Productivity Commission to Investigate GST Carve Up

Thursday 4 May 2017 @ 9.47 a.m. | Corporate & Regulatory | Taxation | Trade & Commerce

By Media Release issued on 30 April 2017, the Federal Treasurer, Mr Scott Morrison, announced that he had tasked the Productivity Commission to undertake an independent inquiry into the system used to distribute GST revenue to the states and territories, known as "horizontal fiscal equalization" (HFE), which is the method which underpins the distribution of GST revenue by the Commonwealth to the States and Territories.

Background to Current System

According to the Treasurer's Media Release, "fiscal equalisation" has been a feature of Commonwealth-State financial relations since the early years of Federation.  The current approach involves the Commonwealth Grants Commission (CGC) recommending  a GST distribution to the States that is meant to provide each State with the capacity to provide its citizens with a comparable level of government services. The current system has been in place since the GST was introduced in 2000 by the Howard government and was agreed to by all States.

The Government's Reasons for the Inquiry

In the Treasurer's Media Release, he indicates that the inquiry results from views that have been conveyed to the Government by some States that the current approach to HFE ". . . creates disincentives for reform, including reforms to enhance revenue raising capacities or drive efficiencies in spending, arguing that any gains from reform are effectively redistributed to other States." By commissioning the Productivity Commission inquiry, the Treasurer indicates that the Government is seeking an examination of the issues underlying these claims.

The ABC reports the Treasurer as saying:

"Under Australia's current approach, the CGC recommends a GST distribution to the states that provides each state with the capacity to provide its citizens with a comparable level of government services, . . . "In recent years, views have been put to the Government that the current approach to [horizontal fiscal equalisation] creates  disincentives for reform, including reforms to enhance revenue-raising capacities or drive efficiencies in spending, arguing that any gains from reform are effectively redistributed to other states."

Scope of the Inquiry

In the official "Terms of Reference" issued to the Productivity Commission by the the Treasurer, the Commission is tasked, to consider the effect of Australia’s system of HFE on productivity, economic growth and budget management for the States and for Australia as a whole. 

Particular considerations for the Commission are:

  • Whether the present adoption by the CGC of an HFE aim to equalise states’ revenue raising and service delivery capacities is in the best interests of national productivity; or whether there may be preferable alternatives. On this matter the Productivity Commission should enquire as to whether this aspect of the CGC formula or any other aspect of it may restrict the appropriate movement of capital and labour across State borders to more productive regions during times of high labour demand;
  • Policies affecting energy and resources, noting the uneven distribution of natural resources across the nation; whether sufficient consideration is given to the different underlying and structural characteristics of different revenue bases;
  • Whether the present use by the CGC in its HFE formula of rolling three year averages provides the most appropriate estimate of real state revenue raising abilities, particularly for those states heavily reliant on large and volatile revenue streams. Particular analysis should be given to whether the lagged fiscal impacts that result from averaging and non-contemporary data leads to GST relativities which accentuate rather than moderate peaks and troughs in state economic cycles;
  • Whether the present HFE formula, may have the effect of producing a disincentive for a State to develop a potential industry or raise a royalty rate for an existing industry at an appropriate time.;
  • Whether the present HFE formula in its stated aim of comprehensively equalising States’ fiscal capacities places too great a reliance on broad indicators and insufficient relevance on specific indicators which recognise States' different circumstances; and
  • The Commission should also consider implications for equity across jurisdictions, efficiency and simplicity.

Reaction and Comment

The ABC reports that the inquiry to examine the impact of GST carve-up on national productivity and economic growth already has the support of WA Premier Mark McGowan who urges the Federal Government to "act immediately" on the findings. The NSW government is also reported to back the inquiry while other states are said to be lined up against WA, opposing any cuts in GST revenue. Given that WA will get a return of just 34 cents for every GST dollar raised next financial year after a determination last month by the CGC it is not hard to see why the new government in WA supports the inquiry.

One of the key states opposing change to GST redistribution is Tasmania, whose Premier, Mr Will Hodgman is reported by the ABC as saying he will fight "tooth and nail" to block any proposals to change the distribution of GST revenue between the states and the territories. The Tasmanian government argues, as do the leaders of other small jurisdictions, that, ". . . the concept of the federation is that there should be fairness across the states." In Tasmania's case, it is reported that, if the GST distribution is changed away from the allocation of revenue based on the costs of running a state or territory, and moved more towards a per capita basis, then some estimates would see Tasmania receive something like $1 billion less in the next financial year.

What's Next

The Productivity Commission is required to undertake appropriate public consultation which includes holding hearings, inviting public submissions and releasing a draft report to the public. The final report is to be provided to the Government by 31 January 2018.

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