I am delighted to publish this guest post from my colleague Nick Behrens from QEAS on the GST redistribution inquiry currently being undertaken by the Productivity Commission. Views expressed are Nick’s, and are not necessarily shared by me. That said, I find it regrettable the PC’s draft inquiry report advances options that forgive WA for its poor public financial management during the term of the Barnett Government, to the detriment of all other states and territories. Queensland certainly needs to exert influence on the PC inquiry before it finalises its report later this year, as Nick argues below. GT

Has Queensland dropped the ball on the GST Carve-Up Review?

by Nick Behrens, Director, QEAS 

Many readers will no doubt be aware that the Productivity Commission is currently undertaking an inquiry into Australia’s system of horizontal fiscal equalisation (HFE), which underpins the distribution of GST revenue, and has been an issue of hot contention among States and Territories for decades. The Inquiry is considering the influence the current system of HFE has on productivity, efficiency and economic growth and whether there may be preferable alternatives.

I have previously asked is this Inquiry a threat or an opportunity for Queensland given that in 2017-18 as a State we will receive close to $15 billion in GST or 24 per cent of all money available despite having only 20 per cent of Australia’s population.  My view is it is undoubtedly a threat.

The proposal with the most profound implications for Queensland is that HFE should no longer aim to raise the fiscal capacity of each state to same as the highest state (currently WA), but instead to the average or to the second highest State (currently NSW). If actioned, Queensland will continue to be a net beneficiary of GST distribution. However, the extent of our benefit would be reduced by $729 million each year if HFE is to the second highest state or by $1.6 billion if it is to the average. These numbers would change from year-to-year, as the extent of HFE in Queensland’s favour varies from year-to-year, and has at times resulted in a re-distribution away from Queensland (when we were penalised for high royalty revenue). However Queensland has generally been a beneficiary of HFE, and the PC’s proposals are expected to be adverse for the State over the long-term.

My fear is that Queensland is being outgunned in the war among States in advancing their interests. It appears we may be more reliant on political rhetoric to progress our case as opposed to the substance of good representation underpinned and advanced through evidence and statistical research. While there are some very good and well reasoned arguments advanced in the Queensland Government’s submissions, I think we can do considerably better. Our arguments are articulated in theory and words and lack research and statistics to underpin them, which is surprising given the high calibre of Queensland Treasury individuals.

Page count is a crude metric by anyone’s measure, but a quick analysis of submissions to the process by each State Government reveals Queensland has the lowest page count among all the State submissions.

State Government Submission Page Counts

Those States that are cross-subsidising the most (like Western Australia) spent the most amount of effort arguing for how the current system is eroding their capacity to deliver services. Oppositely, those States and Territories that receive the highest level of equalisation like Northern Territory and Tasmania also spent significant effort in putting their submissions together.

In its follow-up 14 page submission to the inquiry, Queensland has diligently highlighted the impact that changes would have on the capacity to provide services. At the same time Queensland highlighted that, in its view, the case for change due to erosion of national productivity and growth had not been made by the other States.  Queensland Treasury states:

“Queensland continues to remain unaware of any evidence that this is a factor for governments in the setting of expenditure and revenue policies.

Where potential HFE impacts are considered in the policy decision making process, they are at best fourth or fifth order considerations. This means that many of the incentives or disincentives that are identified in the literature, and mentioned above, exist in theory but not to any material degree in practice.

Additionally, as Queensland set out in its initial submission, the most immediate benefit brought about by the current system of HFE is arguably in the services it allows States to provide. Any change proposed to HFE on the grounds that it will reduce disincentives to pursue economic growth must be balanced against the social costs of any potential reduction in services in some parts of the country – and the important role those services play in the long-term health of the economy.”

This is unfortunately and literally the extent to which Queensland is trying to counter the call for change and it is not enough. To be fair the post draft submission stage of the process was smack bang in the middle of our State Election with Queensland Treasury in caretaker mode.

However, if Queensland wants to maximise the likelihood that detrimental change does not occur then we need to better debunk the Commission’s proposals and highlight how they will affect our productivity and economic growth going forward. Queensland will lose to the greater good of lifting national productivity and economic growth if we are not proactive in countering states like Western Australia when they cite they are deliberately baulking on key reforms that drive economic activity because they are penalised GST payments in doing so.

By not countering the draft proposals with evidence and by not highlighting examples on how the Inquiry’s proposals would impact on our productivity and threaten our economic growth we run the risk of losing. Fortunately, it is not too late with a public hearing in Brisbane on the 5^th of February.

Incidentally, the Victorian Government’s submission does an excellent job taking apart the Productivity Commission’s Report. Reading their submission, it becomes clear a major question is whether we radically change the HFE system to benefit Western Australia, noting that if we do we’re essentially forgiving them for poor budget management in the past and not saving for the future. Queensland and Victoria could and should work together in countering the Commission’s proposals as our interests (i.e. lost revenue) are generally aligned (see chart below).

Queensland can’t rely solely on a passionate State Treasurer appearing before the media throwing barbs at the federal government to advance our interests. We need the evidence and arguments to back up our opposition to change. If we don’t represent our interests in this manner we really only have ourselves to blame.