Western Australians might bemoan the lack of infrastructure or long-term development to eventuate out of the last boom, but the country’s taxation system hardly helped matters.
Put simply, it does not provide incentives for states to be innovative in attracting new companies or projects.
While business was booming in the resources sector, the royalties were heading east in the direction of Canberra.
In theory, WA gets part of the royalty money back from the Commonwealth, however, the more WA earns from royalties, the less it receives in GST revenue through the Commonwealth Grants Commission’s horizontal fiscal equalisation policy (HFE). This means that States with below average revenue-raising capacity or above average spending needs receive a larger share of GST – as HFE redistributes resources from States with the capacity to provide above average services to the other States.
The GST is not distributed on a per capita basis so while WA might contribute $10 a head to the Federal coffers it may only get back $1 per head in GST. Meanwhile, Tasmania may get $10 a head because it does not have the means to provide the level of services residents of a “wealthier” state might expect.
States and territories have their capacity assessed based on advantages or disadvantages beyond their control, considered to be ‘policy-neutral’. However, in many cases it’s unclear what benefits arise as a result of policy or are natural occurrences. This means that a State enforcing policy to build upon its advantages is not rewarded, yet States that do not implement policies to try to develop economically in the face of disadvantage are rewarded.
An egalitarian society clearly has to cater for everyone but this “dumbing down” approach to taxation inhibits innovation. If, for example, the State Government wanted to attract global export companies by offering reduced payroll tax, then it would receive fewer GST allocations from the Commonwealth.
Vertical fiscal imbalance (gap between spending responsibilities and ability to raise revenue) is evident, with the cost of State health and education rising above the cost of inflation, yet net payments to the States remaining below the pre-GST average of 6% of GDP. The NSW Treasurer recently predicted that based on current growth rates, by 2033 the whole of the State’s budget would be swallowed up with health, mainly due to the ageing population.
Yet if the NSW government were to make a policy decision to dramatically reform its health system to improve efficiency and reduce costs – resulting for example in the ability for NSW to provide average levels of health services to residents for half of the previous cost – horizontal fiscal equalisation would kick in and reallocate NSW efficiency gains to below average performing States. This reduces incentives to innovate and prevents States from being able to channel efficiency gains from one sector to improve productivity in another sector.
The Barnett Government has been trying to negotiate with the Commonwealth for an advance on the Gorgon gas deal royalties to ensure it can provide the level of social and industrial infrastructure in the Pilbara that will be required to support the workforce for the $50 billion project. The infrastructure problems WA experienced during the last boom will only get worse without greater access to the tax base, such as a cut of income tax which would also act as an incentive to attract high quality employment.
The Secretary of the Treasury, Dr Ken Henry, is due to hand down his report into the future of the Australian taxation system this year. It remains to be seen whether it will address any of these concerns in enough detail to ensure greater innovation into the next decade and beyond.
