Australian Institute for Progress backs Minns government on GST

Minns backs the right horse on GST

According to the Australian Institute for Progress Australia’s current distribution system for the GST, where funds are distributed according to “need” rather than contribution, is inequitable and damages productivity.

“The AIP backs the Minns Labor government in New South Wales in their call to have the GST distributed on a per capita basis, or alternatively, proportionately to the amount of GST raised in each state,” said Graham Young, Executive Director.

“The current system is a handicap system which rewards average performance, while punishing outperformance.

“If a state raises less revenue than other states, it is compensated for this, and if it raises more revenue, it is punished, irrespective of how the revenue is raised.

“The flaws in the system have been exposed by Western Australia which has optimised its natural advantages in mining to hugely increase the revenue available to the state government for the benefit of all citizens.

“Under the old system WA was penalised for its entrepreneurialism so that it received only something like one-third of its per capita expectations because of the extra royalty income.

“The result is a special deal done with the Morrison government, and continued by the Albanese government, which gives them an additional $5 billion this year.”

Mr Young said that the Australian states should be free to follow their own strategies and reap the benefits and the consequences of them.

“Some states, like Queensland, the one where I live, have pursued a low tax strategy to attract business and residents from other states.

“It’s a good strategy, but their income shouldn’t be topped up by other states, to compensate them for it.

“With Queensland’s mineral wealth it should be following the WA example and developing more mines so that it can complement low taxes with an increased stream of mineral royalties.”

Mr Young said that Victoria and New South Wales generally receive about their per capita expectations, and the states who received the most assistance were South Australian and Tasmania.

“Tassie may have a case for special assistance from the Commonwealth, separate from the GST carve-up, because it necessarily has a high ratio of government overheads to revenue because of its small population.

“South Australia just needs to pick its act up.”

The AIP has published a number of reports on Commonwealth/State financial relations, including Horizontal Fiscal Equalisation, and Covid-19 and Australian federalism, and continues to do research in this area.

“Federations are the most efficient form of national arrangement allowing for diversity and experimentation, with competition encouraging the individual states to do better.

“We can see this working well in countries like the USA and Germany, but we have tended to run our federation like the Melbourne Cup, a handicap race, where it’s almost impossible for the best horse to win, and the worst horse has almost as good a chance of being a winner.

“This arrangement makes for exciting horse racing, and substandard economics and governance.

“When it comes to the GST, the Minns government is backing the right horse.”