How the west won the GST distribution battle

Updated

Colin Barnett has scored himself a posthumous victory, politically at least.

Right through the resources boom, as West Australia's royalty revenues soared and the state's coffers swelled, the then-WA premier cleverly capitalised on the west's sense of isolation, arguing West Australians were being "ripped off" on the Goods and Services Tax (GST) carve-up.

At one stage, he even warned of an American-style Tea Party revolt.

Throughout it all, he demanded WA receive no less than 75 cents of each dollar it collected as GST — an idea that was heavily criticised by the other states and most experts.

Yesterday, Treasurer Scott Morrison delivered.

In a long presentation to the Canberra press gallery, the Treasurer outlined the "problem" the mining boom had created for the GST carve-up by increasing volatility in the system.

"You can't have a system that allows an outlier, for whatever want of circumstances, to come and crush the whole show," Mr Morrison said.

"You've got to give it a more stable basis to be underpinned by."

The system, according to the Treasurer, has unfairly treated some states.

How did we get here?

In the aftermath of the resources boom, West Australia's share of the GST fell below 30 cents for every dollar it had collected, just as its economy was tanking.

Not surprisingly, those in the west were outraged, claiming a massive injustice.

There were no complaints a few years earlier as the resources boom was in full swing.

As WA's income from mining royalties soared, it also raked in a healthy share of the GST, swelling its coffers.

But Mr Barnett realised in 2011, those revenues would seriously hit its GST take down the track, the WA premier went on the offensive, urging a review of the carve-up.

As things turned out, the Barnett government was hit by a perfect fiscal storm.

Not only did its GST take plummet, as he correctly foreshadowed, the price of iron ore — which had provided the revenue bonanza — collapsed right as the WA government was in the midst of a spending spree.

In its 2014 budget, the WA government pencilled in a headline iron ore price of $US122.70 ($166.20) a tonne.

It was not to be.

Iron ore prices plummeted to well below half that, eroding a large portion of WA's mining royalty revenue base, which blew out its deficit and added massively to state debt.

How the mining tax came back to bite WA

For most of the time since Federation, Western Australia has been on the receiving end of support from wealthier states in the east.

The mining boom changed all that.

And it was the west's decision to fight the Rudd and Gillard governments' decision to impose a mining tax that helped turbo-charge mineral royalty revenues.

In exchange for offering political support, the Barnett government in 2010 ended decades of discounted iron ore royalties to BHP and Rio Tinto.

The state government doubled the royalty on iron ore "fines" which delivered a massive injection of funds into WA.

It was a hard-fought deal.

Rio and BHP only capitulated after the WA government threatened legal action.

In addition, iron ore prices soared to previously unimaginable levels.

When the mining tax finally was passed into law in 2012, it contained a fundamental flaw.

The tax not only was imposed after all investment had been accounted for.

It also only kicked in after state royalty payments were paid.

The WA government figured that clause gave it the power to hoover almost all the revenue that would go to Canberra and raised its royalties for a second time.

The other states followed suit.

It worked exactly as planned.

The Minerals Resources Rent Tax delivered virtually nothing to Canberra.

But for WA, it turbo-charged revenues.

The mining companies mistakenly thought the extra impost would be removed once the Gillard government was removed.

But WA refused, which, in effect, meant the miners paid the mining tax to the states rather than Canberra.

While that may have been a coup for the Barnett government in the short term, the trebling in revenues which transformed WA into the richest state in the nation, eventually came back to bite it as a vast reduction in its GST share.

It was just as WA's then-treasurer, Christian Porter, foreshadowed.

GST collection, not the carve-up, is the issue

When former premiers Nick Greiner, John Brumby and South Australian businessman Bruce Carter were appointed to review the GST in 2011, following complaints from Mr Barnett, they knew they were on a hiding to nothing.

"The idea that a dispute over a fixed pot of money could be resolved happily, when recognising anyone's greater claim means that at least one and possibly all the others suffer, seemed unlikely from the outset," they wrote in their foreword.

As it turned out, they found the carve-up of the GST was less important than the collection.

GST revenues hadn't kept pace with projected state expenditures on health and education, which was a far greater long-term challenge.

West Australia is the biggest beneficiary of yesterday's new GST deal.

By adding to the size of the pot, however, the federal Treasurer ultimately will put pressure on federal finances.

At some stage, a future treasurer will be forced to either cut spending elsewhere or raise extra taxes.

The most likely target will be the GST and the age-old debate about whether it should be broadened to include food, education and health, or hiked, once again will rear its head.

Topics: tax, government-and-politics, money-and-monetary-policy, business-economics-and-finance, federal---state-issues, parliament, federal-parliament, wa

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