WA’s GST deal is keeping the rest of the nation under water

Mar 26, 2021
Perth, Credit - Unsplash

Every government in Australia is running a budget deficit. Except one. Western Australia, unlike the rest of Australia and the world, is rolling in it.

The WA government expects this financial year’s net operating balance to finish $2.2 billion in the black. Compare that with Tasmania’s figure of $961 million in the red. Or NSW, with a deficit of $16 billion.

This is a story of how one state can manipulate the nation’s fundamental financial relationships to its own advantage, pocketing billions of dollars from every other government – and get away with it.

The GST, and the system of grants to the states that preceded it, aimed to make Australia a fairer place. The Commonwealth Grants Commission redistributed money paid into the GST from those with a lot to those with less. Without that intervention, rich states like Western Australia could afford much better government services like hospitals, schools and roads than poorer states like South Australia and Tasmania.

The idea was that if we’re to be equal citizens of the same country, we should all have access to roughly the same level and standard of services.

In the first few years of this century, the iron ore price was low threatening the WA government’s budget. So for three years, GST money flowed to them and away from the more prosperous eastern states.

For most of the time since 1910, when the Commonwealth started topping up state budgets, money flowed from the eastern states into WA. In all but seven of the 96 years after general grants – the GST and its predecessors – began, they got more than their population share.

Only with the start of the most recent mining boom, when mining royalties poured in, boosted further by hikes in the rate miners paid to the state, did that change. WA went from being a poor state to the richest in the land.

But because the Grants Commission does its calculations on multi-year averages, the system took some time to catch up. Over four years, WA benefited not only from royalties of more than over $15 billion but also from $7 billion in extra GST.

Windfalls don’t last forever but Premier Colin Barnett and his Treasurer, Christian Porter, pretended this one would. Instead of saving the money for an inevitable turndown, they spent it – for instance, propping up the nation’s most economically inefficient public hospitals rather than reforming them.

Then came the inevitable double-whammy. Iron ore prices, always cyclical, fell back. By then the GST system had caught up, so WA’s share of the GST pool fell by a third in just four years.

Rather than dealing with a system that put every state on an equal financial level, WA agitated for changes that would allow it to keep the benefits when iron ore royalties were high but ensuring it got extra GST when royalties fell.

They got their wish. After years of protesting that the GST system could not be unilaterally changed, the Turnbull government did just that. Other states – including WA – were promised extra Commonwealth money to cushion the blow. Under the new system, WA’s per-head GST share will never be allowed to fall below 70 cents in the dollar, rather than the 30 cents or so it would be likely to be right now without such a deal.

Back in 2018 Scott Morrison, then the federal Treasurer, said iron ore prices would continue to fall, so the 70 cent GST floor would be reached anyway. Nothing to worry about. But – as we have seen – those prices didn’t fall. They soared.

The iron ore price would have to be at around US$80 a tonne to make Mr Morrison’s forecast real. It’s now hovering between US$165 and US$170. This puts it on track for a financial year average of at least US$140. And every dollar a tonne is currently worth an extra A$81 million in royalty revenue. Because of the new system and the boom in prices and volumes, WA now stands to reap a windfall of close to $5 billion this year.

Once, that would have been distributed to all states and territories on the basis of need.

To get the new agreement through without the risk of irritating challenges by the loser states to the High Court – which has never ruled on the issue – the federal government agreed to make up any shortfall between the old system and the new one.

In the most recent Commonwealth budget, this was estimated to cost $1.547 billion this year – but that estimate was reached on the basis of highly conservative assumptions which have proved to be clearly wrong. This year’s bill is now likely to be more than three times that amount.

From 2024-25, WA’s GST floor will have risen from 70 cents to 75 cents, propelling even more money in a rapid westerly direction. The Commonwealth will have to find the money to cover that increase – but only for a year.

From July 2026, a bear-trap threatens to spring a very nasty wallop on all states and territories other than WA. That’s when the Commonwealth is due to end its bail-out, leaving the states to pick up the tab.

If that was happening this financial year, the hit to already-stretched state budgets would be serious. On the basis of current Grants Commission relativities, NSW would lose around $1.4 billion, Victoria almost $1.3 billion, Queensland $1.06 billion, South Australia over half a billion and Tasmania $185 million.

And on those figures, resetting WA’s floor to 75 cents would add some $360 million to the total that WA gets and everyone else loses.

There has been almost no public discussion of this. The Prime Minister has again refused to consider any renegotiation. But unless a new deal can be put in place, the impact on the services most Australians rely on – hospitals, schools, roads, TAFE and the rest – will be serious. We will become a two-nation country.

No state government – other than WA – has enough revenue to deliver adequate services without borrowing large amounts that will eventually have to be repaid. As it stands, the GST is inadequate to its task. But by creating one rich state and making all the others poorer, the WA deal was a huge step in the wrong direction.

 

Saul Eslake is an independent economist. Martyn Goddard is a policy analyst. Both are based in Hobart.

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