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!
States’ positions on HFE
- WA: Does not support the current approach. Weaker States should be supported but the current approach to HFE is failing. The Commission’s assessments are not correct and they provide States with disincentives to improve their operations and develop their economies. Attempts to achieve full equalisation are futile. The Commonwealth should introduce a GST-relativity floor and in the long run take on the HFE role (presumably via some other source of funding) while allocating GST on an equal per capita basis.
- SA: Strongly supports the current objective of full equalisation. The current system is not detrimental to national productivity or economic efficiency. A departure from full HFE would lead to a significant loss in national productivity. State Governments will always pursue some policies that depart from pure efficiency goals but this is not a consequence of HFE and would still occur in its absence.
- Tasmania: The current system of full equalisation is equitable and mitigates inefficient migration of labour from small to large States. There is no evidence that it prevents or discourages economic development efforts by States. Many factors outside States’ control impinge on their fiscal circumstances. HFE has not undermined States’ reform efforts.
- Queensland: Supports HFE. While the PC has been asked to consider economic costs, it should also acknowledge the role that HFE plays in promoting equity and the importance that the Australian community places on equity. At a theoretical level there may be disincentives to pursue growth but there is no evidence that they have significant consequences. An equal per capita distribution would overlook structural differences between States and would lead to inequitable outcomes.
- ACT: Strongly supports the current system but recommends some improvements. Potential disincentives to reform and pursue growth could be dealt with by allowing for the “second-order” impact of State policy settings into assessments. The Commonwealth should consider taking over mineral taxation from the States so as to avoid the anomalies that arise from large differences in States’ capacity to raise mining revenues.
- NT: Strongly supports HFE. There are no known alternatives that better achieve efficiency, equity and simplicity objectives and promote national wellbeing.
- NSW: The current HFE system is broken and radical, comprehensive reform is long overdue. It should be replaced with an equal per capita distribution. Australians have lost faith in the fairness of the GST distribution and it undermines incentives to pursue growth-enhancing reforms. It creates a welfare mentality. The Grants Commission makes decisions that are overly complex and it relies on questionable data. Oversight of the CGC including decisions about the meaning and implementation of HFE should be transferred to a States-only body in which States have voting power corresponding to their size.
- Victoria: Supports HFE. It is a mechanism that allows equitable levels of service across States when they make comparable revenue efforts. There is room for improvement in the implementation of the system, but these changes are mostly administrative and technical in nature. There is little convincing evidence to suggest that HFE has impeded reform, growth or productivity. Western Australia’s current fiscal difficulties are due to its own mismanagement—it was foreseeable that GST grants would with a lag fall in response to its mining revenue boom but it did not save the proceeds to cover this.