Western Australia’s brazen call for more GST money
Long before he was a politician, Mike Nahan was an ideologue.
For many years the American-born economist worked for the right-wing think tank the Institute of Public Affairs as director of its state policy unit and, for a decade to 2005, as its executive director. Back then he was a neoliberal economic purist.
Now he is the treasurer of Western Australia. Which is ironic given the economic management of the Barnett government has long been pretty much the antithesis of the policy principles Nahan stood for in his pre-politics days.
A full appreciation of the irony of his current position requires a little background. Back in 2006, two years before Nahan entered the parliament, he was still writing for the IPA about one of his particular bugbears, the process that goes by the arcane name of horizontal fiscal equalisation.
The concept is actually not as complicated as it sounds. It is simply a mechanism by which money is redistributed between poorer and richer such that all Australians may enjoy similar levels of services and comparable standards of living no matter where they live.
Nahan was disdainful of this process, which is hardly surprising. The free-market philosophy of the IPA does not much care for notions of government wealth redistribution, whether they relate to individuals or states.
In his view, the system by which the independent Commonwealth Grants Commission topped up the finances of economically weaker states at the expense of the richer ones had “long inculcated a mendicant mentality among the states”.
He argued that it had the perverse outcome of rewarding poor policy decisions rather than good ones, because if a state government made a mess of its finances “it will eventually be compensated, in part, with higher grants”.
Nahan maintained the Goods and Services Tax, introduced six years earlier, had only “augmented its distortions” by pumping up the volume of money flowing to the states via the grants commission. This easy cash, he complained, had allowed the states to go slow on the process of reforming their own tax systems and making other changes he regarded as necessary. Hence the title of his treatise: Opportunity Squandered – How the States have wasted their reform bonus.
Crippling lack of reform
Nahan’s general argument was the classic neoliberal one, that taxes should be low and levied on as “broad and steady” a base as possible, and that government should be smaller and should hand over as many responsibilities as possible to the private sector.
But now he is treasurer of a state government that has made an awful mess of its finances and which is loudly, collectively complaining that the grants commission is not doing enough to compensate it for its failings.
They are pretty spectacular failings. Even the likes of federal finance minister and fellow West Australian Mathias Cormann complains the West has been the laggard among all states and territories in economic reform.
Instead of levying its income on a “broad and steady” tax base, Western Australia became increasingly dependent on a single revenue source – mining royalties. Instead of privatising, it subsidised. Instead of practising small government, it spent like a drunken sailor the massive windfall that came to it through the iron ore boom.
And now that the royalty spigot that gushed billions over a decade has stopped gushing as the price of iron ore plunges, the state is left in a parlous position. Its budget is in tatters, its government is in debt, and its credit rating is in peril.
To be fair to Nahan, it’s not his fault. He’s only been treasurer for a little more than a year, although he was minister for finance and resources for more than a year before that. It’s really the responsibility of those who preceded him: Christian Porter, Troy Buswell and Premier Colin Barnett.
Still, it’s more than a little incongruous that the man who formerly complained about the grants commission bailing states out when they screwed up is now making the opposite complaint.
And it’s pretty rich to hear any Western Australian complaining that the redistributive process of the grants commission is unfair given that the state has been, to borrow Nahan’s word, a “mendicant” for most of its history. Indeed, the impoverished position of Western Australia was a powerful motivating factor in the establishment of the Commonwealth Grants Commission more than 70 years ago.
In 1933, West Australians, angry that they were not getting the same economic benefits as the big eastern states, voted by a 2-1 margin to secede from the federation. Obviously, that never happened, but the grants commission was subsequently set up to ensure greater economic equality between states.
It is a uniquely Australian expression of our egalitarian beliefs, says Saul Eslake, chief economist for Bank of America Merrill Lynch.
“The grants commission is the main reason why the gaps between the living standards, the quality and range of public services between Australian states are a lot less than the gaps between, say, Mississippi and Connecticut, or Newfoundland and Alberta,” he says.
“And up until about 2000, Western Australia got a bigger share of federal grants than its share of the population every year for about 65 years. For most of that time WA’s per capita gross state product (GSP) – which is the broadest measure of income – was below the national average.”
That’s no longer the case. A decade or so ago, Western Australia’s ship came in, in the form of a bulk ore carrier. First the volume of iron ore exports began to rapidly increase, at an average of about 12 per cent a year between 2001 and 2011. Then the price of iron soared. After having been flat for decades at less than $20 a tonne, it took off in 2005 and rose almost tenfold by 2011.
Even now that the boom has ended, the ore price is still more than twice what it was a decade ago.
WA economy outstrips other states
Western Australia is now by far the richest state in the country. And also the most inequitable, as economist Andrew Leigh pointed out in his book Battlers and Billionaires. The gap between rich and poor is as wide there as it is in the United States.
Last year, WA’s per capita gross state product was more than $100,000, about 50 per cent above the national average of less than $67,000. It was well over twice that of the most impoverished state, Tasmania, where GSP per capita was just $48,500.
Given those figures, the grants commission formula determined that WA could do with a smaller share of GST revenue. So now the WA government is complaining that the long-established system of grant allocation, which worked to its advantage for so long, is not fair and should be changed.
Eslake compares their position to that of “a pensioner who wins the lottery and then complains that they have lost the pension as a result”.
True, the share of the GST going to the West is unprecedentedly small, just 38 per cent of the amount raised in the state this year is going back in grants. And next year it will fall to just under 30 per cent. But that simply reflects that the margin by which the state’s income has exceeded that of the rest of Australia over recent years is unprecedentedly large.
“There has never been a time when one state has been so much richer than the rest of the country than Western Australia has been in recent years,” says Eslake. “When New South Wales was the richest state, it was never more than about 10 per cent higher than the rest of the country.
“The system is working as it is meant to,” he says.
That view is shared by all the other states, and most other people who understand the fiscal equalisation process and the role of the grants commission.
Still, the WA government has a devilish problem, not least because grants commission payments are determined on the basis of a state’s economic circumstances over the past three years. They reflect a state’s fiscal circumstances as they were, rather than as they are. So the state now is being treated as though it is still a boom economy, even though the boom is over.
Bear in mind, though, that the same lag in GST payments meant that it was getting more than its fair share during the early part of the boom. The Barnett government might have put away some of that royalty and GST windfall against an inevitable future decline. Instead it increased spending at an average annual rate of 8.7 per cent over the past 10 years.
“They’ve given themselves fancy new strange shapes on the Swan River foreshore, they’ve tarted up a lot of railway stations, they’re building themselves a big football stadium. There’s been a lot of money wasted on bread and circuses,” says Eslake.
The bottom line here is that West Australians are much, much richer than the rest of us, and yet their government now cries poor and wants a bailout.
Worse, they are going to get one from the Abbott government. Nahan and Barnett confidently expect a gift of $500 million to $600 million in the coming federal budget.
The conservatives of the federal government very much want to keep the conservatives of Western Australia happy. And that means not just the Barnett government, which has threatened to make federal–state relations very difficult if it doesn’t get its money. It also means the electors of the famously conservative state. They voted 58-41 per cent for the Coalition at the last federal election, but polls now suggest they are becoming disenchanted with the Abbott government even faster than the rest of the country.
So the 10 per cent of Australians who live in the richest state will be shielded from the economic folly of their government.
And the corollary is that an equal amount will not be available for the benefit of the other 90 per cent of Australians living in less wealthy parts of the country.
As it says in the Bible: “For he that hath, to him shall be given: and he that hath not, from him shall be taken away even that which he hath.”
It’s not supposed to be the way the federal system works. But it’s the way the federal government does.
This article was first published in the print edition of The Saturday Paper on Apr 25, 2015 as "The West wring". Subscribe here.