Image for How safe is our GST?

*Pic: Image from here

First published July 2

Once again, the Western Australian GST problem has proved too hard for the federal government. Cabinet discussed it again but could reach no conclusion.

Maybe soon there’ll be something to say, according to the Treasurer, Scott Morrison. Maybe.

To be fair, both major parties have found the issue impossible to navigate. Both are delivering very different messages – one version for Perth, another for Hobart, Adelaide and Brisbane.

Once again, the can looks likely to be kicked down the road. If published leaks are correct, the Treasurer planned to buy off the West Australians with a huge cash injection while leaving the GST itself alone.

If the Cabinet had agreed, an announcement would have been made on Tuesday as planned. It didn’t happen. “We are taking our time to get it right and we will continue to take the necessary time to get it right,” Mr Morrison said.

Certainly, time is being taken. It’s been years.

Twelve years ago, when royalties from the mining boom and revenue from a property boom gushed lavishly into its money bins, WA switched from being a “mendicant” state – the thing it now accuses Tasmania of being – to being one that got less than its population share of the GST pool, rather than more.

Because the redistribution system takes a few years to catch up, Colin Barnett’s state government got to keep those extra royalties. It spent them with an abandon to make a drunken sailor blush. And it went on spending even when the GST was finally doing its job, borrowing heavily rather than doing the hard work of increasing efficiency and productivity.

Just one example: it costs more to treat a patient in WA’s public hospitals than anywhere else in the country except Canberra. Better, smarter leadership would deliver more and safer care for less money. That sort of incremental, intelligent reform has not been evident in that state in its hospitals or anywhere else.

Back in the early 1980s, WA’s funding relativity – the amount of Commonwealth grants money they got per person – was about where Tasmania’s is now. But from the mid-1990s, increasing iron ore royalties began reversing WA’s fiscal situation.

In 1999, Australia produced 38 million tonnes of iron ore, almost all of it from Western Australia. Five years later that had become 58 million tonnes and by 2011 stood at 108 million tonnes.

All that time, the lag in calculating grants to the states – now in the form of GST – meant a massive amount of the new bonanza stayed in the west rather than being redistributed through the rest of the country. Instead of saving some of that money for the inevitable downturn, they went on spending it. State administration became ever flabbier and wasteful.

“All this was predictable,” wrote top constitutional lawyer Professor George Williams in 2015. “At some point, the WA boom would be followed by a bust, likely made worse by its GST being calculated according to prior years. Rather than planning for this, such as saving for difficult times, the state has spent its revenue. The result is a fiscal crisis.”

We need also to remember why the redistribution system happens at all. At any time, there are rich states – like Western Australia now – that are capable of providing gold-plated services because they are able to raise so much money from their own taxes and charges.

And there are poor states, like Tasmania now and WA in the 1980s, which are unable to raise anything like that amount. If they had to rely solely on their own resources, their hospitals, schools, police and ambulance services would be barely above third-world levels.

Australia would be a highly unequal and unfair place. Those able to move to rich states from poor ones would be the most productive and resourceful people with high-level, marketable skills. Those left behind would be poorer and poorer, as the downward spiral continued.

The process of redistributing cash is essential if we are to create a nation that avoids these massive extremes of wealth and poverty. It is a central component of the federation, part of who we are as a nation. It is what makes us Australians first and Tasmanians or Western Australians second.

Rather than taking the blame for his own government’s inadequacies, former WA Premier Colin Barnett chose to blame everyone else, and Tasmania in particular. Because of the massive iron of boom in which royalties are paid to the state rather than to the Commonwealth, WA’s share of the GST pool in 2018-19 will be 4.9%, even though it has 10.4% of the nation’s population.

So the argument from the west, seemingly oblivious to history and national ideal, is that one rich state – theirs – should be able to impoverish the others, particularly Tasmania and South Australia. They want the GST to be distributed on a population basis or, at worst, for their share of the GST pool never to fall below a certain level.

This argument has been bought wholesale by almost every commentator and politician in the west. The GST redistribution system makes ours the fairest federation in the world –but they cannot see beyond their own short-term interests. They have all, as the saying goes, drunk the Kool-Aid.

Rather than defend a centrepiece of the Australian federation, both major parties have tried to appease the West while reassuring all the others. Scott Morrison delayed an actual decision still further in May last year by referring the whole matter to the Productivity Commission.

The draft report was issued last October but the government was not required to respond to it at that stage. But now they are.

The final report was handed to the Treasurer over six weeks ago and Cabinet, clearly split, continues to dither. Malcolm Turnbull has promised it will be released before the Super Saturday by-elections.

But final reports from the Productivity Commission seldom differ much from their drafts. Unless the Commission changes its mind radically, it will continue to favour an approach that carves Western Australia out of the GST redistribution system and allows it to keep not only all the GST it raises but also its mining royalties.

If this happened there would be one winner and seven losers. For the Northern Territory and Tasmania, it would be a disaster. The quality of our hospitals and schools would plummet even further. For the NT, it would be worse even than that, with a gargantuan hit to its capacity to deliver care to its aboriginal population.

Scott Morrison’s preferred option – to put a floor under which WA’s GST cannot fall and provide top-up money for everyone else – was rubbished by the Productivity Commission. That top-up funding would have to come from somewhere, they said. If the federal government was not prepared to raise other taxes to compensate, it would have to come out of money already given to the states in non-GST grants, or would come out of other Commonwealth programs. And it would be highly vulnerable to the federal government’s own budgetary needs and political whim.

None of this addresses the two crucial questions. Are such radical changes to federal-state relations politically achievable? And are they even legal?

Under both of these proposals, there are seven potential losers and only one winner.

The GST was established as part of the over-arching Intergovernmental Agreement on Federal Financial Relations. The series of documents under this umbrella is – along with the constitution – one of the two key documents defining how the federation works.

The aspects of the agreement dealing with the GST were written into the A New Tax System (Commonwealth State Financial Arrangements) Act 1999, one of the swag of laws establishing the new system. The government would first have to amend or repeal this law.

Clearly, and according to all the experts, the Commonwealth Parliament has the power to unmake any law it has previously made, including this one. But can you imagine the discussion in the party room? Can you imagine the politicians from the seven loser states and territories caving in to those from Western Australia on such a critical matter?

Let’s say it gets past the party room. It then has to go to the House of Representatives, where the government has a one-seat majority. Unless Labor, the Greens and the independents were politically suicidal, they would oppose the government’s bill. It would take only a couple of Liberals to cross the floor to defeat it.

And can you imagine the public outcry, right around the nation, with the West Australians the only ones who weren’t outraged?

Let’s say the bill succeeds. Then it goes to the Senate. And the chances of getting through there are even less likely.

But, once again, let’s ignore the political realities and the public outcry against the government. Even if the Commonwealth act was repealed, the Intergovernmental Agreement would still be in place. And it says: “This agreement will operate indefinitely from 1 January 2009 unless the parties by unanimous agreement in writing revoke it”.

The question that would then arise is: can one party to such a critical agreement simply vary it, against the wishes of one or more of the other participants?

This is where the High Court is likely to come in.

The Intergovernmental Agreement requires any change to the rate (10%) or base (the list of goods and services attracting GST) of the GST to remain as they are unless all parties – that is, all states and territories and the Commonwealth – agree. Carving one state out of the system might not be held to affect either the rate or the base, though examples might be found of this happening.

But the agreement also stipulates that “the Commonwealth will distribute GST payments among the states and territories in accordance with the principles of horizontal fiscal equalisation”.

And that is the question on which the High Court would almost certainly be asked to adjudicate. At what point does an agreement between jurisdictions become a contract that one party can’t just tear up at will? In all its 115 years, the court has never given clear guidance on that point.

A legal opinion from barristers Bret Walker SC and Anthony Lang said the agreement was not a contract. But if the dual-citizenship fiasco has taught us anything, it is that relying on the opinions of learned counsel to second-guess what the High Court will rule is a mug’s game.

As Professor Cheryl Saunders, Sydney University’s top constitutional expert, wrote, whether an agreement is a contract or not is a grey area.
“In the absence of legislation, however, the legal effect of an agreement between governments must be determined by reference to the rules that apply to an exercise of executive power,” she wrote.

“These rules do not clearly distinguish intergovernmental agreements from two other more familiar categories of executive instruments: treaties and contracts. Conceptually, an intergovernmental agreement usually falls between the two, bearing the hallmarks of a political agreement, but between parties who lack the sovereign status of treaty partners. An intergovernmental agreement may in some circumstances be able to be enforced as a contract.”

But it’s not a clear matter: “Usually, however, lack of precision in the terms of the agreement, or the political nature of the undertakings in it, dispel an intention to create binding legal relations and place it beyond the normal authority of courts to enforce.”

Agreements between governments are usually taken seriously by both sides and are seldom abrogated. But if it is clearly an administrative matter between two elected governments involving, for instance, arrangements for Commonwealth contributions to state services such as hospitals and schools, the court would not class this as a contract. Tony Abbott was able to tear up the hospitals funding agreement with the states without being taken to the High Court.

But the GST agreement has some unusual characteristics. It required the states to repeal a number of taxes they had previously relied upon for revenue, in return for getting GST money under the current equalisation system.

That looks awfully like a contract.

Nobody knows what the High Court would eventually rule, but there can be no serious doubt that any state losing out on a new system would initiate a challenge. And that would add several more months to the political angst being suffered by any government which was politically stupid enough to embark on such a course.

If the government tried to buy off the disadvantaged states by promising top-up funding to make up for lost GST money, it is likely to run into trouble here too. Unfortunately for Mr Turnbull and Mr Morrison – and Mr Shorten too, probably – the agreement requires Commonwealth special-purpose funding to be paid on a population basis.

“An equal per capita distribution,” says the text of the agreement, “ensures all Australians, regardless of the jurisdiction they live in, have the same share of Commonwealth funding support for state service delivery”.

Any variations from this are evened out later in the GST redistribution process. Any state which has been given more Commonwealth grant money than its population share will lose an equal amount of GST later on.

There are minor exceptions allowing the Treasurer to exempt some payments from later redistribution. But this is most unlikely to apply to a measure designed to subvert the fundamental nature of the GST.

If the High Court agreed that the agreement could be enforced as a contract, this apparently easy way out would become impossible.

*Martyn Goddard is a public policy analyst based in Hobart.

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