how should we slice the GST pie?

mmmm, pie

SMH April 2, 2011: NSW gets back only about 96¢ for every dollar it pays in goods and services tax, while the Northern Territory gets $5.36 for every dollar it tips in. Do you think that’s unfair? If you do, you’re either not a very good Marxist or you don’t understand the concept of “horizontal fiscal equalisation”. “Guilty on both charges!” I hear you say.

The Prime Minister, Julia Gillard, sought to soothe an old wound this week by announcing a review of the way GST revenue is distributed among the states. Since the GST was introduced in 2000, states have been squabbling about what share of the GST is rightfully theirs.

Since all GST revenue is collected by the federal government and goes into a single pot the question arises: who gets what? Should states simply get back every dollar raised from their citizens? Or should states with a lesser ability to raise other funds, for example because they lack a big mining industry on which to impose royalties, or with higher service delivery costs because of higher indigenous populations, get a higher share?

In fact, it was the Fraser government in 1976 with its “New Federalism” policy that decided federal funds should be delivered on the latter basis so that each government should be able to deliver the same service to all Australians. Redistributive payments made to achieve this are called “horizontal fiscal equalisation”. Put simply, it’s a policy of: from each according to their ability, to each according to their need.

Strange, you might think that this most Marxist of notions should have been first applied by the Liberal Fraser government and later entrenched by the Liberal Howard government. Strange also, perhaps, that it should be a Labor government under Gillard that has ordered the first review on whether this is appropriate.

The theatrics of this review have much to do with Gillard’s political need to get the Liberal West Australian government on side for a host of contentious reforms, including hospitals, schools curriculum and the mining tax.

West Australians are feeling particularly hard done by at present, receiving the lowest share of GST revenue at 72¢ in the GST dollar next financial year. For a long time the WA government was mute as its relatively subdued economy meant it received an outsized share of GST funding. But now that the mining boom has boosted WA’s relative capacity to raise revenue, they are bleating about having to share it with other states. WA wants a floor imposed below which its GST share cannot fall. But any floor would come at the expense of other states’ funding.

The deeper, more worthy, motive for the review is to discover the extent to which current arrangements create a disincentive for states to pursue economic reforms. For example, is the incentive for states to create a more sustainable, that is bigger, tax base blunted because a slice of any revenue gain is immediately distributed away to other states?

Another potential concern is that states receiving a high GST share per capita, for example the Northern Territory due to its large indigenous population, do not spend their supersized GST money on improving service delivery to those disadvantaged. Worthy questions, but unlikely to radically change the way the GST pie is carved up.

THE IRVINE INDEX

$2222
Estimated amount of goods and services tax each Australian will pay next financial year
($50 billion divided by 22.5 million people).

96¢
Amount NSW will get back from every GST dollar paid next financial year.
90¢
Amount Victoria will get.

93¢
Queensland’s amount.

72¢
Western Australia’s amount.

$1.27
South Australia’s amount.

$1.60
Tasmania’s return — it will get back more than it paid.

$1.12
Australian Capital Territory’s amount.

$5.36
Northern Territory’s amount.

Sources: budget.gov.au (Mid-Year Economic and Fiscal Outlook 2010-11); Commonwealth Grants Commission 2011 Update.

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