Dean Smith (WA, Liberal Party) Share this | Hansard source

Before I begin my commentary in support of Senator Wang's Commonwealth Grants Commission Amendment (GST Distribution) Bill 2015, I think it is important to make an observation about what has happened in the Australian Senate this morning following prayers. We debated a private senator's bill, the Racial Discrimination Amendment Bill 2014, a bill that came to this Senate with little support—the support of four senators. If you look at the speakers list today, you will see that momentum for reform has been building. Indeed, I suspect that, when a vote happens in this Senate, there will be many senators who support reform of racial discrimination laws in our country.

The second issue is the one that we are debating here this morning, which of course is the sensitive but very important issue of GST distribution reform—a debate that once upon a time had very few voices. I think it is worth noting that Senator Wang, since he has come to the Australian Senate, has been a strong champion for reform of GST distribution arrangements, but it was great to hear the contributions of Queensland's Senator Canavan and of others who over time have seen the merits of this debate.

The point is that on this Thursday morning in this Australian Senate we have seen how discussion, debate and bringing informed opinions to the parliament can lead to change over time. The change will take place. I am confident that, on both the Racial Discrimination Amendment Bill, which I co-sponsored, and this bill on GST distribution reform, change will happen. Yes, sometimes change takes a little bit of time, but it will happen, because momentum is building on both of these important causes.

I would just like to reflect briefly on the contribution of Tasmania's Senator Urquhart. It stretches belief for Labor Party senators in this place to claim credit for or involvement in the very wise decision of the former Prime Minister Tony Abbott in May this year to provide $499 million in infrastructure funding to Western Australia—and I will come to that point later. It is absolutely not defensible. Labor senators in this place cannot take one ounce of credit for that very wise short-term decision—short-term in the sense that it is part of a longer term solution to the GST distribution issues.

With Senator Canavan, Senator Wang and other senators in this place, I am sure that the very important issue of GST distribution reform will be addressed. I want to make this point while we are debating the issue of GST: GST reform falls into three categories. There is the debate about the GST rate, and I am on the public record as not supporting an increase in the GST rate. The second element of the broader GST debate is one which focuses on the issue of the base and how wide the base should be. I am on the public record as arguing for an extension of the GST base, but I do not think it is necessary that food be included. It is possible that food could be included in extending the GST base, but it is not necessarily necessary. When you look at the growth in GST revenues across our country, you can see quite clearly that extending the GST to health and education meets two important criteria: one is that that is where the growth in the Australian economy is occurring, and the second is that it makes sense from a simplification perspective. Anyway, they are two views of mine that are on the public record. People will not be surprised to hear that.

Of course, on the third element of the debate, which deals with distribution—how that GST is distributed across the Commonwealth—I am well and truly on the public record as arguing for GST distribution reform. That is why I support Senator Wang's bill as a small first step in this important debate. I will come to some other points that I think could be included in reform of GST distribution.

For my part, I spoke on this issue on 18 June 2012, when I first came to the Senate, in my maiden speech. I spoke again about the issue on 19 March 2013. I am pleased that The Australian Financial Review published an opinion piece by me on this issue on 15 April this year and that TheWest Australian published some views of mine on this issue on 15 April this year also. Then, of course, on 6 May 2015 we had the very wise decision of former Prime Minister Tony Abbott in bringing forward $499 million of infrastructure funding for Western Australia in response to concerns raised by coalition members and senators in this parliament, and of course we have had the release of the 'Reform of the Federation' discussion paper. It is in that document that we can see further hope for reform on the issue of GST distribution.

Debates around the Federation are as old, and sometimes as tedious, as the Federation itself. I have my own ideas about how we can improve the Australian Federation, but that is not for this debate. The discussion paper that was released, called the 'Reform of the Federation green paper 2015', points to three options worthy of consideration in tackling the GST distribution reform issue. For the sake of the Hansard, I am just going to read each of those three out, because they demonstrate that the issue is a live one and that for the first time people are putting their minds to the challenge but also the options. I would say, being the eternal optimist, that this points very clearly to reform being undertaken, hopefully at some point in the not-too-distant future. That discussion paper identifies three options. The first option is 'Maintain the status quo, with changes to improve transparency':

Under this option, the GST would continue to be distributed according to the objective of full fiscal equalisation, as defined by the CGC—

the Commonwealth Grants Commission—

so that each State and Territory has the fiscal capacity to provide services and associated infrastructure at the same standard.

It goes on to say:

The independent role of the CGC in recommending the distribution of the GST would continue. The CGC would also continue to conduct independent reviews of the equalisation methodology as directed by the Commonwealth Treasurer, which has occurred about every five years.

It goes on to say:

The CGC would be best placed to examine the key drivers of the methodology, including the treatment of mining production revenue and costs associated with providing services to States and Territories Indigenous' populations.

Some additional measures could be considered to improve transparency and public understanding of the equalisation process. These could include activities to improve the public's understanding of the intent and the operation of the HFE system.

The second option describes itself as 'less comprehensive equalisation through changing the current methodology'.

Under this option, the current methodology would be altered to move towards less comprehensive equalisation. There are a number of ways to achieve this.

Importantly—and this is a position that is advocated by many Western Australians, including me—it says we need to establish a GST relativity floor. The paper goes on:

This option would set a minimum level of GST revenue to which any State or Territory is entitled.

This would mean donor States would not be able to fall below a set proportion—or floor—of their equal per capita (or population) share of the GST pool.

If one or more States or Territories had a high enough fiscal capacity to reach the floor, the GST redistributed to other States and Territories would be reduced. The proposed level of the floor would need to be developed in consultation with States and Territories.

Option 2(b) would apply a discount on all revenue and expense assessments used by the CGC.

It goes on:

In assessing how to distribute the GST, the CGC currently takes account of all significant revenue bases and expenditure undertaken by the States and Territories.

If a discount were to be applied, the CGC would be taking account of a lower proportion of these revenue and expenditure factors.

Finally, the third option that is put forward in the discussion paper is a:

… Less comprehensive equalisation through a transition to an equal per capita distribution of GST, with top-up grants to recipient States and Territories.

Under this option, and subject to the unanimous support of the States and Territories, the GST would be distributed using a simple equal per capita formula.

Fiscal equalisation would occur outside the GST through top-up grants from the Commonwealth. The top-up grants would ensure States and Territories that are recipients under the current system are no worse off.

To ensure recipient States and Territories are not worse off, and donor jurisdictions receive the benefit of the equal per capita distribution, the top-up grant would have to be financed from some combination of (1) higher Commonwealth taxes, (2) increased Commonwealth debt, or (3) savings against Commonwealth expenditure responsibilities.

There we have it: progress is being made on the issue of GST distribution reform. It is there for the world to see in the Reform of the Federation white paper. For those who are interested, you can go to pages 102 to 104.

While Senator Wong's bill contains merit, and that is a discussion around how suitable the existing averaging arrangements are, I would argue that it is just a piece of a bigger solution to reforming GST distribution reform in our country. There are five other elements. One of them is this bill proposed by Senator Wong. There are my four elements plus Senator Wong's element, giving us five elements which would lead to a successful rectification of the GST distribution inequalities that exist in our country.

The first, consistent with the recommendation of the government's own National Commission of Audit, would be to ensure that over time—and I think this is an important point; we do not necessarily need to rush to a GST distribution solution because it is important to build confidence amongst other states and territories—this is in the national interest and not just in the parochial interests of one state or a number of states. The first proposition in a suite of reforms would be to ensure that GST distribution moves to an allocation based on population share and, further, there should be a minimum GST entitlement of 75 per cent of each state's population share.

The second element of a broader suite of reforms would be to ensure that there is an additional mechanism developed to assist those states and territories in need of additional financial support. This mechanism should be based on incentivising and rewarding economic reform. This is an important point. GST distribution is not just about the collection and distribution of the GST revenue; it is about developing a mechanism that will drive economic reform and drive incentive in the economy so that every economy across the country, including in Tasmania, can be set on a more prosperous and incentivised footing.

The third recommendation in what could be a suite of reforms would be to ensure that the Commonwealth could actually improve the immediate situation by addressing the significant time lag in assessments made by the Commonwealth Grants Commission in relation to royalty receipts. This is the proposition that is contained in the bill that we are debating this morning.

The fourth element would be to ensure that the Commonwealth Grants Commission process includes incorporating better recognition of each state's economic development needs and reducing the impact of the Commonwealth Grants Commission's considerations of jurisdictions' efforts to raise royalties by developing their mining industries.

Importantly, this is the fifth point in what I would call a broader suite of reforms. Senator Canavan correctly identified this in his criticisms of the Commonwealth Grants Commission. I also used the Senate estimates process last year to inquire of the Commonwealth Grants Commission about a number of issues that are important to Western Australia. Their response—and I will be as polite as I possibly can—was poor. That is why I think it is timely now for an independent review of the Commonwealth Grants Commission itself and of the methodologies.

I am happy to be open to debate on this, but I think a good agency to do that would be the Productivity Commission. Senator Anne Urquhart made the point in her contribution—and it is a correct one—that the Commonwealth Grants Commission was established at a certain point in time. That is absolutely correct; she is right on that. But the times are now significantly different.

I am proud that in my home state of Western Australia we are enjoying the full fruits and benefits, of an open economy, we are participating in resource exploration and sending those resources and energy abroad. I am grateful, as I am sure Senator Canavan is, that Queensland too is embarking upon that course of action. I would hope one day that South Australia exploits to its fullest potential the resources that are available to it in its state. These are things that we should all be able to agree on. I would argue that Senator Wong's bill has merit, but I think it should be part of a broader suite of reforms that I would hope that this coalition government would eagerly put its mind to.

How did we get to this point? What was it that led a senator like myself, indeed, senators like Senator Wong and Senator Canavan and others to get to this point where we thought it was not just important enough to talk about GST distribution reform; it was important enough to start to argue for GST distribution reform. My attention to this issue was pricked when I had drawn to my attention what is called the GST distribution review: interim report. That is a report that had a very revealing statement in it. It talks about the outlook for GST distribution reform in our country and said:

As Western Australia’s fiscal position has improved, its relativity has declined—

no surprises in that—

resulting in a reduction in its GST share. It is unclear how much lower Western Australia’s relativity will go. The Western Australian Government said it expects its per capita relativity to reach 0.36 by 2014‐15. Depending on the strength of the mining boom, it is conceivable that their relativity could reach zero in the medium to long‐term.

That is not something that Senator Wong has said, not something that I have said; something that has been revealed in the GST distribution review: interim report. It is recognition that, while Western Australians have been arguing about the substantial fall in the relativity for their state, others have argued that it can go less than 0.36; it could actually get to zero—meaning that GST moneys raised in Western Australia would not find their way back to Western Australia at all. The consequence of that is real for Western Australians, as it would be for Queenslanders or for South Australians or, dare I say it, a long time into the future, for Tasmanians—meaning that the state government's capacity to deliver important infrastructure, health and education for Western Australians would be seriously diminished to the extent that Western Australians will get a significantly reduced quality of life, a significantly reduced and deteriorated living standard as a result of that GST distribution mechanism in our country.

I would like to end with a quote from a political mentor—that is, former Prime Minister John Howard, someone whom I have a tremendous amount of respect for, someone who, indeed, had the political courage and momentum to drive tax reform in this country. I want to quote from an opinion piece that I had published in The West Australian, where Mr Howard was reflecting on the current state of GST distribution in our country:

Even former Prime Minister John Howard has conceded while he always knew that there would be fluctuations in the GST relativities—

Mr Howard said—

'I do not think anyone in 1998 or 2000 had in front of them the projections as to how unequal the distribution would become.'

John Howard said that, while he and others knew there would be fluctuations in the GST relativity, nobody—not John Howard, not Peter Costello—ever thought in 1998 or 2000 just how unequal the distribution would become. When it comes to tax reform, when it comes to economic reform, I think we can put our faith in these people: Peter Costello and John Howard and their contributions in the past; Malcolm Turnbull and Scott Morrison now and into the future. I am confident that GST distribution reform will be part of a wider suite of tax reform policies that will set not just Western Australia free but the whole country free. (Time expired)