Dear Committee Secretary
The only fair and sustainable solution to the GST distribution system is to abolish equalisation
The ongoing debate about whether the 2018 changes to GST distribution were ‘fair’ or not to Western Australia is irrelevant and unhelpful. The foundations of the current system, based on horizontal fiscal equalisation principles, are fiscally unsustainable, throttle economic growth, and increase fiscal uncertainty.
The Institute of Public Affairs recommends that governments should not look towards minor reform, but should abandon horizontal fiscal equalisation entirely.
GST redistribution is not ‘fair’ – it punishes economic reform and creates perverse outcomes
HFE as practised hubristically seeks to distribute GST so that each state can “deliver the average level of services if it makes the average level of effort to raise revenue”. Such abstract concepts inevitably lead to unintended consequences whereby jurisdictions game the formula to increase their GST allocation rather than pursue intrinsically beneficial economic reforms.
Under HFE, the Commonwealth Grants Commission applies a complex formula to ‘equalise’ the states, based on the three most recent years of data pertaining to how much the states need to spend to provide the average national level of services and infrastructure, and how much revenue the states could raise by themselves. In other words, pro-growth economic reform that expands a state’s tax base would mean that state would be entitled to less of the GST pool. This forms a powerful incentive for states to maximise GST revenue.
As the IPA has repeatedly argued since 2011, distributing the GST based strictly on population shares or alternatively based on the location of taxable transactions would be a far more economically efficient and transparent arrangement. Disadvantaged states could receive top-up grants from the Commonwealth for specific purposes, and the opaque and costly process of HFE could be abandoned.
This isn’t a fringe view. The 2002 review of GST distribution by economists Ross Garnaut and Vince Fitzgerald recommended a per capita distribution in the interests of simplicity and to free states from the penalties they endure for pro-growth policies.
Former state premiers Nick Greiner and John Brumby, a decade later in their review of the GST distribution, similarly found a per capita distribution would be optimal, as did the Abbott government’s Commission of Audit.
The prevailing system has delivered some egregious anomalies such as a consistently high GST relativity of well above 1 for the ACT, the highest-income jurisdiction, which arises from the federal government’s anomalous exemption from payroll tax.
Moreover, the Northern Territory’s consistently very high GST relativity arises from its large remote Aboriginal communities, creating potential perverse incentives. ‘Closing the gap’ would see it lose GST payments.
