*Pic: Far-Right WA Treasurer Mike Nahan and Premier Colin Barnett …

How WA can fix its own GST problem

Western Australia’s far-right Treasurer is demanding fundamental changes to the system which uses the distribution of the GST to iron out the differences between rich and poor states.

The debate out of the West is immensely dangerous ‒ because Mr Mike Nahan, Premier Colin Barnett and Finance Minister Senator Mathias Cormann might just get their way. At the last federal election, the West was Abbott heartland. They embraced him with fervour and delivered him the votes to make him Prime Minister.

But now, polls show the opposite. According to the latest Newspoll analysis, the federal Liberal vote in Western Australia is at its lowest ebb in 14 years.

And if an election was held now, Colin Barnett’s Liberal government would lose to Labor 52% to 48%. Barnett himself trails Labor’s Mark McGowan 38% to 44% as preferred premier.

That seems to be largely what the current stoush is about. West Australian Liberals, like Finance Minister Mathias Cormann, are seriously worried about the fate of two conservative governments.

The idea behind the present, long-standing system ‒ it’s called horizontal fiscal equalisation ‒ is that whoever you are, wherever you live, you have a right as an Australian to the same level and quality of government services as everyone else.

It’s the best possible expression of a decent society and the notion of a fair go for all.

The process is run by the Commonwealth Grants Commission. They do a remarkably good job in an immensely complex area. Without them, Australia would be a different and much less decent place.

The problems faced by the WA budget at the problem at the moment ‒ apart from having an inefficient government sector ‒ is the delay factor in the Grants Commission assessments of GST share entitlements.

When there is a ‘fiscal event’ such as a change in the iron ore price or a payment from Canberra that affects a state budget in Year One, that state’s share of GST is adjusted during years Three, Four and Five till everyone comes out equal.

This is what happened to Tasmania over the Royal Hobart Hospital redevelopment grant and it’s what’s happening to WA now.

So there’s a significant lag. That lag is probably necessary to ensure both that the sums are right and that year-to-year volatilities are ironed out so the system becomes more even and more predictable.

When iron ore prices were going up, WA benefited from this delay. Its GST share was inflated for a while because its royalties were always more than the Grants Commission calculated. I don’t recall hearing any complaints from them at that time.

Now, with iron ore royalties going in the other direction, they’re experiencing the other side of the equation.

Tasmania, on the other hand, is benefiting slightly from the lag right now. As our economy improves, we are still being assessed on the basis of how our things were a while ago.

All states find themselves in this position from time to time. It’s nothing new. The cleverer ones make provision for it.

The WA situation will not last for long. Apart from the folly of changing such a fundamental process as fiscal equalisation for a situation affecting one state, and that’s only going to last for a only couple of years anyway, the solution is well within the capacity of the WA government to fix ‒ and at no cost in real terms.

Most economists believe iron ore prices are at or near the bottom of the price cycle. Industry forecasters are mostly expecting something of a rise over the next year or so, though not of course to the artificial heights of the mining boom.

Ratings agency Standard and Poors …

So this is strictly a temporary situation for WA. The system will soon catch up.

In the meantime, the WA government could easily fix its own problem.

If Mr Barnett and Mr Nahan issued three-year state government bonds to bridge that temporary gap, their alleged GST shortfall would go away until the system caught up again.

In real terms it would cost them nothing: in fact, in real terms they would show a profit.

NSW three-year bonds are currently carrying a yield of 1.94% p.a. That’s below the rate of consumer price inflation and about half a per cent below the expected inflation rate over the three-year period.

Even though the WA government has been put on a negative credit watch by the ratings agency Standard and Poors ‒ because of their inefficiency and lack of reform ‒ there is no reason why they should have to pay significantly higher interest than NSW.

The chance of default is nil. And that’s what yield-hungry global investors want to know. They ask two questions: how much will I get? And will I get my money back?

They know they will get their money back. No Australian state government is about to go broke. And a WA state government bond yielding around 2% would be a much better bet than US Treasury, Japanese or German bonds at close to zero.

If the iron ore price stays where it is ‒ which is close to its historic average ‒ GST will flow back to WA from other states and they could once again become a net beneficiary state.

The WA government is well able to solve its own problems. It doesn’t have to destroy a system which is such an essential part of what makes us a nation.

• Phil B, in comments: There is nothing far right about the WA Government. They are actually mere populists, as shown by their refusal to let markets (which they already distort through a lack of competition) to set the price consumers pay for electricity. If there hadn’t been a huge subsidy running for years, WA’s State debt would be lower and the budget would look a lot better without the $500m pa subsidy.