Hon N Greiner AC, Hon J Brumby and
Mr B Carter
GST Distribution Review
Treasury Building
Langton Crescent
PARKES ACT 2600

Dear Messrs Greiner, Brumby and Carter,
GST DISTRIBUTION REVIEW	
I appreciate the opportunity to meet with the Review Panel to outline the position of the WA Labor Opposition to the terms of reference (both original and supplementary) which are guiding the GST Distribution Review.  Whilst I appreciate that an interim report has already been provided to the Commonwealth Government it is hoped that the WA Labor Opposition can highlight those areas that it considers to be of importance to Western Australians.
To a large extent these issues have indeed been covered by the WA Submission dated October 2011, and then the subsequent WA Submission in March 2012 in response to the Supplementary Terms of Reference.  To a large extent the WA Labor Opposition endorses the arguments presented in both of these submissions, however, I will also attempt to highlight some other areas for consideration by the Review Panel.
Ultimately, in considering any possible changes to the form of equalisation, the Review Panel is required to have regard to the principles of efficiency, equity, simplicity, predictability and stability.  It is clear that the current process of equalisation has now failed all of these principles. I will deal with each of these throughout this letter.

WA Submission, October 2011
The WA submission prepared by the WA Treasury is thorough and clear in outlining the WA Government’s position regarding the flaws in, and proposed reforms to, the principles that underlie the GST distribution.  As pointed out in the Executive Summary of the WA Submission the ‘…current form of fiscal equalisation in Australia is too extreme.  It is equivalent to a 100% tax on any excess of one State’s fiscal capacity over the average for all States’.  

The WA Submission has three main recommendations for the Review Panel to consider regarding the future of the distribution of the GST.  Namely:
1.	The implementation of a relativity ‘floor’ of 75% (subject to the continuation of the North West Shelf grants being paid to Western Australia).  The WA Labor Opposition has argued that this ‘floor’ should be higher, at 80%, however, the key point is that both sides of politics in Western Australia support the need for a relativity ‘floor’;

2.	The discounting of mining revenue assessments by 50%; and

3.	A State’s GST relativity should not fall by more than one percentage point in any one year.  The reasoning behind this particular recommendation is obvious.  It would allow a particular State to plan and budget with more confidence and ensure that any significant increase in revenue in the short term were not immediately ‘equalised’ to other States.
Again, the Labor Opposition strongly supports these recommendations in the WA Submission.
Alternatively each State should receive back its GST contributions and the Commonwealth provide support to less well off States.
There is also concern in Western Australia that States that receive very significant income from poker machines do not have that income taken into consideration in the same way as WA’s mining income is.  Western Australia does not, and will not, have poker machines.
Intent of the Intergovernmental Agreement
‘Enhance Revenue Security’.
Without going through the history of the evolution of the GST, it is clear that the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations signed by the States’ Premiers on 9 April 1999 was sold to the public on the basis that the States would gain access to  a reliable, long-term, growth tax.
The 2000-01 Commonwealth State Budget (Budget Paper No.3 – Federal Financial Relations) states that the Intergovernmental Agreement will, by way of the GST, ‘provide the States with access to a more robust tax base which will grow over time thus ensuring that State budgets will be substantially better off over the medium term’.
The Commonwealth Treasury produced a document titled ‘Reform of Commonwealth-State Financial Relations’ that stated that ‘[t]he principal objectives of the Commonwealth-State reforms proposed in ANTS [A New Tax System] are to:
	…
Improve the financial position of all State Governments by providing access to a more robust tax base that can be expected to grow over time.  This enhanced revenue security will ensure that the States can provide a sustainable level of quality services – such as hospitals, schools, and law enforcement – into the future’.

The creation of a stable and growing revenue base for the State Governments was also one of the key reasons why the GST was introduced. In the Second Reading Speech of the ‘A New Tax System (Commonwealth-State Financial Arrangements) Bill 1999, the then Federal Treasurer, Hon Peter Costello stated:
‘A key feature of the new tax system is the Commonwealth’s offer to the states and territories of a stable and growing source of revenue.  By passing all revenues from the GST to the states and territories, the Commonwealth will provide the states and territories with a superior growth tax…’.
The then WA State Government also told the public, through the State Parliament, that the GST would provide access to a growth tax.The now Premier, Colin Barnett, stated in the Legislative Assembly on 28 June 2000:
“It [GST] does provide a growth tax for the State.
...
The GST will be a far stronger revenue base.”

‘Reduce reliance on grants from the Commonwealth’
The Commonwealth Treasury document titled ‘Reform of Commonwealth-State Financial Relations’, referred to above, also made the point that the GST was to provide ‘…the States with a robust source of revenue, reducing their reliance on grants from the Commonwealth…’ (emphasis added).
This was another key point made in the Second Reading Speech of the ‘A New Tax System (Commonwealth-State Financial Arrangements) Bill 1999, by the then Federal Treasurer, Hon Peter Costello:
‘The new arrangements mean that the states and territories will no longer have to rely on inefficient taxes to raise their own source revenues and that they will have greater independence from Commonwealth funding.  They will no longer have to rely on general purpose grants from the Commonwealth…
It is difficult to compare the level of Commonwealth grants as a percentage of total State revenue prior to the introduction of the GST as with that percentage post-GST, but it is clear that the Commonwealth has provided a myriad of alternative grants to Western Australia for specific State projects.  
For example:
•	$480 million for the Gateway Project;
•	$280 million for the Great Eastern Highway Upgrade;
•	$236 million for the Perth City Link project;
•	$118.6 million for the Expansion of the Bunbury Port Access Road;
•	$350 million for the Perth Urban Transport and Freight Corridor Upgrade Project;
•	$154 million for realigning the Great Northern Highway at Port Hedland around the Wedgefield industrial area;
•	$255.7 million for the new State rehabilitation service at the new Fiona Stanley Hospital;
•	$180 million for the new Midland Health Campus;
•	$195 million for the expansion of the Ord River irrigation project (for infrastructure including health, housing, community facilities, transport, training);
•	$339 million to the Oakajee Port common user facilities.
Further, former Prime Minister, Kevin Rudd, committed the Commonwealth Government to providing Western Australia with $100 million per year from the Gorgon gas project off the coast of Western Australia.  As reported on 20 February 2007, Mr Rudd stated:
‘At present WA does not receive any allocation from the commonwealth’s resource tax from future developments like the Gorgon gas development.  I’m proposing a different approach whereby WA would receive 25 per cent from that into a WA infrastructure fund’.
It is clear that, despite the intent of the Intergovernmental Agreement, the WA State Government is still very much dependent on a range of grants from the Commonwealth Government.  The above list, by no means exhaustive, covers projects that range across roads, ports, health, education and community facilities.  The fact that the Commonwealth Government has made these significant financial commitments is, in itself, recognition that the intent of the Intergovernmental Agreement to ensure States had ‘greater independence from Commonwealth funding’ has clearly not been met.

Failure of the machinery of the Intergovernmental Agreement
The Commonwealth Treasury document, ‘Reform of Commonwealth-State Financial Relations’, also specifically noted that ‘GST revenues will be distributed amongst the States on the basis of horizontal fiscal equalisation (HFE) principles’.  Ultimately, this is the fundamental failure of delivery in respect of the original intent of the Intergovernmental Agreement.  That is, whilst the package of legislation to introduce the GST was delivered, the Western Australian and Commonwealth Government failed to consider the machinery by which the GST revenues were to be distributed, namely, the process of horizontal fiscal equalisation(HFE).
Whilst it is often easy to look back on decisions of Governments and be critical, this failure by the Western Australian Government to demand a reconsideration of the HFE process was indeed extraordinary.  
At the time that the WA State Government signed the Intergovernmental Agreement in April 1999, the inadequacies of the HFE process were already known to the WA State Government.  In the 2000-01 WA State Budget (Economic and Fiscal Outlook) it noted at p.144:
‘Under the Grants Commission’s fiscal equalisation methodology, the stronger a State’s ability to raise its own revenues (compared with the other States), the smaller its grant from the Commonwealth.
…
Over the last seven years the Grants Commission’s recommendations have led to a cumulative $365million loss in Western Australia’s annual share of grants, mainly reflecting Western Australia’s stronger economic performance over time, with a consequent reallocation of grants to weaker States.  Western Australia’s loss far exceeds that incurred by any other State’.
It is extraordinary that a State Government, well aware of the weaknesses of the HFE process, would then commit to effectively make a significantly larger proportion of its revenue base subject to the principles of HFE without even considering methods to protect is revenue base over the medium to long term.   
Whilst the current review is guided by the fact that ‘the Commonwealth Grants Commission will continue to make recommendations on the distribution of the GST’, the debate back in 2000 highlighted the fact that the then Labor Opposition already had concerns with how the CGC, by application of the principles of HFE, would ultimately distribute the GST.It is the view of the WA Labor Opposition that had a ‘floor’ been introduced at this stage then the unsustainable drop in GST returns to Western Australia would not have occurred and the financial outcomes would have had faith with the original intent of the Intergovernmental Agreement.
It is clear that the application of the principles of HFE have completely undermined the original intent of the ‘A New Tax System’ to provide the States with ‘enhanced revenue security’ and, importantly, to reduce the dependence of Western Australia on other grants from the Commonwealth.
It is the very strong view of the WA Labor Opposition that any reform of the way that the GST is redistributed must deliver on the original intent of the Intergovernmental Agreement and, indeed, the Second Reading Speech of the then Federal Treasurer, Hon Peter Costello.  Delivery of this intent will ensure efficiency of the tax system, equity in GST returns to individual States, simplicity of the application of the equalisation process and predictability and stability of revenue to allow individual States to budget over the medium and long term.
The three main recommendations in the WA Submission that have been endorsed by the WA Labor Opposition will deliver on this outcome.
It is clear that this intent, to provide the States with ‘enhanced revenue security’, particularly in respect of Western Australia, has failed.  As such, the GST Review Panel needs to ensure that it makes recommendations to the Commonwealth Government that actually introduces the financial machinery to deliver on the intent of the tax reform package as agreed to in the Intergovernmental Agreement.

Infrastructure Requirements
Western Australia faces significant challenges in respect to the provision of infrastructure.  We are a large export orientated State, and our resources are spread throughout the jurisdiction.  The State is often called upon to provide significant infrastructure of both an economic and social nature.
Large infrastructure projects have a significant cost to the WA Government.  With the decline in WA’s GST ‘relativity’, the return to the State may well indeed be outweighed by the costs of providing infrastructure.  Whilst the WA Labor Opposition does not support such erratic commentary made recently by the WA Premier about intentionally slowing down economic development, infrastructure costs places enormous strain on the State Budget.  
In April 2006, the WA Department of Treasury and Finance released a document titled ‘A Discussion Paper on Commonwealth-State Relations: An Economic and Financial Assessment of how Western Australia Fares’.
This document outlined the expected net benefit to Western Australia of a range of projects versus the net benefit to the rest of the Commonwealth:
Gorgon Gas Project:
‘The Gorgon gas project is forecast to improve national GDP by $21-31 billion, and the Australian Government’s budget balance by $11-14 billion.  However, after taking account of State expenditures to service the increased population resulting from the Gorgon development, and the redistribution of net revenue benefits by the CGC, Western Australia’s forecast net fiscal benefit is only $300million.  Other States will receive a net fiscal benefit of around $3 billion’ (emphasis added).

Burrup Peninsula Gas Processing Developments:
These projects were ‘…forecast to improve national GDP by $3.6 billion and generate nearly $600 million in net fiscal benefits for the Australian Government.  However, after taking into account State expenditures and the redistribution of net revenue benefits by the CGC, Western Australia is actually expected to incur a net loss of $60 million.  Other States will receive a net fiscal benefit of around $450 million’ (emphasis added).
The financial impact of HFE is indeed quite perverse and utterly unfair to Western Australia.  And, as is apparent from these two examples, has the potential to become a ‘drag’ on the overall economic performance of Australia as there is no overall fiscal benefit to Western Australian taxpayers to continue to fund major infrastructure projects that ultimately do not deliver a net benefit to the State.

Supplementary Terms of Reference
The WA Labor Opposition was concerned by the supplementary terms of reference released by the Commonwealth Government.
The WA Labor Opposition endorses the WA Government’s submission to the supplementary terms of reference.
While I do not intend to repeat the WA Submission to the supplementary terms of reference I do want to emphasise some key points.
Western Australia’s right to set royalty rates
Western Australia has the sole constitutional right to levy royalties on its minerals.  The WA Labor Party, when in Government, reserves its right to alter the rates upon which royalties will be set.  Ultimately it is the people of Western Australia who are the owners of the minerals.
Supplementary Terms of Reference 6A(c) suggests that the Commonwealth Government seems to has a misunderstanding of the motivators for State Governments to increase mineral royalties.  The recent amendments to the WA State Agreement Acts to increase the iron ore ‘fines’ royalty rates from 3.75% to 5.625% from 1 July 2010 and then to 6.5% from 1 July 2012 and to 7.5% from 1 July 2013 were supported by the Labor Opposition.  These increases were due to the fact that the argument for ‘fines’ to be treated differently from iron ore ‘lump’ were no longer relevant.  
With ‘fines’ becoming the major export market in iron ore there is clearly no commercial impediment to the development of the iron ore ‘fines’ market and, therefore, no longer a necessity for the Western Australian taxpayer to continue to provide this subsidy.  In light of the fact that new entrants to the market, such as Fortescue Metals Group, did not have the benefit of this subsidy further adds weight to the reasons behind this royalty change.
As stated in the WA Submission to the supplementary terms of reference, ‘States’ decisions to increase royalties will be driven by ensuring a fairer return to the owners of the resources (the State community), rather than by any malicious intent of depriving the Commonwealth of revenue’.
Assumption of efficiency
The supplementary terms of reference states that the Review is to be guided by:
‘the Minerals Resource Rent Tax and Petroleum Rent Tax provide a more efficient approach to charging for Australia’s non-renewable resources than mineral royalties’.
Yet, in the original terms of reference the Review Panel is asked to consider:
‘efficiency, including the effect of alternate approaches on the allocation of resources in the national economy and on the States’ reform, service delivery and investment decisions to best meet the requirements for growth’.
The submission by the Chamber of Minerals and Energy of Western Australia (CME) to the Senate Standing Committee on Economics on the MRRT, dated 19 December 2011, highlighted:
•	Western Australia’s economy has rebounded strongly from the Global Financial Crisis (GFC).  Despite economic growth slowing to 0.7 per cent in 2008-09, it grew by 4.3 per cent in 2009-10, 3.5% in 2010-11 and is forecast to grow by at least 4 per cent over the forward estimates.
•	The strong performance of the resources sector underpins these results.  In 2010-11, the value of Western Australia’s minerals and petroleum production reached $101 billion, representing a 39 per cent increase over the prior year.
•	With respect to State royalties, the resources industry’s contribution in this area has been rising significantlythe(sic) since 2004-05, in line with increasing production and commodity prices.  Royalty payments to the WA State Government reached a record $4.8 billion for the 2010-11 year and are expected to rise to $5.8 billion for the 2011-12 financial year.
•	CME has always maintained a strong preference for retention of the current State royalty regime, administered by the State Government and with revenues flowing to the State.  The State has prime responsibility for resources project approvals and the provision of non-privately owned infrastructure.  As such, it is imperative the State Government maintains and receives a dividend for WA resources.
It is clear that the royalty regime in Western Australia has not impeded the strong growth of the mining sector in Western Australia.  If the Review Panel is instructed to be ‘guided’ by the assumption that the MRRT is a ‘more efficient approach to charging for Australia’s non-renewable resources than mineral royalties’ then the Commonwealth Government should explain its assertion with reliable and credible evidence.
Conclusion
For many years, successive Western Australian Governments have been expressing increasing frustration with the way in which the GST is distributed amongst the States.  This has been primarily due to the fact that the return of GST payments to Western Australia has steadily declined.  Indeed, as the Economic and Fiscal Outlook (Budget Paper No.3) of the Western Australian 2011-12 Budget points out, Western Australia’s GST relativity is projected to decline from 0.78 in 2009-10 to an incredible 0.33 in 2014-15.  This is clearly contrary to the very clear intent of the Intergovernmental Agreement signed by the States in April 1999.
Fundamentally, it is the machinery of the Intergovernmental Agreement that has failed.  The Commonwealth Grants Commission and the principle of Horizontal Fiscal Equalisation have meant that the intent of the Intergovernmental Agreement and, indeed, the purposes of the legislation establishing the GST have been completely undermined.
When the States were agreeing to, and establishing, the ‘A New Tax System’, a prime opportunity was missed by both the Western Australian and Commonwealth Government to implement reforms that would have delivered on the intent of the Intergovernmental Agreement.  
It is the view of the WA Labor Opposition that the recommendations contained in the WA Submission will, finally, deliver on this intent.
Establishing a ‘floor’, discounting mining revenue assessments and limiting the amount that a State’s GST relativity can fall in any one year will provide the equity, predictability and stability for Western Australia and other States as outlined in the original terms of reference.
These mechanisms, if implemented, will also result in an increased return of GST to Western Australia which may well mean that our State becomes less reliant on other grants, hence, improving both the efficiency and simplicity of the taxation system.
As you will appreciate, the WA Labor Opposition is excited by the opportunity to finally deliver on the promises made, and hopes created, by the Intergovernmental Agreement signed in April 1999.  I commend the Prime Minister for creating the opportunity for the Review Panel to consider what may be one of the most important issues of our Federation in my lifetime.
Please do not hesitate to contact me should you have any questions or require any further information.

Mark McGowan MLA
LEADER OF THE OPPOSITION
WESTERN AUSTRALIA
16 April 2012