PM orders GST review to punish states that let economies stagnate

Sydney Morning Herald

Thursday March 31, 2011

Phillip Coorey CHIEF POLITICAL CORRESPONDENT

THE Prime Minister, Julia Gillard, has ordered a review of the formula used to distribute the tens of billions of dollars raised by the GST.Ms Gillard said she wanted the formula overhauled so the states that expanded their economies were not penalised and those that allowed theirs to stagnate were not rewarded."Instead of states facing penalties for economic growth and rewards for economic underperformance, the GST distribution process should encourage economic reform and better delivery of services, and provide states with certainty," she said.The review will be conducted by the former NSW premier Nick Greiner, the former Victorian premier John Brumby and the South Australian businessman Bruce Carter.Its recommendations will affect the distribution of GST revenue from 2013-14 onwards.Ms Gillard made the announcement in Perth where Labor is deeply unpopular and where the Premier, Colin Barnett, has complained incessantly about losing GST revenue because of the mining boom.Under a complicated process known as Horizontal Fiscal Equalisation, an independent body, the Commonwealth Grants Commission, hands out the $40 billion-plus GST revenue each year.Essentially, the states that are doing well by generating revenue lose GST money to those with sluggish economies. However, higher costs, which can be a product of a good economy, are also taken into account.The smaller jurisdictions - South Australia, Tasmania and the territories - are subsidised without complaint by the larger states but the big states constantly bicker about not being able to keep all the GST revenue generated within their borders.Mr Barnett welcomed the announcement, as did the NSW Premier, Barry O'Farrell."NSW has been ripped off for years under the deal signed off by the former NSW Labor government," he said.Before the state economy tanked, NSW complained bitterly about subsidising the so-called mendicant states. In 2004-05, it kept just 87€š for every dollar of GST it raised. As a result of its slowing economy, it now keeps 96€š in every dollar.It potentially could benefit from the review by receiving all the GST revenue it raises but that would require an economic lift.In February the Grants Commission handed NSW an extra $972 million in GST revenue for 2011-12.Although the WA economy is booming, the mining state was granted an extra $440 million for 2011-12 because its high wages had driven up service costs. However, WA will still receive only 72€š for every GST dollar it raises in 2011-12.The shadow treasurer, Joe Hockey, said the review was a stunt to boost Labor in the west.

© 2011 Sydney Morning Herald

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