The contest for most stupid political proposal is a toughly fought one, but on the weekend the bar was well and truly raised when the WA state Liberal party voted to “examine the option of Western Australia becoming a financially independent state within the commonwealth.”

While stopping short of complete secession, the proposal remains one of the kookiest ​ you could get from a party that was once in charge of the state’s finances and, presumably, would like to one day again be considered worthy of being in power.

The proposal is dumb, firstly because “financially independent” and “within the commonwealth” make no sense whatsoever. It’s all very well to say states should raise their own taxes and pay the federal government for services rendered, but even a half-second thought ​ reveals the idiocy of a state paying another ​ government to defend it.

WA Liberal party votes to look into state seceding from federation Read more

One suspects the eastern states might believe the federal government should charge a very high premium to Western Australia for its nearly 13,000km of coastline.

All of this, of course, has come about because Western Australians continue to feel hard done by the break-up of the GST – it now receives only 34.4% of the GST revenue its citizens paid.

GST is divided up on the basis ​ that it furthers the principle of horizontal fiscal equalisation. Essentially, this is about ensuring, as the Commonwealth Grants Commission states, “each of Australia’s states has the same fiscal capacity, under average policies, to provide general government infrastructure and services.”

It takes into account states’ ability to raise revenue and also the circumstances that affect their expenses – such as age of the population, geography, and the number of Indigenous people living within the state.

The calculations are done on a rolling three-year average of these different aspects. This meant that Western Australia was hit particularly hard by the falling iron ore price after 2013 – as WA’s capacity to raise mining royalties was based on an average iron ore price that was well above the amount that was actually leading to WA’s revenue:

Of course there are swings and roundabouts. At the start of the mining boom, the iron ore price rose very fast – meaning WA received a bigger share of GST than it would have had the Commonwealth Grants Commission determined its share of GST based on the current rate rather than a rolling three-year average.

In 2015, the CGC estimated that “prior to the reduction in its iron ore royalty revenues in 2014–15, Western Australia received around $7bn additional GST revenue than it would have if fully contemporaneous assessments had been in place.”

So yes, Western Australia might have a case over what gets counted as revenue raising capacity but if we’re going to say it is being ripped off now, we should also remember it has also done very well out of the system.

But let us ponder what a “financially independent” WA would look like.

Firstly, yes it would be a hit to Australia. WA represents about 15% of Australia’s economy and about 35% of its exports.

Over the past 25 years, Australia’s economy excluding WA has grown by 108% compared with the actual 120%:

But what would a WA economy independent of Australia look like?

For a start it would mean residents of Perth would go from living in a country with the 13th or 14th biggest economy in the world to roughly the 50th biggest.

In 2016-17, Western Australia’s annual gross state product was $239.7bn – roughly around the same size as New Zealand’s GDP.

The population of 2.6m would make it about the 140th biggest nation on earth. And because of a relatively large GDP, that would also see it have one of the best GDP per capita levels in the world.

This is not surprising – the mining boom has seen WA gross household disposable income per capita grow faster than other states over the past decade:

But while it might seem a very rich country, the economy of this new country would be very narrowly based. Over a quarter of its GDP would come from the mining industry:

But to show just how all that industry earns might not necessarily flow through to the Western Australian workers, only 7% of all Western Australians would be employed in the mining industry – though still well above the 1.2% of people in the rest of Australia:

It makes for a fairly precarious economy – one burdensomely dependent upon iron ore prices. Falling iron ore prices have wrecked havoc with the WA state budget and they would be just as liable to do the same with a WA federal budget. Only this time there would be no Commonwealth of Australia to come lend a hand.

If WA received all of the GST it paid it would have about $4bn extra revenue. That would be enough to wipe out the state’s budget deficit, but the problem with wanting to become financially independent is you don’t get to choose only the good things.

The Australian government currently has a debt of $500bn. That debt was raised to pay for Western Australian services as much it was for other Australians. The Australian government as it granted WA its independence would also gladly grant WA its share of the debt – let’s be generous and give them 10% based on their share of the population.

As the West Australian’s Shane Wright has noted, this means WA’s new financially independent government would be taking on an extra $50bn in debt to go with its own current $50bn of state debt.

And this is for a government that has a lower credit rating than does the federal government, meaning it would need to pay a much higher rate of interest on that debt. Given its level of debt would be double that of the similar sized economy of New Zealand, most likely credit agencies around the world would quickly downgrade the new Western Australia, meaning it would again have to pay higher interest rates.

And while an independent WA economy looks quite strong given its exports, the problem for WA residents and businesses is while they have an export surplus with the rest of the world, they don’t with the rest of Australia.

There are estimates of trade deficit with the rest of Australia of up to $45bn a year. Financially independent WA might like to hope that Australia will allow free trade, but as Brexit has shown, the larger economy of Australia would have the whip hand in any trade deals.

Western Australia also depended greatly on people moving from the rest of Australia to work during its mining boom. Without that influx of people it would not have had the skills to take advantage of the boom in iron ore prices – and the price of labour would have soared astronomically:

Taking back its GST revenue and hoping like hell the companies don’t relocate their businesses in a way to avoid paying company tax to WA might seem a joy to some deluded souls of the WA Liberal party, but the reality is that without the rest of Australia WA would be an economic basket case.

Mining dollars would generate wealth for few and lead to rampant inequality.

Saddled with massive debt, being required to renegotiate trade deals with every nation in the world, having a narrowly based economy dependent on fluctuation in iron prices, and needing to pay for its own security, WA’s new currency – an important aspect of being “financially independent” – would quickly become worthless.

Clearly this move to investigate financial independence is being done to give comfort to West Australians who feel ripped off by the GST share. But all it really does is demonstrate the WA Liberal party is like a dopey teenager demanding his parents give him independence without thinking that it might mean he will be asked to pay rent.