I’ve been thinking a lot recently about the forthcoming Australian Institute for Progress (AiP) discussion paper on the “golden handcuffs of federation” by well-known Queensland economist Dr John Fallon. Based on the blurb for the August 15 discussion paper launch, which would be well worth attending I’m sure, the paper will critique the complex methodology, known as Horizontal Fiscal Equalisation, which is used to redistribute the $70 billion GST revenue pool. As I discussed in a post last week, I would expect that abolishing HFE, and the Grants Commission which oversees it, would disadvantage Queensland. I am confident Queensland Treasury thinks the same way. Indeed, the Queensland Government’s submission to the 2017 PC HFE Inquiry noted:

Queensland places great value on HFE…HFE is the mechanism by which Australian Governments collectively ensure that Australians living in different parts of the country will be provided with broadly similar levels of service.

This submission was prepared by the Queensland Treasury. I expect our state Treasury recognises that Queensland faces a number of challenges in delivering services to our vast State: our extensive road network, remote communities, and a higher proportion of Indigenous people than in the rest of Australia. Typically, HFE provides Queensland with a greater share of Commonwealth funding than it would expect based on its share of the Australian population, to help compensate for our higher cost of government service delivery. This is generally to our advantage.

That said, at times, HFE has worked against Queensland because the HFE methodology has penalised us for high royalty revenues. This penalty can appear unfair given the backward looking nature of the methodology, which means we can be penalised for high royalties in recent years, even though commodity prices and royalties are lower in the current year.

Furthermore, HFE isn’t perfect, and the methodology appears to compensate southern states for restricting the growth of their resources sector, particularly in gas extraction, and to discourage state taxation reform (see pp. 13-16 of the PC’s HFE Inquiry Report). I am concerned about these perverse impacts, so I will read John’s paper with an open mind, open to being convinced HFE is a bad idea and against Queensland’s interests.

No doubt, John will have plenty of points to criticise HFE on. However, considering how much Queensland historically has gained in GST revenue above what we would have expected based on our population share, in the order of $7 billion in total over 2000-01 to 2018-19 (Figure 1), John will face a huge challenge convincing the Queensland Treasury to abandon its long-standing support for HFE.

Figure 1. Additional GST revenue flowing to Queensland as a result of HFE

Source: Author’s calculations based on data in various Australian and Queensland Government budget papers since 2000-01.