leading, steroids-enhanced ‘Taking from Peter to pay Paul’ arrangement.

Of course that doesn’t stop the poorly performing States, the ones with little incentive to do better, from throwing out the ‘F’ word. The South Australian Premier is defending this egregious carve up on the basis of some supposed sense of fairness: ‘That is the current system, which is all about fairness, about one nation ensuring you get similar services wherever you live in this nation is upheld.’

Except it does nothing of the sort. The money, once received, can be spent anyway a State wishes. Moreover, federalism only works when States compete with each other. The South Australian Premier seems to want to ditch federalism for a one-size-fits-all regime, a unitary state like France in other words. Worst of all, it sticks in the throat to hear any Labor politician from SA say anything at all about fairness. SA is probably the gerrymander capital of the democratic Anglosphere world. Labor regularly gets fewer votes but has the electorates configured in such a way to win elections anyway. Consistently. Labor does nothing about it. And yet a Labor Premier from SA, gerrymander haven that it is, has the bare-faced gumption to trot out the ‘F’ word. Fair-me! What a joke!

Let me be blunt. Western Australia is wholly on the right side of this argument in my opinion. The follow-up question is all one of tactics. Does WA do better by creating a stink or by being quiet and demure, as the Labor opposition in Perth suggests? This is a no brainer. Look at Quebec in Canada. Look at Scotland in the UK. If you have what people in your State see as a justifiable grievance, you do better – you get a bigger chunk of the pie – by screaming blue murder and even threatening independence. I don’t like the fact that that is true. But it undeniably is.

The Commonwealth would be well advised, in my opinion, to cut WA a better deal than the punitive one of letting it keep less than 30 percent of what is raised in its State, the result that would follow from the formula of the Grants Commission (a Commonwealth statutory agency I might emphasise, not a States’ one). This country will be completely ungovernable if a separatist political party gets up and running in Western Australia.

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