Scott Morrison should be supported in his efforts to fix defects in the federal system
The states have an incentive to undertax minerals and restrict resource projects
The malaise in the Australian Federation — far more dangerous than people recognise — demands a structural policy change to mend and the Productivity Commission has given Scott Morrison a blueprint to begin to transform this sterile conversation.
The terrible fear, yet again, is that narrow self-interest and populist negativity will kill any rational debate before it gets started, backed by cynics with their ritualistic chant of “the politics don’t work”. On trial, again, is not whether we can reform but far worse — whether we can even debate our problems.
The starting point embraced by the Productivity Commission is that the “fair go” system of redistribution of GST revenue is a national disincentive for good policy, a ludicrous complexity that risks becoming another cumulative burden on our economy.
When you are reminded this system is called “horizontal fiscal equalisation”, don’t just laugh or say it is meaningless. You need to grasp this name is filled with truckloads of wrong meaning. It testifies to three of Australia’s worst traits — bureaucratic engineering, utopian egalitarianism and sanctification of failed orthodoxies. That’s why it will be defended with such blind passion.
There are critical points to be made at the outset.
First, while Western Australia has a legitimate case for complaining it has been disadvantaged by the model, this is an Australiawide problem that affects all states.
Second, this is not about destroying the equity principle as the basis for GST redistribution, but putting equity on a more tenable basis.
And third, the Productivity Commission says progress to a new model must be a “transition” that accepts reducing GST funds to weaker states “would be undesirable” — a big hint that the commission knows zero-sum politics on this reform cannot work as an answer. That is unlikely to prevent scare campaigns by the incompetent fearing their incompetence might be penalised but it suggests there must be a “no losers” priority to secure any major reform.
The interim report commissioned by Morrison says at the outset the GST redistribution model is “beyond comprehension by the public” and “poorly understood by most within government”. Decoded, its perpetuating asset is its incomprehension. How good is that? How can there be confidence in such a system? Federal governments kept postponing any review until the current West Australian fiasco revealed the game was finally up. How is the model working? Estimates for 2017-18 are that for each dollar of GST revenue raised, NSW gets back 88c, Victoria 93c and Queensland $1.18. But look to the other states for the real bite. WA, with 11 per cent of the national population, gets only 3.8 per cent of the funds. The winners are South Australia, which has 7 per cent of the population but secures 10 per cent of the funds; Tasmania, which has 2.1 per cent of the population but gets 3.8 per cent of revenue; and the Northern Territory, where 1 per cent of the population earns 4.7 per cent of GST funds.
So WA gets back only 34c in each dollar of GST revenue compared with South Australia’s $1.44, Tasmania’s $1.80 and the Northern Territory’s $4.66.
This reveals the secret business of our federation: how the strong subsidise the weak, the ailing South Australia, the basket-case Tasmania and the failed “state” Northern Territory. Yet the conditions of the weak just continue to deteriorate. This system doesn’t work. It’s a case of “unfair equality” but if you put the brand “equity” on anything in this country, you get a free licence for failure.
In a measured response, Morrison said: “The Productivity Commission has blown the whistle on how the old system was working and they’re saying it needs a real fix and I’m very determined to ensure that we get a fix.”
This system is a monument to deluded utopianism. The report’s more polite term is that it seeks an “undeliverable ideal” — namely “to give states the same fiscal capacity”. We work overtime to curb the nature of a federation in which different states have different capacities. The redistribution has the absurd aim of bringing all states up to the fiscal capacity of the strongest state, currently WA. The lesson is that chasing undeliverable ideals for several decades creates a train wreck.
The commission says it is “hard to tell” whether the model has damaged economic growth and productivity. But it shows how it discourages tax reform by the main states (if Victoria increased its tax revenue by $100, $75 of its extra revenue would be redistributed to other states.) The WA government estimates if it raised royalties on iron ore it would lose 88 per cent of the extra revenue to other states.
The report features a cameo: a major state cuts in half its stamp duty on property and substitutes a broad-based land tax (a good policy switch) yet the upshot is it could lose up to $1 billion in GST payments.
The report says the states have an incentive to undertax minerals and restrict resource projects. It says the potential cost to the economy could be “significant”. Some people claim there is no evidence of actual adverse decision-making. Don’t believe them: the incentives and disincentives are too strong not to influence policy and this is clearly the commission’s view.
The Productivity Commission’s central conclusion is that the model is too biased to equity at the cost of efficiency and simplicity.
Its message is “equalisation is taken too far” and goes “much beyond” any other federation. The potential to distort state policy is too great. The current redistribution, given the WA mining boom, is “historically high”.
Indeed, the report even suggests the scale of redistribution is “beyond” what a unitary government would do within a single jurisdiction, a stunning remark.
The commission confronts the reality: that there is “a trade-off be- tween full and comprehensive equalisation on the one hand, and efficiency and simplicity on the other hand”, and that this is “inescapable”.
It wants a rewrite of the core goal towards a “reasonable level of services” for the states, not the “same” level. This is all about correcting, yet again, our manic obsession for equality where every reactionary scheme in our history, every shoddy special deal and each destruction of aspiration has been justified on the high altar of equality along with a refusal to confront the downside of such actions.
The commission, however, helps Morrison with a major concession: it examines and rejects a more substantial philosophical change in the model, namely, a shift to GST redistribution on an equal per capita basis. That is, funds divided according to population share. Its report says this cannot meet the core equity goal of the system.
In truth, the positives with this alternative model are excellent: extreme simplicity and abolition of incentives against good state policy. There could even be top-up funding to ensure the weaker states — Queensland, SA, Tasmania and the Territory — would not be losers. But the drain on the federal budget would be a problem and the commission says this is not a realistic option at present.
In short, the report sticks by the principle of equalisation but wants a major change in the mechanism. It repudiates the notion of an extreme redistribution to equalise according to the benchmark of the strongest state. Indeed, tables in the report show the best equity/efficiency trade-off comes with equalisation to the average state benchmark.
The commission rejects the idea that you solve the problem purely by a “fix” for WA by putting in a “floor”, suggested at a return of 70c for each GST dollar provided by WA. The logic is irresistible: “prevention is better than cure”. This repudiates the natural reflex of the politicians — let’s just fix up WA and forget the shambles of the system.
But Morrison wants to address the defects of the system. He should be supported. He will be guided by the commission’s final report. Meanwhile, the weaker states are squealing, unable to see the path to better policy, and pledging to fight to the political death for a system that is incomprehensible and undeliverable.
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