Friday, April 01, 2011

The way we divide the GST cake is a scandal

At the heart of Prime Minister Gillard’s decision to upend Australia’s long-settled system of dividing GST money between the states is a scandal, an outrage.

She hinted at the awful truth when she said it rewarded “underperformance in service delivery”.

At present all the Goods and Services Tax takings are pooled and divided between the states on the basis of their population adjusted by a relativity rating.

For the two biggest states the ratings are close to 1. The NSW rating is 0.95, Victoria’s is 0.93, meaning each gets back somewhat less than they would expect on the basis of population.

Adjusted for special needs and the luck some states have in having a resource base to tax, the ratings range from a low of 0.68 (for Western Australia) to a high of 1.62 (for Tasmania).

Except for one. The Northern Territory adjustment is by a factor
of 5 - 5.07 to be precise, soon to climb to 5.35. Largely because of its special needs in having a large highly-disadvantaged Indigenous population it gets back five times as much from GST as it puts in.

But it doesn’t need to spend the money fixing up Indigenous disadvantage - the grants are untied.

In fact it is in its financial interest for the Indigenous disadvantage to remain... It is in its financial interest to spend the money on something else - offices in Darwin, enviable salaries for its public servants and politicans.

As Australia’s foremost expert on state taxation Neil Warren puts it, “the Northern Territory likes to have a disadvantaged population - it has no interest in removing disadvantage.”

“The money given to them because they need Indigenous housing, they have poured into Darwin.”

If, as Professor Warren has proposed to the government, that money was paid instead in tied grants decided on the basis of performance rather than need, its relativity factor would drop like a stone.

It isn’t such an unusual idea. It is what Kevin Rudd proposed for hospitals. Money would be carved out of the untied GST distributions and handed to the states on the basis that they spent it where it was needed.

Critics of Julia Gillard’s push for a shakeup of the system of dividing the cake miss the point when they say that for every state that is made better off another will be made worse off. If we can get a system that actually makes Australians better off, we’ll all get ahead.

Published in today's Age

Related Posts

. The carve up

. Slicing the states' pie