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The distribution of funds collected by the Australian government to the states and territories often results in a fight over the outcome. This is a certainty in Australian politics, repeated over the years and decades as premiers and chief ministers fight with each other about what they consider a fair outcome for their respective jurisdictions.

The current spat between New South Wales and other states is but the latest episode in a long-running political saga.

According to media reports, the NSW treasurer, Daniel Mookhey, complained bitterly about the distribution of the GST revenue. In particular, he objected to the payment of $39 billion to Western Australia.

The NSW government argued that the payments to the states should be made on a per capita basis, which would deliver more to the most populous states of NSW and Victoria.

Redistribution

When the GST was introduced by the Howard government in 1999, the proceeds of the tax were allocated to the states. This was in return for the repeal of some state taxes.

It was also a political decision in order to win support for the new tax.

The GST revenue is paid to a central pool and then distributed between the states and territories according to the principle of horizontal fiscal equalisation. The HFE system is designed to equalise revenue between the states and remedy fiscal imbalance. Recommendations for the rate of return to each state and territory are made by the Commonwealth Grants Commission.

The goal of the scheme is to provide equal quality government services between all states. This takes into account a range of factors including the age of the population, and the need to provide services to both urban and rural areas.

It also endeavours to measure the ability of each state to raise taxes and the extent this occurs.

The consequence is that states and territories with smaller populations tend to receive a greater proportion of the funds than they would if distributed on a per capita basis.

Tinkering

Changes were made to the formula in 2018 following consistent complaints by Western Australia, particularly when the state’s resource tax revenue declined.

The new system is supported by both the federal government and opposition for political reasons. Opposition to it would likely result in a loss of seats in WA.

One of the underlying reasons for the change is the reluctance of the states to raise their own taxes. Although the states have constitutional powers to raise more taxes, they prefer to allow the Commonwealth to tax the populace.

They find it politically easier to argue about the fairness of the distribution than justify to their residents the need for additional taxes.

The incident demonstrates the reluctance of political leaders to discuss the underlying issues. States are complaining about the distribution of the GST pool, but not the underlying reasons for the pressures on it.

Instead of addressing the real challenges facing Australia, state leaders resort to calling each other names.

Victoria, for example, has a huge debt, which it displays no preparedness to tackle.

Pressure Points

All states are facing pressures on housing and other infrastructure, but have not tackled the Commonwealth about the very high levels of immigration that contribute to their challenges.

There were 55,000 net arrivals in Australia in January, the largest ever number for the month.

Australia only added 166,000 houses to the stock last year, yet the population — driven by immigration — increased by some 680,000. This ratio is unsustainable.

But the treasurers continue to avoid a discussion about the issues underlying their ongoing financial challenges.

Sadly, the situation is unlikely to change in the next few years.

A review of the distribution is scheduled by the Productivity Commission in 2025, and the national government has said it will review the formula.

With the Chinese economy slowing, Western Australia’s resources taxes are likely to diminish, exacerbating that state’s financial squeeze.

When visiting Perth, the prime minister eagerly signed a pledge to maintain the existing arrangements on a mock front page of the state’s major newspaper, The West Australian.

In the meantime, the current argument between the states will continue.

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Republished with thanks to KevinAndrews.com. Image courtesy of Karen Laårk Boshoff.