Misunderstanding our current problems is reaching epidemic proportions if one is to judge by Dr Michael Powell’s comments ( Tasmania, the GST and Peter Pan economics ) on the new GST arrangements and the wider more crucial issue of Federal budgetary difficulties.

Just to quickly address the GST issues before moving to the broader matters of budgetary policy.

There’s nothing new about Scott Morrison’s Magic Pudding solution to add more to the GST pie to ensure States aren’t adversely affected in $ terms by the new rules. It’s the way the current system works. Not the current GST system per se but the current system of horizontal fiscal equalisation (HFE), of which GST is a part.

Grants flow from the Feds for specific purposes and for general purposes. The latter are sourced from the GST pool. States can decide how to spend general purpose grants whereas specific purpose grants need to be spent as stipulated.

But all grants are considered when squaring up under the HFE system. For instance, Western Australia, as it was forever reminding everyone, only received 30 per cent of what it would have received had its GST entitlement been calculated on a per capita basis. However, its overall entitlement to Fed grants was 60 per cent, due to it’s mining riches, which most people east of Kalgoorlie reckon belongs to all Australians, but which ends up in WA coffers.

When WA receives specific purpose grants it receives roughly 100 per cent of what it would have received were the grants distributed on a per capita basis. That’s the way specific purpose grants have worked in the past. Most have been distributed on a roughly equal per capita basis. These are mainly for health and education, to a lesser extent housing and the environment. Only NT tends to get more than equal per capita assistance via specific purpose grants.

When it comes to dividing up the GST pool, because WA has received 100 per cent from specific purpose grants when its assessed share under HFE principles is only 60 per cent, it receives less GST, in one year as low as 30 per cent of its per capita entitlement, so that overall its share of Fed grants, both specific and general purpose, equals 60 per cent of its per capital entitlement.

Tasmania on the other hand is entitled to about 147 per cent of its per capita entitlement. If it receives 100 per cent from specific purpose grants, it needs to get a higher percentage from the GST pool to compensate. That’s why Tasmania has been receiving more than 170 per cent from the GST pool …

… Unfettered financialisaton has extracted increasing amounts from the real economy under the pretext of making the economy more efficient. But we have ended up with an unbalanced economy, one that is leaving more and more people losing contact with the peloton. It’s not just the housing market. Infrastructure, such as electricity transmission networks and airports are even worse when it comes to the amounts extracted by the finance sector to the detriment of consumers and the real economy. Greed masquerading as efficiency.

But the talk is still about a distant government surplus. Does it really matter who runs a deficit and who runs a surplus if we achieve a fair and equitable society? Government deficits, if financed by borrowings, will result in more of the pie being distributed as interest to the bond holders. But that’s a distributional problem, which all governments face every day of their existence. If our children and grandchildren are the bondholders, in other words they own the debt, then a payment of interest is simply a distribution of the pie. Should extra debt ever be a problem then governments can create money out of thin air to do anything it wants without borrowing as we have seen the RBA do. It won’t necessarily lead to outbreaks of inflation as scaremongers suggest …

Read more on John Lawrence’s superb blog, TASFINTALK, here

*John Lawrence has worked as an economist, public accountant and a DIY Super consultant. Currently a public policy researcher and blogger. Am interested in promoting an understanding of finance and economic issues particularly those that confront the State of Tasmania.