How GST is killing our productivity

American playwright Eugene O'Neill was as direct and unsparing in his personal correspondence as he was in his plays. On one occasion, he had received an unwelcome approach from Howard Hughes to write a screenplay of Hell's Angels. His telegram in response used the maximum 20 words allowed. It read; "No. No. No. No. No. No. No. No. No. No. No. No. No. No. No. No. No. No. No. O'Neill."

A number of Australian states and territories have adopted the O'Neill approach (without his charm) in response to the Productivity Commission inquiry into the distribution of GST revenues. The message from submissions from Victoria, Tasmania and the ACT – who benefit from the existing rules – is simple. No thanks. No change. Go away.

In the past this has been an effective approach. But the system is now reaching a breaking point. The current system has three defining characteristics. It is unfair. It is hurting the economy. And it is very difficult to change.

The current arrangements meet the unfairness test with ease. One state, Western Australia, receives less GST today than it did in 2001-02, while GST payments to all other states and territories have doubled over the same period. In fact, WA loses more in GST than it collects in iron ore royalties. There is wide disparity in the share of state and territory revenues that are subject to the revenue assessment. Three-quarters of WA's own source revenues are subject to assessment compared with only 41 per cent of ACT revenues.

The GST distribution system has developed perverse incentives that are profoundly hurting national productivity. The system assumes that all states will develop their mineral resources with equal vigour. This is plainly not the case. While some states promote resources development, others like Victoria ban uranium exploration and mining, prohibit exploration for conventional gas and have ruled out new coal generation.

Hostile approach

But the system rewards Victoria for this hostile approach to investment. In the last four years, while assiduously blocking new resources investment, Victoria has gained $13.1 billion from the mining assessment. In other words, the Victorian budget surplus of $8 billion over the next four years is entirely due to the efforts of other states.

The policy signal is unmistakeable. You can pander to the anti-CSG crowd, the anti-uranium crowd and the anti-coal crowd and you will actually be better off, not worse. Our approach is simple. We propose a minimum 25 per cent discount to the mining revenue assessment in the GST distribution calculations. Such a discount is not new. The Commonwealth Grants Commission already applies a 25 per cent discount to elements of its land tax, health costs and regional costs assessments to adjust for uncertainty.

To help overcome the political obstacles, our model leaves no state worse off. No state or territory receives a reduction on its GST receipts compared to a baseline year. The changes resulting from the mining revenue discount are drawn only from the annual growth in the GST funding pool.

In short, we can have a fairer system, which promotes growth rather than rewarding sloth. And no state or territory will be worse off.

When it comes to reform of GST Distribution arrangements, the No case has had its day.

Brendan Pearson is chief executive of the Minerals Council of Australia

AFR Contributor

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