It was inevitable that the GST would end in tears before long, because the system was flawed in the first place.
This week, Treasurer Peter Costello called for greater accountability on how the states spend the GST revenue, and the states in turn told him to butt out.
The flaw in the GST system is that the Commonwealth was forced into a grave error at the time it was introduced. In order to get the GST legislation through the Senate, the Commonwealth agreed that all the revenue would go directly to the states to replace untied Commonwealth grants.
It was a foolish thing to do. It was one of the biggest shifts of power from the Commonwealth to the states in the history of our federation. No longer would the state premiers have to go cap in hand to the Commonwealth every year to argue for money.
Before 2001 the Premiers argued with the Commonwealth each year about how much in total would go to them. The Commonwealth Grants Commission would then apply a formula as to how the total would be divided among the states.
These days the total is guaranteed. Within three years of the GST’s introduction, the money going to the states outstripped the old grants (even allowing for inflation). GST revenues go up automatically with economic growth, or better. In its first year (2000-01) the GST was about 3.7 per cent of GDP. In 2003-04 it was be just over 4 per cent of GDP and in that time GDP has grown from $671 billion to $780 billion.
The Grants Commission still has a role in determining how big each state’s slice of the pie will be, but the size of the total pie is now out of the hands of the Commonwealth.
The Commonwealth still has some sway over the states with special-purpose grants, but the GST has given the states their own money. The states are rolling in it. And it’s a worry.
We should not get distracted by periodic squeals from individual state premiers that their state is being hardly done by. Those squeals are only about how much one state gets compared to the others. Invariably they pick one parameter (population, state gross product, distance, need or whatever) and argue a disadvantage, as ACT Treasurer Ted Quinlan and NSW Premier Bob Carr did this week. Overall, though, the states are all hugely better off under the GST, and they do not have to wear the political opprobrium of having imposed and collected the GST.
Costello is right; they are unaccountable. There is a fair argument that the states and territories have made a worse, not better, job of health and education since getting all this extra money. Moreover, they have reneged on part of the deal. The states were supposed to get rid of or reduce a lot of inefficient taxes – stamp duties, payroll taxes, property taxes. They have either delayed their abolition or increased most of the taxes.
Costello, of course, is in a bit of tricky position on the GST. Before the election he was content to call it a state tax, not a federal one, because once you include the GST as a federal tax, the Howard-Costello Government becomes the highest taxing Government in Australia’s history.
He argued before the election that the GST was a state tax for the states to spend as they saw fit.
After the election, his tune changed. He now wants the states to be “accountable” for they way they spend GST money.
Accountable to whom, is the question. Presumably, accountable to the Commonwealth – the body that collects the tax. However, Victorian Premier Steve Bracks argues that the states are accountable to their voters.
This is a much-cited (but exaggerated in my view) difficulty with Australia’s government finances: the Commonwealth raises far more revenue than it spends and the states spend money they do not raise. It is called vertical fiscal imbalance. And the imbalance in Australia is the highest of any federation in the world. The Commonwealth raises 75 per cent of total Commonwealth and state revenue, yet spends for its own purposes just 57 per cent of it.
So the states can blame the Commonwealth for not raising enough money to give to them, as Quinlan and Carr did this week. And the Commonwealth can blame the states for bad administration, as Costello did this week.
Costello’s concern is that the states’ poor handling of health and education might require the Commonwealth to put in more money, because if education and health falter it will reflect badly on the Commonwealth and affect the Australian economy a whole.
He issued as stern warning: “My message is this: you take the money, you take responsibility, because if the Commonwealth has to take back the responsibility, let me assure you it won’t be doing it without taking back some of the [GST] revenue base.”
Good. In July, the Government will get control of the Senate and can change the GST rules.
Given it would be almost impossible to abolish the states, a large vertical fiscal imbalance is about the next best thing, with the Commonwealth raising nearly all the revenue and the states being controlled agents to spend it.
It has many advantages. The Commonwealth can use its revenue powers to deal with “national” issues, rather than letting parochial state interests interfere. It can better manage cycles in the economy. It can use tax to balance regional disadvantages to help Tasmania and the Northern Territory, for example. And a national tax is more efficient.
Constitutionally it would be very difficult for the states to introduce their own broad-based consumption taxes, so the Commonwealth has to do it for them.
In all, Costello may as well bite the bullet. The GST is a federal tax so he may as well make sure it is spent wisely – there is not much evidence that the states are doing that now.