States’ submissions to Productivity Commission Horizontal Fiscal Equalisation Inquiry

There are some interesting submissions at the PC’s Horizontal Fiscal Equalisation (HFE) Inquiry website.

Victoria, Queensland, SA, Tasmania, ACT and NT are all in favour of HFE albeit with some suggestions for improvement. None of these States buy the line that HFE is undermining reform, growth or productivity. NSW and WA are opposed to HFE and support an equal per capita distribution, and they say that HFE does undermine growth. I’ve given a potted summary of each State’s position below.

To some extent WA wants to have its cake and eat it: it wants equal per capita in the GST distribution and says it wants the Commonwealth to take on the HFE role. Maybe this involves the Commonwealth finding another pot of money to top up States funding and implementing HFE with this? In this case the substance of the new arrangement is that WA is better off as a result of expanded grants from Commonwealth to States—as indeed are all States. But aggregate grants are still distributed according to HFE and as such will not be equal per capita. (A separate issue is that GST has underperfomed as a funding base for the States and something needs to be done about it as was foreshadowed in the 2012 GST Distribution Review—see especially Chapter 11 of the Final Report.)

While WA is very dissatisfied with its current treatment under HFE, Victoria says that since Federation WA has received $25 billion more in Commonwealth payments than it would have with a per capita distribution. Victoria has received $86 billion less. These unequal funding shares are a direct consequence of the long standing practice of distributing funds to support equity in the service levels and revenue efforts of the States. It is that long standing practice that now delivers a low share of Commonwealth funds to WA in consequence of its strong mining royalties.

NSW proposes that “A new HFE Board should be established charged with overseeing the distribution of GST. This board should comprise state treasurers with voting powers reflecting population share or the number of seats each state has been allocated in the Commonwealth Parliament” [pp. 35-36]. On current populations that would mean that a coalition of NSW and Victoria or a coalition of NSW and Queensland could exercise absolute power over defining the meaning of HFE and thus the GST distribution!

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