The meeting of the state and territory treasurers last week once again saw a fight over the distribution of revenue from GST. Under the current rules for the breakdown of the GST, Western Australia is set to receive less than 30 cents in the dollar of the total tax income.

This has caused Western Australian premier Colin Barnett to invoke the American War of Independence, and suggest WA’s economic and financial future rests more with Asia than the rest of Australia. But such rhetoric is more about trying to find a blame for his state poor budget position, and ignores the fact that for most of the past 100 years the rest of Australia has actually propped up WA.

The GST was never intended to be shared by states only according to population size. Its purpose – and that of other state grants from the federal government – is to ensure “horizontal fiscal equalisation”.

Horizontal fiscal equalisation (HFE) refers to the imbalance of the revenue raising and expenditure capabilities of each state – due to factors such as population size, geography, demographic makeup, and other various economic factors.

The principle which guides HFE for the distribution of the share of the GST is defined in the Intergovernmental Agreement on Federal Financial Relations as:

“State governments should receive funding from the pool of GST revenue such that, after allowing for material factors affecting revenues and expenditures, each would have the fiscal capacity to provide services and the associated infrastructure at the same standard, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency.”

Thus, the GST should be split up such that it would allow each state to provide a similar level of services as other states. In effect, it attempts to redress the fact that some states – currently NSW, Victoria and Western Australia – would be able to provide better services than other states purely because of the advantages those states have due to the factors listed above.

HFE is an important concept in Australia’s federal system. Without it the standard of health and education services in each state, for example, would vary massively.

New South Wales’ schools and hospitals would be much better funded than those in South Australia and Tasmania.

And the difference would grow as the poor services would cause people to leave those poorly serviced states, which would in turn further reduce their revenue raising capacity, which would in turn lead to poorer services.

Without HFE Australia would be more akin to a group of confederated states rather than a federated nation.

Currently the main argy-bargy over the distribution of the GST is related to the amount Western Australia is getting.

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In its latest decision the Commonwealth Grants Commission (which determines the breakdown of the GST) has decided that Western Australia should get just 29.99 cents in the dollar of revenue.

This is the lowest share ever by any state by a long way.

New South Wales receives 97.7 cents in the dollar and Victoria just 89.3 cents. The rest of the states all receive more than the share they would receive on a pure per-capita basis. Queensland gets $1.12, South Australia $1.36, Tasmania $1.82, the ATC $1.10 and the Northern Territory – mostly owing to its high proportion of Indigenous people – receives $5.57.

Not surprisingly, Western Australian politicians are complaining they are being ripped off and that they are funding other – poorer – states.

A look at the distribution of the GST since 2001 shows that WA has certainly lost a lot of its share in recent years, but it is worth noting that as short a time ago as 2006-07, WA was actually receiving more GST revenue than it would expect due to its population size:

WA has received a lot less GST in recent years purely because of the mining boom. Its capacity to raise its own revenue via mining royalties has massively outpaced that of other states on a per capita basis.

When determining the distribution of the GST, the commission looks at the capacity a state has to raise revenue and the requirements it has when spending money on services.

This year the commission determined that WA’s capacity to raise revenue from mining royalties reduced its share of GST revenue by the order of $2,180 per person:

It was far and away the biggest impact on GST revenue. By contrast, the ability of NSW to raise revenue through property sales reduced its share by just $99 per person.

But WA also gets more GST revenue than it otherwise would due to the impact of its size and demography on the cost of providing necessary services:

Last year the commission noted that with regards to education, Western Australia – as well as Queensland, Tasmania and the Northern Territory – needed to spend more on school education services than the average, because “they have a higher proportion of students and/or high cost students in their population”.

Thus, in 2014-15 WA received $249m more in GST than it would have received under a strict per capita distribution, purely due to the extra cost of providing education in that state.

But WA is complaining this year not just because it is getting less, but because WA’s budget is in a shambles. As I noted last year, the falling iron ore price has smashed the state’s budget.

The falling prices also affect their GST takes because the commission calculates the ability for WA to raise mining royalties based on a three-year average of the iron ore price. Clearly the fast-dropping iron ore price means WA is getting a smaller share of GST than it would were the GST calculated on the current price:

But as the commission noted, that WA’s budget has taken a hit from falling iron ore revenue is not in itself a reason to increase the amount of GST it should receive. Rather pointedly, the commission stated that the distribution of GST “seeks to equalise fiscal capacities, not states’ budgetary circumstances which include their policy choices”.

The commission also noted that since 2010-11 WA has benefited from fast-rising iron ore prices, which meant the amount of mining royalties the state earned was actually higher than the amount estimated by the commission when it determined the state’s GST share:

The commission calculated that because it underestimated the amount of mining royalties WA would raise, over the course of the mining boom till 2014-15, the state “received around $7bn additional GST revenue” than it would have had the commission’s estimate been equal to the actual amount of the royalty raised by WA.

So it is pretty damn rich ($7bn worth of richness) to start complaining now that it is being hard done by.

Complaining about Western Australia paying for other poorer states also requires forgetting a great deal of history.

From 1910 to 1928, only Western Australia and Tasmania received any commonwealth grants. As economist Matt Cowgill notes, WA was so economically destitute in those early days that a royal commission was held into the issue.

From 1934 to 1968 the state was deemed to be a “claimant state” – a position only Tasmania also held for that entire period.

And when we look at the share of commonwealth general revenue assistance (which includes GST and other special grants) given to Western Australia since 1942, we see that until 2009 it received much more assistance than its share of the population would deserve:

The state is fortunate that the rest of Australia did not treat it as it would now treat the other states.

Little wonder the Bank of America Merrill Lynch Australia chief economist, Saul Eslake, suggests the state is “to some extent, like a pensioner who’s won the lottery and then complains about having lost the pension and having to pay income tax”.

The policy of horizontal fiscal equalisation has massively benefited Western Australia. Now that it is finally in a position where it has the capacity to raise more revenue than other states is no reason to change the system.