Claims about the fairness or lack thereof of the Commonwealth Grants Commission's recommendations have been flying across the Nullabor, with Western Australia feeling aggrieved at their share of GST revenue collapsing even further, down to 30c for every dollar paid. This is occurring as the mining boom has ended, with iron prices dropping to about a third of their peak price. The Western Australian government has forecast their deficit to balloon from $1.3 billion to $3 billion.
Western Australia's anger has been matched by the rest of the country, who refuse to consider any loss of revenue that would happen if the CGC's recommendations were not used. This is understandable, as dividing up a set of of money between eight parties is necessarily a zero-sum game. But over the past week there has been so much said, by the governments and the media alike, that what is truth and what is fiction has become difficult to spot.
So, it's time figure out once and for all who's telling the truth about what.
Claim: The percentage of Western Australia's revenue that it is receiving back is smaller than any other state or territory has received historically.
Response: Seems to be true. The Commonwealth Grants Commission was established in 1933 to assess claims made by the state governments to the federal government for special assistance. The way in which it has redistributed, and what it has redistributed, has changed over the years, as far as we can find, no state has ever had such a large yearly contribution to the Commonwealth distributed to other states since 1942, the year the Commonwealth government gained control of income tax and began redistributing funds to all the states.
Claim: Western Australia will have to borrow money to pay its contribution to the CGC.
Response: Probably the simplest way of putting it. The Grants Commission is making its recommendations on, amongst other things, the assumption of an iron ore price that is no longer true. The gap between the estimated iron ore price, and the real iron ore price, is expected to be a deficit of $500 million this financial year. As Western Australia is currently running a deficit, it will have to borrow more money than it had predicted to make up for the gap in GST revenue.
Claim: Western Australia has to make economic reforms before it can receive assistance.
Response: This claim, which has been made by a number of state and federal politicians, is a stretch. The federal politicians to have suggested it are those in the government who support widespread privatisation. The state politicians who have suggested it come from states who have done likewise. There are separate problems with their suggestions. The federal government has no power to tie GST to state reforms. The Grants Commission only considers the ability for a state to finance itself equal to every other state. The Commonwealth could, theoretically, offer Western Australia a tied grant, with the tie being these 'economic reforms'. But such a tie is not legally binding, and the ties are generally that the funds be spent on a specific project or area, not that it would be used to cut a deficit on the condition of policy changes. Besides, the WA government would never agree to such a grant in the first place.
The state governments are not in any position to tell another state how they should be run, particularly when their 'economic reforms' haven't been the reason they have stayed afloat recently. In the case of some states, they have only stayed afloat because of revenue taken from better performing states...such as Western Australia. The reforms in question tend to be the dreams of the neoliberal: further deregulation of trading hours and selling of state assets. Neither of these would fix the deficit in the short term, and would cause problems in the long term. There is also a certain irony in Labor governments telling a Liberal/National government to privatise their assets.
Claim: Western Australia is only complaining now that the boom is over.
Response: Not true. Western Australia has been warning the rest of the country of the potential consequences of this method of equalisation since at least 2008. But, because WA was doing so well, it was ignored.
Claim: Western Australia has wasted its boom and is now getting its just desserts.
Response: Has Western Australia misspent its revenue during the boom? If so, on what? The answer is pretty simple: infrastructure. In 2006, Western Australia was estimated to have a population of 2 million. As of now, that number is around 2.6 million. The mining boom brought a massive number of people to the state, and the wealth being generated elsewhere had to be provided for. WA's infrastructure was not yet ready for this. In many regional areas of the state, local infrastructure had been neglected for decades. The WA Nationals successfully ran on a scheme of 'Royalties for Regions', which guaranteed that a proportion of mining royalties would be spent in regional areas, bringing their infrastructure up to scratch. The cost of doing this cannot be underestimated, as any quick scan of an atlas might show you. The cost of delivering services in Western Australia is the second highest in the nation, behind the Northern Territory. In Perth, too, billions has been and is still being spent on infrastructure projects. Much of this has been to cope with a population that has just reached 2 million, up from 1.5 million in 2006. This cannot be rightly claimed to be a misspending of finances Many of these projects also bring the city up to speed with its rivals in the eastern states, which brings us to our next claim...
Claim: The GST distribution is fair/The GST distribution is not fair.
Response: Each side is claiming 'fairness' is on their side. Indeed, fairness is the whole point of the CGC and its distribution process. Specifically, the CGC states its aim is that:
"State governments should receive funding from the pool of GST revenue such that...each would have the fiscal capacity to provide services and the associated infrastructure at the same standard..."
In essence, each state should be able to provide the same services as each other. This is, in actual fact, what the Western Australian government has been doing. Two new hospitals, a new stadium, better public transport and a city waterfront centre in the capital, matching what other capital cities have. The regions, meanwhile, have had their services brought up to the kind of standard expected in bigger regional centres. This is exactly what the CGC redistribution is meant to do. Except the Western Australian government has done it despite, not because of, the redistribution. WA bringing itself up to speed with the rest of the country is entirely of its own doing, and now it is, perversely, being punished for it.
On the other hand, there is reason to claim that a changing of the distribution now is unfair, given that (in theory) the redistribution should, in some way, balance out over time. But that is rather shaky ground to stand on, as it assumes that everything else will remain equal. We all know that no such thing happens.
Claim: Western Australia thought the boom would never end and failed to see this situation coming.
Response: The WA government knew the boom would end, and, as stated earlier, foresaw the potential pitfalls of the GST redistribution well before this year. But no-one expected the drop-off in iron ore revenue to be quite as large as it has been, and here it can be argued that WA had a misstep, in that they thought the boom would end more gradually than it has. There were budget preparations already, but the speed at which further infrastructure projects have had to be held back shows that the end of the boom came quickly. Really, though, they should have accounted for the possibility of a quick end to the boom. The resources sector is hardly renowned for stability.
Claim: Western Australia is being greedy/the eastern states are being greedy.
Response: The claims here are slightly different. The claim against Western Australia is that they had their fair share during, and now want even more. This is a very basic way to try and understand a complex issue, and we have already examined the concept of fairness. But, again, why should Western Australia be punished for creating wealth in a state where providing services comes at a high cost?
The claim against the eastern states is that they are only looking short term. But who can blame them? The budget of the WA government is not their responsibility, and they only need to be interested in what affects their state. This may have consequences in the long term for them, but it is unlikely any state will be affected as badly as WA has. In the short term, their only interest is getting the greatest win possible in a zero sum game.
Claim: The states need to sort it out amongst themselves, as it is not a federal responsibility.
Response: This statement, which has been said by a number of government ministers over the last week, makes no sense. GST distribution is done by the federal government, as GST is collected by the Australian Tax Office and redistributed to the states according to the federal government's CGC. It is the very definition of a federal responsibility. If the federal government does not want this responsibility, then they should be considering wider tax reform which frees the states to not be reliant on federal government income. Until then, the federal government must take responsibility for this issue.
Claim: Western Australia has benefited from Commonwealth grants for decades and is now being hypocritical.
Response: This is probably the crux of every claim being made. Ultimately, it comes down history, as it's your knowledge of history that will affect the way you view the present. This idea that Western Australia has been a beneficiary from federal government redistribution for most of its history is a well-worn and oft-repeated one. One article from The Drum on this matter essentially made this point, in a way that is as patronising as possible. Many internet commentators have been saying similar things. So, is it true?
It is true that Western Australia has received Commonwealth grants for much of its history. If we simply viewed this in isolation, that would be that. Of course, it isn't that simple. Prior to federation, WA was actually a thriving colony, although it had taken a while to get there. Post federation, WA's economy slumped so badly that a Royal Commission was called to figure out what had gone so wrong. The answer? Federation.
Yes, the federation that WA had cautiously joined had turned out to have an enormous negative impact on the WA economy. The Commonwealth had in place a strong system of protectionism, which was great if you had an economy that didn't rely heavily on exports. Western Australia, however, had an economy that heavily relied on exports. The reason that Western Australia was being granted funds by the federal government had little to do with Western Australia - it was essentially compensation for being hit hard by tariffs and restrictions on free trade. This is no surprise when you keep in mind how WA essentially had to lured into joining the federation with constitutional oddities (eg. section 95) and assorted promises.
So, for many years Western Australia was punished for the nature of its economy, not because of its own failures. But then there's the claim that it's only been since the mining boom began that Western Australia started paying its own way. This, too, is false. Western Australia has been a net donor to the federation since the 1980s, arguably since even earlier.
What this argy-bargy is clearly demonstrating, above all, is that the current distribution of wealth between governments is not right, and widespread reform is necessary. A band-aid solution will not fix the current situation.
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