Tuesday, 2 May 2017

A note on GST relativities

If you want to understand more about how the GST pool is split between States have a look at the following table.

This is from the 2015 GST Review by the Commonwealth Grants Commission.

Tasmania’s share of overall Commonwealth assistance is 147.3% of the average per capita across the federation but our share of the GST pool was 181.9% of its per capita entitlement.

The following extract from the 2015 Review explains further:

The table shows how much in total States need to receive from the Commonwealth, compared to the average of all States (across 2011-12 to 2013-14) to achieve fiscal equality. New South Wales, Victoria and Western Australia required less than the average per capita total Commonwealth funding assistance while Queensland, South Australia, Tasmania, the ACT and the Northern Territory required more than the average total Commonwealth funding assistance.  

For example, Western Australia’s substantially above average own-source revenue raising capacity means it has the lowest requirement for Commonwealth funding to meet its spending needs and achieve fiscal equalisation, at 60% of the national average. Western Australia received marginally below the average level of assessed payments for specific purposes from 2011-12 to 2013-14 and is assessed as needing only 30% of the average GST payment.

Put another way, Western Australia’s strong revenue raising capacity means its payments for specific purposes cover 67% of its total assessed Commonwealth assistance, with its GST requirement making up the remaining 33%. In contrast, the Northern Territory’s very high cost of delivering the average level of service means its well above average per capita payments for specific purposes meet less than 16% of its total assessed Commonwealth assistance, with the GST having to meet the remainder.

Every 5 years the Grants Commission does a full review. In intervening years it does a yearly update, usually issued March/April in time for the budget season commencing May.

States have different capacities to raise their own revenue and face different costs in delivering services. But it is often forgotten how specific purpose grants , roughly $1 billion or 20% of Tasmanian government revenue, also have a considerable impact of our GST share. The GST split is the residual balancing item which takes into account other specific grants received.

Not all grants are taken into account. The Federal Treasurer sets out in his annual terms of reference to the Grants Commission how other payments to States are to be treated. National Partnership, Health Reform and other Specific Purposes payments are taken into account. The Royal Hobart Hospital redevelopment funds negotiated by Andrew Wilkie, although a cash boon to the state government at the time, led to a consequent reduction in GST receipts in subsequent years. The $50 million received to redevelop Macquarie Point in Hobart was excluded. And most fortuitously the $270 million IGA receipts to restructure the forest industry was ignored when calculating our GST entitlement. We’d be broke otherwise. Road rail and water funding does affect the calculation of the GST share. In the latest update for the 2015/16 year one of the Commonwealth grants which reduced our GST share was for water. We got more for water in 2015/16 via specific payments than the national average ($26 million more) so we will receive less from the GST pool during 2016/17. Strictly speaking money for water may look like a handout from Canberra but it essentially comes from our share of the GST pool.

Trying to second guess what Tasmania’s future GST entitlement is extremely difficult. There’s a lag of up to three years between something happening (the reduction in iron ore royalties in WA for instance) and the flow through effect of a greater share of GST for WA . A greater % share for one State means a lesser share for others.

But it’s the flow through effect of other government grants that is also a big unknown especially following the noises made by Joe Hockey at Budget time in 2015 when the discussion about slashing grants to States by $80 billion first occurred. As recently as today (the 2nd May 2017) vanquished Prime Minister Abbott was at it again, as reported in the AFR :

Mr Abbott said many of the states were in better financial shape than the Commonwealth and they should be taking more responsibility for such services as public schools and hospitals.

“It’s time for the states to grow up and act like adult governments rather that constantly blaming the Commonwealth for their problems and to stop treating the Commonwealth as an automatic teller machine,” he said.

Oh to be an adult like Mr Abbott. That aside, if one logically follows the Grants Commission explanation of WA receiving 67% of its total assessed Commonwealth assistance from specific purpose grants thus leaving it with only 30% of its per capita entitlement from the GST pool, if the level of specific purpose grants were to fall then that would suggest a rise in WA’s % share from the GST pool would be needed to give WA its total assessed Commonwealth assistance?

It would appear NSW and Victoria would also see their GST %s rise. Which means the other states will see their GST %s fall. Tasmania’s lower bound is 147.3% (as at 2015) being its overall assessed share of Commonwealth assistance. We currently get about 180% of our per capita entitlement from the GST pool.

Conversely if specific purpose grants rise, which admittedly seems unlikely in today's climate, WA share of the GST pool may fall and Tasmania's may rise. Seems incongruous but that's what (my) logic suggests.

One can’t talk about the % split of the GST pool in isolation as all commentators seem to be doing. One needs to discuss the whole of Commonwealth assistance to the States. The % split of the GST pool is  just the residual balancing amount of the entire Commonwealth assistance arrangements.

Concern has been expressed about the Productivity Commission looking into GST relativities. What is the Productivity Commission going to review? The Federal system? That’s why it looks to be mainly a political reaction to noises coming out of Perth. Even if the Productivity Commission recommends one thing or another it will almost certainly be up to the Federal Treasurer what he puts in the terms of reference when he asks the Grants Commission for an annual update of GST relativities. If a better understanding of how the GST pool is split is the only outcome we may at least have made some progress.


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