This article, by LGAQ media executive Craig Johnstone, originally appeared on LinkedIn here.
Is it reasonable for any state in Australia to have access to enough revenue from Canberra to guarantee that it will provide better schools, hospitals, fire brigades and other services than other states?
Or should there be a system that provides for an equitable level of such services to people, no matter where they live in Australia?
These are the questions the Productivity Commission is grappling with as it finalises its recommendations on how the $60 billion in annual goods and services tax revenue should be divided among the states.
In the Commission’s sights is the system of horizontal fiscal equalisation, which tries to strike a balance among the states between the costs of providing a certain level of services (schools, hospitals, etc) and factors that affect their ability to do so.
In recent years, this system has meant that Western Australia’s proportional share of GST revenue has dropped dramatically, a politically intolerable outcome even though some other states are happy with the existing formula for carving up the money from the GST.
Treasurer Scott Morrison has said the Commission had shown in its interim report on the issue last year that the “system is broken and needs a real fix”.
The problem is that the “fix” the Commission has initially suggested would leave states such as Queensland with hundreds of millions of dollars less in GST revenue than they have had in previous years.
But what to do about horizontal fiscal equalisation is only part of the problem affecting financial relations between the Commonwealth and state and local governments.
The fundamental flaw with the system is that the Commonwealth raises a whopping 83 percent of all tax revenue in Australia, local government a paltry 3 percent, with the states accounting for the remainder.
In its submission to the Productivity Commission, the Queensland Government spends a lot of time on how to fix this issue, even suggesting that the states have access to personal income tax revenue, which accounts for the lion’s share of the money that Canberra collects.
The Commission is due to hand its final report to the Turnbull Government on 15 May. It will hold a public hearing in Brisbane on 5 February.