Thursday, August 18, 2016

Say no to Western Australia, the prodigal state

prod·i·gal (prŏd′ĭ-gəl)

adj. Rashly or wastefully extravagant: a prodigal nephew who squandered his inheritance.

Western Australia wants the rest of us to bail it out.

Without warning, the GST lifeline it needs to fund its operations has collapsed, or so it says.

Our Treasurer, Scott Morrison, seems to believe it. Here is he on Monday telling radio host Ray Hadley no one saw it coming: "The simple point that the Prime Minister is making is this, no one envisaged that the current way things are done would lead to a situation where Western Australia would just get 30 per cent of the GST that their people paid."

No one envisaged it, apart from Western Australia. Five years ago in 2011, when it got back 72 cents from each dollar of goods and services tax its residents paid to the Commonwealth, its budget papers predicted that by 2014-15 it would get just 33 per cent. In fact it got 38 per cent, a less severe downgrade than expected. A year later it predicted 25 per cent by 2015-16, and got 30 per cent.

You can say what you like about the Western Australians, but you can't say they didn't see this coming.

The Grants Commission distributes the GST pool according to need, and ability to pay. That's why the Northern Territory always gets back far more than it puts in: its highly disadvantaged Indigenous population means its needs are greater. It's why, ever since the start of the GST at the turn of the century, NSW and Victoria have got back somewhat less per person than they've put in: housing Australia's two most important cities and the businesses and real estate within them means they are able to raise more per head from their own resources.

Except that the Grants Commission moves slowly. By the time it has collected its evidence and divided up the pool, as many as three years can have passed, meaning Western Australians are suffering now because of the extraordinarily high revenue-raising ability they had earlier in the decade. But here's the good news: they knew back then it was going to happen and had time to prepare.

So what did they do?

Christian Porter was Western Australia's treasurer at the time. He is now a federal minister and is being talked about as a future federal treasurer, which makes his actions in Western Australia especially worth examining.

He spelled out the problem clearly enough. His 2011 budget said GST revenue would "fall dramatically" from $3.6 billion in 2011-12 to just $2 billion in 2014-15.

His response was to spend even more. He promised spending growth of 7.9 per cent in 2011-12, and achieved 10.2 per cent. And he borrowed more, boosting state government debt from $13.4 billion to $18.2 billion in two years. He borrowed for a new football stadium, a new purpose-built home for the Western Australian Institute of Sport, a new Perth Museum, a new hospital and new schools, and a $270 million Perth Waterfront Project, all in the middle of a construction boom when the cost of building was soaring.

He'd done some thinking about his looming revenue problem, and he'd come up with a plan. He spelled it out on page 64 of his budget paper 3:

"The prime minister has announced a review of the arrangements for distributing GST revenue grants among the states and territories," it said. "The review is likely to significantly alter Western Australia's GST grant share from 2013-14 onwards."

That was it. With one bound he would be free. All he would need would be Julia Gillard's agreement, and the agreement of the other states, and the problem would vanish. The system was "almost certain to change".

The other states laughed. Western Australia knew what was going to happen and had time to cut its coat according to its cloth. In the year that Porter announced his escape plan the Western Australian public service swelled 3 per cent. Public service numbers in the rest of Australia fell. In that year Western Australian public service salaries climbed 4.6 per cent. Even now, they are climbing 3 per cent. In the rest of the nation it's 2.4 per cent.

John Nicolaou runs ACIL Allen Consulting in Western Australia and was previously chief economist at the Western Australian Chamber of Commerce and Industry. He says the talk about changing the GST formula is a sideshow designed to draw attention away from financial mismanagement. During the boom years Western Australia got enough revenue to set it up for good. Instead it sprayed it around, even while it published forecasts of what was to come.

Turnbull and Morrison appear to have sympathy for the prodigal son, at least until after its state election. They shouldn't. Its latest forecasts show its GST share rebounding over the next three years in a delayed reaction to the end of the mining boom. A bailout, of any sort, would send the worst possible message about the views of Turnbull and Morrison and the consequences of governing badly.

In The Age and Sydney Morning Herald
Related Reading

. GST can’t fix flawed Budgets, Shane Wright, The West Australian