The Australian Institute for Progress, a Brisbane-based conservative think tank, has a very interesting upcoming event on what some may consider the rather dry topic of horizontal fiscal equalisation, the complex methodology by which the Commonwealth Grants Commission determines each State and Territory’s share of the $70 billion GST revenue pool. John Fallon, an economist who should be well known to anyone who has worked on economic policy issues in Australia in the last few decades, will be launching his discussion paper HFE and the Grants Commission at the AiP’s offices in Woolloongabba on the evening of Thursday 15 August. Here’s the blurb from the AiP website:

Allocating Commonwealth funds: the golden handcuffs of federation

Why does the Commonwealth government penalise states that raise more revenue by fully developing their mining industry? Or penalise states that encourage investment and innovation by cutting taxes?

It doesn’t make much sense, and an obscure policy called Horizontal Fiscal Equalisation, has a lot to answer for.

If you’re involved in policy at a state level you need to understand Horizontal Fiscal Equalisation, and you should be at this policy launch. Click here to book.

John Fallon, a fellow of the Australian Institute for Progress, is an economist who has worked for Economic Insights, the Queensland Competition Authority, Queensland Treasury, Industry Commission, OECD, and Reserve Bank on a range of public policy and economic matters.

He will be launching the discussion paper “Horizontal Fiscal Equalisation and the Grants Commission”.

I have some sympathy with the economic efficiency arguments I expect John will be prosecuting. However, as a Queenslander, I need to recognise that our state has historically been a net beneficiary of HFE. For instance, in the chart below, consider Queensland’s GST relativity (the ratio of what Queensland receives compared with what we would receive if GST revenue were shared on an equal per capita basis across Australia). Over the last twenty years, Queensland’s average relativity was 1.033. My gut feeling is that any national efficiency gains from abolishing HFE wouldn’t compensate Queensland sufficiently for the loss of GST revenue to the state government over the long-term. Of course, as always, I’m open to being persuaded by logic and evidence, and I very much look forward to reading John’s paper.

I’m interested particularly in John’s views on the changes to the future distribution of GST revenue that were announced by the federal government last year (see this media release), changes designed to ensure WA doesn’t receive less than 70% of what it would under an equal per capita distribution. I expect John will say it supports his view the current system is broken, given it requires the federal government to inject hundreds of millions of dollars into the funding pool so WA gets more without disadvantaging other states.

On HFE, the Productivity Commission’s HFE 2018 Inquiry Report is very good on explaining how HFE redistributes royalty revenues and may discourage tax reform at the state level.

Also, you may be interested in Reflections on Fiscal Equalisation in Australia from Henry Ergas and Jonathan Pincus.