Against a backdrop of plummeting iron ore prices piercing a worrying hole in his government’s bottom line, Western Australian Premier Colin Barnett has been battling to preserve his state’s share of the GST carve-up.

Now Finance Minister Mathias Cormann and Federal Treasurer Joe Hockey have hinted that Western Australia may see a larger slice of the GST pie if only they, as Senator Cormann put it, “show a sense of urgency” around microeconomic reforms such as the sale of the state’s electricity poles and wires.

In other words, do as we say – or else.

This is nothing short of the federal government bossing around the states – and using the distribution of GST to the states as a bargaining chip. Any time the Commonwealth starts dictating policy to the states on ideological grounds without clear benefit to the national interest, then it’s bad for Australia and it’s bad for democracy.

Trouble in the West

The GST stoush has been brewing for some time. It’s been clear to the Western Australia government that, under the current system for calculating the GST distribution, things were going to get worse for them over time.

That’s been compounded by the plunge in the iron ore prices.

The independent Grants Commission has recommended that WA’s share of GST revenue be cut from about 37% of the per capita average of GST collected nationally to around 30% – as part of an effort to redistribute the mining windfall enjoyed by the resource-rich states. It’s been calculated that Western Australia stands to lose $664 million of GST next year under changes to the GST distribution formula recommended by the Grants Commission.

So as far as Western Australia is concerned, they are being penalised for good conditions that they are no longer enjoying.

Iron ore prices have plunged to below $50 a tonne, with the Treasurer warning they may even reach as low as $35 a tonne.

This is causing serious distress in the industry, with investment drying up and revenues winding down. So Western Australia is in a difficult position. They have committed themselves to government spending based on the previous state of the economy, not today’s dire outlook.

In such turbulent economic times they’re not likely to give up easily on the fight for a larger share of the GST pie. They need it too much. Fiscal equalisation is a good thing, but Australia’s arrangements are too slow in adjusting to changing circumstances. They are also too reliant on horizontal transfers from state to state and not enough on vertical subsidies from the Commonwealth.

Carrot or stick

As part of the National Competition Policy reforms of mid 1990s, the federal government rewarded states with payments for liberalising energy markets.

Those payments weren’t coercive. These were reforms that the states were collaborating in, and the payments were to help enact policies that citizens of those states and their representatives wanted. It was more carrot than stick.

This week has seen quite a different approach from the federal government – and this time it’s more stick than carrot.

Now the federal government is effectively saying “We could consider giving you what you regard as your just desserts in terms of your share of the GST… but only on the condition that you implement the reforms that we believe in.”

It makes a mockery of federalism.

When Prime Minister Tony Abbott launched his White Paper on federalism, he said:

We need to clarify roles and responsibilities for States and Territories so that they are, as far as possible, sovereign in their own sphere. The Commonwealth will continue to take a leadership role on issues of genuine national and strategic importance, but there should be less Commonwealth intervention in areas where States have primary responsibility.

The federal government’s push for reforms in Western Australia look, to many, like exactly the opposite. It is the Commonwealth bossing around the states.

The benefit of federalism is that people in different parts of the country can choose the mix of policies that they want. There’s a democratic principle at stake here.

Privatisation push

The federal government has suggested it sees room for privatisation of a range of assets in Western Australia including the poles and wires network and the Port of Fremantle. Joe Hockey also described Western Australia’s trading laws as “antiquated”.

But WA trading laws are none of Joe Hockey’s business. These are all entirely matters for state governments and state citizens to decide, just as we just saw voters decide on electricity network privatisation in the NSW election.

Some may argue that all Australia can do at the moment is to increase the efficiency of its economy through privatisation and many of those perceived obstacles to efficiency on that are under state jurisdiction.

But the point is: surely that’s choice for Western Australia to make. It’s not something they should be bullied into by the federal government while their slice of the GST is held to ransom. And as a country we are much better off if States are free to follow their own paths, allowing us to compare what works best

Even if we do assume there’s a clear cut case and that privatisation creates clear efficiencies for Western Australia, what’s the overall benefit for Australia? The net gain, at a national level, would have to be pretty small. That suggests that the federal government’s push for privatisation of state assets is largely ideological.

Who’s next?

This stoush affects all Australians – not just those in the West – because it affects the autonomy of every state. Everyone has a stake in how the GST is distributed and everyone has a stake in ensuring their state is free to make policies supported by the people of that state.

All states have a vested interest in their ability to negotiate strongly, whether it is collectively or individually, with the federal government any time a state is being bullied.