We had six kids in our family. In those days, ice cream did not come in large plastic buckets at little cost. It “wa’ loxury”. It came brick shape in a waxed cardboard container.
We could never carve the ice cream into six exactly equal portions without a major quarrel. Invariably the exercise would end with my father slicing it haphazardly with a spatula.
“I’m bigger, I need more ice-cream,” one sibling yelled.
Another replied, “I’m smaller I need more ice cream so I can grow.”
And another: “I did a job for Mum so I should be rewarded.”
I was reminded of these squabbles in the past couple of weeks as NSW, one of six states – not siblings – squealed as the Commonwealth Grants Commission wielded the spatula over the slab of Commonwealth funding to be dished out among the states.
“It’s not fair,” NSW squealed, “Why should Queensland get more ice cream than us. Even the fat cats in Canberra get more ice cream than us.”
Well, it depends on which way you look at it. And the Commonwealth Grants Commission looks at it long and hard from every angle.
But one thing is for sure, the slab of ice cream in the 1960s never got any bigger, but the slab of Commonwealth money going to the states and territories is now rising every year. Indeed, it is rising slighter faster than the growth in the economy as a whole. This is because of the GST.
Under the New Tax System laws every last cent collected in GST has to go to the states in untied grants to spend on whatever those governments see fit.
Before 2000-2001, the states and territories had to go to the Commonwealth to argue not only about how the slab of ice cream should be carved up but also on its actual size. The farce was called the annual Premiers’ Conference until then Prime Minister Paul Keating renamed it the Council of Australian Governments in the early 1990s.
In those days the Premiers whinged a lot about the total size of the Commonwealth untied payments to the states. These days they can no longer whinge about that. But they still have to blame the Commonwealth for something in order to distract their voters, so they turn instead to the way this ever-growing slab of ice cream is carved up rather than its actual size.
NSW is squealing loudest. It says it is “subsidising” Queensland. It will happily cop a subsidy to little Tasmania and the Northern Territory, but thinks Queensland, Western Australia and the ACT should not be subsidised by NSW (and Victoria).
This month the commission announced how it would divide the ice cream for 2004-05. Every state and territory would get extra. It is just that Queensland and Western Australia would get a lot more extra (per head of population) than NSW and Victoria.
NSW with 33.6 per cent of the population would get just 30.0 per cent of the grant money. Queensland with 19.3 per cent of the population would get 20.3 per cent of the grant money. One percentage point does not sound much, but the total grant money is $41.6 billion. One per cent of that is $416 million. That will buy a lot of votes – I mean nurses and teachers.
Of the $2.8 billion extra in 2004-05, Queensland is to get $886 million, or 32 per cent. Yet its population is just 19.3 per cent of the Australian total.
The GST revenue climbs inexorably with economic growth – in fact slightly higher than economic growth as the GST’s tentacles reach further into the economy.
In its first year (2000-01) the GST was about 3.7 per cent of GDP. In 2003-04 it will be just over 4 per cent of GDP and in that time GDP has grown from $671 billion to $780 billion.
It is a long-term worry. The childish squabbles by the states illustrate how ill-equipped they are to spend this ever-growing windfall. The states are notoriously parochial pork-barrelers. The Commonwealth can be bad enough, but it is untainted with corruption and is a model of administrative efficiency compared to the states.
But given we are stuck with the states and now stuck with handing them an automatically increasing stream of revenue it might be time to change the way the commission hands out the money.
To date the theory has been that in the federation all states benefit from the economies of scale of having a national army, diplomatic corps, maritime administrations, currency and so on which they would otherwise have to provide themselves. Therefore all Australians, wherever they live, should have access to reasonably equal government services. Those services cost more to deliver in remote parts of Western Australia, Queensland and the Northern Territory. Further, some jurisdictions do not have access to sources of revenue. The ACT has no mining, for example, and much of its workforce are federal public servants exempt from payroll tax.
But now the guaranteed GST revenue is going straight to the states, this “equality” idea has less logic and less economic sense. Do the states have to provide equal average services across the nation or merely reasonably adequate services? Subsidies in general are often inefficient. They reduce the incentive for efficiency and self-reliance.
There is less of a case for using federal money to equalise now the states have access to a secure and growing tax base.
Also, the GST is not collected according to population, but according to economic activity, so why redistribute it according to population, especially if this was designed as a tax for the states. Each state should get whatever is raised in their state. The easies way to do that is to base the redistribution according to state economic activity, not population. That would obviate the need for all or some of the equalisation subsidy to Western Australia, the ACT and Northern Territory because the gross state product per head (roughly income per head) in those jurisdictions is significantly higher than the Australian average. People in the ACT get 122 per cent of the Australian average and Western Australians get 111 per cent. So more GST is raised there than average. It seems absurd to take away the extra GST revenue raised from those states and territories and then hand funds back to them as a subsidy. Also, if citizens in those places are getting more income they are in a better position to look after themselves without help from their state-level Governments.
Further, if the GST were redistributed according to where it was raised the states might be in a better position to abolish other inefficient taxes. That was supposed to be the underlying idea behind the GST: the states would have access to an efficient growth tax so there would be no need for inefficient stamp duties and employment-destroying payroll taxes.
For that to happen we need a little healthy inequality among the states.
There would still be a good case for helping the Northern Territory and Tasmania and perhaps South Australia. But Western Australian, Queensland and the ACT can stand on their own feet.
All the states are much better off with the GST. The slab of ice-cream is much bigger. There should be no need to bicker if economic fate delivers a slightly bigger slice to one or other state, especially if it spurs it on to more efficient tax regimes and greater prosperity for other states to aspire to.
It need not be a survival-of-the-fittest free-for-all. But surely we no longer need to aspire to precise equality. No one is going to starve.