Michaelia Cash (WA, Liberal Party, Shadow Parliamentary Secretary for Immigration) Share this | Link to this | Hansard source

I rise to speak on the Commonwealth Grants Commission's Report on GST revenue sharing relativities—2011 update and move:

That the Senate take note of the document.

Just two weeks ago I rose in this place as a senator for Western Australia and addressed the current outdated and inequitable formula which the Commonwealth Grants Commission continues to use to determine GST sharing relativities. My comments were well and truly well timed because WA has just received a slap in the face from the Commonwealth Grants Commission following its recommendation that almost $600 million be slashed from WA's GST share for 2013-14. The Commonwealth Grants Commission 2012 update has reduced WA's share of the GST to a mere 55c in the dollar. Based on the Commonwealth Grants Commission's recommendation, one may well ask: where are the incentives for states to develop their economies and, in turn, be rewarded for their ability to implement economic reforms?

There would appear to be none whatsoever.

The CGC's announcement further confirms what Western Australians know to be true: the current system unfairly penalises Western Australia for our economic success, and is so transparently inequitable as to be unsustainable in the longer term. It was bad enough that WA received just 68c for every dollar in 2010; now in 2012 we have been reduced to receiving a mere 55c. This is not only the lowest of any state; it is the largest drop in GST share in the history of the GST grants process. The irony of this is that previous WA Treasury forecasts indicated that, if the downward trend in GST revenue to WA were to continue, WA's share would drop to an unsustainable 33c in the dollar by 2014-15. That would appear to have been a conservative estimate because, based on the proposed 2012 Commonwealth Grants Commission cuts, WA Treasury preliminary modelling is now predicting that the WA share of GST grants will fall to as low as 27c in 2015-16. That is clearly unfair, unsustainable and unacceptable.

All WA asks in relation to its share of GST is for the Commonwealth Grants Commission to recognise the significant upfront financial outlays required to be met by the state to encourage and support some of the biggest mineral developments in Australia. In return for this support WA would be able to continue to provide the infrastructure required to encourage the development of additional export projects, infrastructure that needs to be established well before the first shipments of mineral commodities are exported to overseas markets and well before any mineral royalty is paid to the state. Withholding this grant funding is forcing Western Australia into an overreliance on debt and borrowing to fund infrastructure and services. Based on our full population share of the GST, a 55 cent share will cost WA about $2.4 billion each year. There is something very wrong with a system that penalises success and economic reform.

I accept that Western Australia is part of a federation and that the more prosperous states have a responsibility and a role to play in protecting the interests and supporting the reasonable needs of the less financially advantaged states. However, I also support the WA government's repeated calls for the federal government to recognise the inequitable distribution of GST funding to WA and to recognise the need for the federal government to understand and identify with the cost pressures being placed on the WA government in providing infrastructure to support our massive mineral export projects. What is good for WA is good for Australia. When you stimulate the WA economy you stimulate the national economy, and that has flow-on benefits for all Australians. WA Premier Colin Barnett is correct when he says:

I think every West Australian knows we are just being dudded out of Canberra. It's a disgrace what's happening.

… there basically is no commonwealth-state financial relationship".

We need a Commonwealth Grants Commission formula that rewards best performance and embraces the principles and concepts of competition and productivity. That is the only way to deliver the national economic and social outcomes required for us to continue to prosper as a nation.

Scott Ryan (Victoria, Liberal Party, Shadow Parliamentary Secretary for Small Business and Fair Competition) Share this | Link to this | Hansard source

I rise to support the motion moved by Senator Cash with respect to the Commonwealth Grants Commission Report on GST revenue sharing relativities: 2012 update. I can say, as a former student in this area, that horizontal fiscal equalisation is without a doubt one of the most complex areas of public policy in Australia. Indeed, it has been observed that Australia's fiscal equalisation arrangements are some of the most complex of any such federation.

The history of horizontal fiscal equalisation is a similarly complex one. It is as old as the Federation itself but took on a substantial role with the formation of the CGC in 1933. As well as ensuring an equitable level of access to government services around the nation and reflecting the different costs of providing these, one of the historic justifications was to compensate those states without a large manufacturing base for the cost of the protection regime that was in place in Australia for many decades. It is this last fact that has profoundly changed over the last 30 years. Farmers, for example, no longer have to bear the cost of extensive tariffs, quotas and other modes of protection that were directed at supporting the south-eastern states.

While I understand the anxiety caused by the recent trend and the quite radical fall in GST payments to the state of Western Australia, I point out that Victorians can welcome them to the club of net funders. In fact, my home state of Victoria has consistently been the most significant contributor to the fiscal equalisation program. Over the past few years this has continued to be significant. While Victoria will see its share rise to 22.5 per cent next financial year, it is still worse off than it was before the cut of 0.9 per cent in the current year.

Victoria has historically been a donor state through the fiscal equalisation program. Its share of GST has consistently been in the low 90s, although early last decade its share fell to below 85c in the dollar. This is despite the fact that its population was growing at record rates and in absolute terms at one of the highest rates in the country. The real issue at hand with this program is the incentives provided to the states. I note that one of the reasons listed in the current report for Victoria's lower expense base, compared with the other states, is that a smaller proportion of its students attend government schools. I see it as perverse that providing choice in education to one's constituents results in financial penalty for a state government. Importantly, questions have been raised by experts such as Neil Warren about the incentive to address disadvantage for governments that are net recipients. When these funds are untied and continued extra funding is dependent on disadvantaged economic conditions, is the incentive strong enough to address these? In the end, this would reduce extra payments.

No one is arguing against some equalisation of GST revenues in order to ensure all Australians have access to a specified level of services, but the lack of predictability of these relativities and the degree to which they reward underperformance is of increasing concern. My home state last year effectively received a $2.5 billion cut in forecast revenues, owing to the recalculation of relativities. In a constitutional regime that effectively prohibits many efficient state own-source taxes, this lack of predictability is a serious problem for budget formulation. Last year the Labor Treasurer of Queensland complained, despite being a substantial net recipient in budgetary terms. He has to hold a record for squandering an inherited legacy of being debt free at the same time as undergoing a major resource boom, yet having the gall to complain.

This issue of resources is becoming increasingly critical. The introduction of the MRRT represents a real and significant threat to the remaining financial independence of the states. Apart from the outrageous threats from this government to seek to punish states that exercise their legal right and, indeed, their duty to collect royalties from mining resources, the MRRT threatens to weaken the financial position of all states. At the moment, royalty revenue of the states is considered when calculating funding relativities. Indeed, that is at the core of the Western Australian complaint. The reality is that all states eventually directly benefit from an increase in Western Australian royalties. This is done by reducing funding relativities to the resource states. In short, a royalty increase in one of the resource states is effectively redistributed to the non-mining states through these relativities.

The Commonwealth is seeking, through the MRRT, to remove this growth tax and this funding pool from all states. In typical Labor fashion it seeks to shrink the pie. All Victorians will be worse off if the resource states are no longer able to increase royalties, as these funds will no longer become available to all state budgets through the GST redistribution process—they will then become Commonwealth revenues. This is the real agenda of the MRRT: to remove the royalty revenues from the realm of the states, where their use is determined by state priorities, governments and even elections, and to increase the funds available solely for the Commonwealth to use as it sees fit.

Ian Macdonald (Queensland, Liberal Party, Shadow Parliamentary Secretary for Northern and Remote Australia) Share this | Link to this | Hansard source

This is an important document and, as both the previous speakers have mentioned, it is certainly an arrangement which has served Australia well over many years. In prefacing what I have to say, I acknowledge that, in the fifties and sixties, what we now call the rust bucket states of New South Wales, Victoria and South Australia supported the more remote states, like Queensland and Western Australia, and that was under the same arrangement. As this report says, the distribution of GST revenue among the states for 2012-13 is meant to give each state the same capacity to deliver services, to acquire infrastructure and to hold financial assets. It says that it does that using unchanged methods but with updated and more recent data.

What Senator Cash says about Western Australia deserves considerable consideration. Western Australia has become a boom state because of the energy and activity of Western Australians and, particularly, their government. I note in passing that most of the wealth of Western Australia comes from the north, as indeed does most of the wealth of Australia, or if it does not now it will in the not too distant future. My own state of Queensland is very similar to Western Australia in that it has big revenues from mining activities which have, in the last few years, assisted the southern, 'less fortunate' states. We know the southern states get lots of subsidies for manufacturing industries—subsidies that are not repeated for the tourism industry, which is a significant industry in my state of Queensland, and yet it is suffering a crisis without much government support.

This year's report from the Common­wealth Grants Commission indicates that Queensland is again a recipient state. The summary of the report says:

Queensland has experienced a smaller improvement in fiscal capacity over recent years. However recent data show that the slowdown in its property market and the impact of natural disasters are now reducing its fiscal capacity.

That is, its capacity to provide the same level of services as other states. The Grants Commission is, of course, non-political. It could not say in its report that one of the other reasons Queensland is doing so badly is that the government of Queensland is, for all intents and purposes, broke. Senator Ryan mentioned this briefly in passing. It is a government which has now run up debt that exceeds the enormous amount of debt that the Keating Labor government left to the Australian public and to the Howard government to pay off. In Queensland we now have a massive government debt of over $90 billion and, as Senator Ryan quite rightly said, this is at a time when Queensland has been earning unheard of revenues from the mining boom in our state.

The Grants Commission could not sheet the blame home, and it very nicely said that it was a slowdown in the property market and the impact of natural disasters. Both of those aspects are true, but I suggest to you, Mr Acting Deputy President, and my colleagues in the Senate that the greater reason for Queensland's slowdown is incompetent government. Queensland has a Treasurer who simply does not understand. Queensland has lost its AAA credit rating and it is now in a position where it has to accept welfare from states like Victoria and New South Wales. We have problems in Queensland, and I think all Queenslanders now recognise that the only way to fix the financial and other problems we are experiencing is to get rid of a tired, old Labor government with no new ideas, no energy, no enthusiasm and no idea. This report from the Grants Commission is an interesting document, and one which all senators would do well to consider further.

Alan Eggleston (WA, Liberal Party) Share this | Link to this | Hansard source

The distribution of GST, as has been said, is very inequitable at the moment. Western Australia is carrying the Australian economy with its enormous resource projects. Oil and gas, iron ore and magnetite projects are boosting our export income and balancing our budget, and it is really because of Western Australia that Australia is seen by the rest of the world as having a very strong economy. It is those exports, mostly to North-East Asia, that have made the Australian economy resistant to the vicissitudes which have rocked the world in the last two or three years—the global financial crisis and the problems that are occurring in western Europe at the moment. All sorts of people have predicted that the problems in western Europe may result in a recession not unlike the 1930s depression because there are features which are very similar to those which prevailed at the time of the 1930s depression.

Western Australia occupies a third of the Australian continent—an enormous area of country, a million square miles in the old coinage. Because of that, we have a particular need to have sufficient funds to provide infrastructure. We have in Western Australia what I call 'the three long lonely roads'—the Great Northern Highway, the North West Coastal Highway and the east-west highway, or Eyre Highway as it is known. All of these are not particularly good roads. There is also a need for ports such as Oakajee and other infrastructure to maintain the mining industry and minerals boom in Western Australia.

The GST was set up as a dedicated tax by the Howard government to provide an income stream to the states. That is an important thing to remember. The states, you will recall, had the power of income taxation until the Second World War, and it was handed over to the federal government as an emergency measure for the duration of the war. The GST was set up by the Howard government as a means of providing a stream of funding to the states for them to finance the services for which they were responsible.

To see Western Australia reduced to a share of 55 per cent of its GST defies the rationale for the GST in the beginning. It means that Western Australia simply does not have the funding to build the infrastructure that is needed to maintain the mining boom, which, as I said, is the basis of the success of the Australia economy. The Western Australian Premier, Colin Barnett, wants a floor of, I think, 75 per cent of GST to be established so that, when the Grants Commission redistributes the GST, the absolute maximum—or minimum—amount of a state's GST which can be redistributed is 25 per cent, and each state would have returned to it 75 per cent of the GST generated within its jurisdiction. I believe that is a very sensible, fair and rational approach to horizontal financial equalisation through the GST.

The GST, as I have said several times already, was designed to be a dedicated income stream for the states. It is an absolute abuse of the concept, undermining the principle upon which this tax was established, for a state like Western Australia to find that its share of the GST generated in Western Australia is only 55 per cent—and, as Senator Cash said, there are predictions that it may get down to as low as 25 per cent. We all know that Western Australia was a reluctant joiner of the Federation. Certainly we benefited during the times when Western Australia was, as Sir Charles Court used to say, a mendicant state. But that is not the situation anymore. Western Australia does not object to contributing, but we think it should be on a fair and rational basis and the state should receive a fair share of its GST. I seek leave to continue my remarks later.

Leave granted.

Debate adjourned.