GST formula stunts national growth

28 April, 2017

Unless WA comes up with a GST alternative that benefits the nation as a whole, our cries for help will continue to fall on deaf ears, writes CCI Chief Economist Rick Newnham.

We need to talk about GST in the national interest.

Most Western Australians believe we’re getting a raw deal on GST, but that argument just isn’t going to cut it in Canberra.

However, the Chamber of Commerce and Industry of WA (CCI) believes holistic GST reform could inject billions into the national economy by incentivising states to grow under-developed industries and their economies, which is in the interest of the entire country – not just any individual state.

Unfortunately, the current GST system has removed these incentives.

Here’s how. The GST is distributed on the principle that every Australian should live in a place where their State Government can provide services just as well as whichever state or territory has the greatest capacity to deliver services. This is called Horizontal Fiscal Equalisation. At the moment, that leading state is WA.

First, the Commonwealth Grants Commission (CGC) looks at the cost of delivering services in each state as these can vary. For example, some states have more remote populations than others (e.g. Northern Territory, WA), meaning it costs more to deliver services there.

Second, the CGC reviews each state to determine how much tax they could raise if they applied the average tax rate from across the country. All good so far.

Third, all states are then raised to the national average of service delivery by distributing the GST. This ensures each Australian citizen has access to a minimum standard (the national average) of public services.

CCI believes GST distribution should stop here. States should be ‘partially equalised’ up to this national average and then remaining GST should be evenly distributed.

Instead, there’s a fourth step – GST is unevenly distributed across states and territories to bring everyone up to the leading state’s capacity. Every state is now the richest house on the street, above and beyond the average. Lastly, any left-over GST is distributed on a per-head basis.

This all means states do not need to strengthen their economies or drive efficiencies in service delivery, because they can simply sit back and be brought up to the leading state’s capacity every year.

Let’s look at New South Wales and Victoria’s on-shore gas resources, which could become billion dollar industries creating hundreds of millions in revenue for their State Governments.

Instead, NSW and Victoria have banned on-shore gas development and the CGC says they therefore have a lower capacity to raise their own revenue. They pick up more in GST than they would need if they developed their own gas industries.

Whilst I don’t believe the decision to ban on-shore gas development was made with GST in mind, the incentive for reconsidering the decision has been completely removed, leaving other states to fill the revenue gap through GST.

Too often the GST debate is centred on WA’s woes – namely our budget deficit and debt position. While the GST distribution certainly doesn’t help, WA’s financial problems are its own creation – over the last decade, the WA Government consistently increased spending above revenue growth, leading to a structural deficit. Whether you are managing a government or household budget, if you spend more than you earn, you end up in the red.

What’s more, WA Treasury has its own GST forecasts, so it saw the GST ‘cliff' coming a mile away - as iron ore goes up, GST comes down.

The case must be made for GST reform in the context of national economic growth. Reform can incentivise new economic activity and the development of state resources. To this end, CCI is calling on the Federal Government to direct the Productivity Commission to review the economic benefits of changing the GST distribution to partial equalisation.

CCI’s members have identified GST as a key concern for WA business. Later this year, I will join four senior WA business leaders in Canberra to call for change and highlight how holistic GST reform could not only assist WA, but grow the nation’s economy and create jobs for all Australians.

If we are going to succeed in changing the GST system, we must make the case in the national interest. For too long this debate has centred on WA’s self-interest, which is why our arguments have fallen on deaf ears.

Want to know what’s around the corner for WA? Register for CCI’s annual Federal Budget Breakfast to hear firsthand what the federal budget will mean for WA business.