Outlook for the GST distribution

Budget Review 2015–16 Index

Daniel Weight

On April 9 2015, the Government publicly released the 2015 GST Review report by the Commonwealth Grants Commission (CGC),[1] in which the CGC made recommendations about the distribution of the GST to the states and territories for the 2015–16 year. That report was controversial; particularly as it recommended that Western Australia (WA) receive a GST relativity of 0.29999 for the 2015–16 year, down from 0.37627 in 2014–15. A state or territory’s GST relativity determines the amount of the GST that a state or territory will receive, relative to an equal per capita distribution. The CGC calculates each state or territory’s relativity to offset each state or territory’s revenue raising capacity and expenditure needs.[2]

Background

The main driver of WA’s low GST relativity is the rise in iron ore prices, and WA’s capacity to raise mining royalties. The CGC estimated that mining production enabled WA to raise $5.9 billion more in revenue in 2015–16 than the average of all the states and territories.[3] WA, however, argued that the methodology used by the CGC was flawed, as it was based on an historical iron ore price of $123 per tonne from
2013–14, and not the contemporary iron ore price of $48 per tonne.[4] WA Premier, Mr Colin Barnett, described the CGC system as ‘dysfunctional’ and suggested that ‘its time is up.’[5]

In response to the decline in the amounts of the GST revenue to be received by WA, the Commonwealth Government agreed to provide Western Australia with another $500 million in infrastructure funding outside the GST process.[6]

Outlook

The CGC’s reports did not make forecasts of the GST relativity of each state or territory in the years beyond 2015–16. The Government, however, typically provides projections of both the GST relativity of each state and territory, and the specific amount of GST revenue each state and territory is projected to receive, in Federal financial relations: budget paper no. 3: 2015–16.[7] But unlike prior years’ budgets, the 2015–16 Budget paper no. 3 provides two sets of projections.

Technical projection

The first projection, which is consistent with the projections presented in prior years, only takes into account limited technical assumptions about the size of the GST revenue pool, changes in state and territory populations, and the impact of certain other Commonwealth payments. Those projections are set out at Table 1.

Table 1: Technical projections of CGC’s 2015 Review report GST relativities, 2015–16 to 2018–19[8]

Year
NSW
VIC
QLD
WA
SA
TAS
ACT
NT
2015–16
0.94737
0.89254
1.12753
0.29999
1.35883
1.81906
1.10012
5.57053
2016–17(p)
0.92605
0.87367
1.21220
0.23820
1.42761
1.80375
1.08242
5.34709
2017–18(p)
0.92553
0.87159
1.26052
0.18064
1.44880
1.81104
1.11116
4.91376
2018–19(p)
0.93075
0.87740
1.25194
0.20175
1.42763
1.78167
1.10641
4.77782

(p): projection

The technical projection indicates that WA’s GST relativity would fall to 0.18064 in 2017–18, before recovering a little in 2018–19. Embedded within these technical projections, however, is an assumption of an iron ore price above $100 per tonne.

Technical projection with anticipated iron ore volumes and prices incorporated

The second projection produced by the Government differs from the first only through the incorporation of the effect of the iron ore volumes and prices that the Government anticipated at the time of the budget.  Nowhere in the 2015–16 Budget Papers forecasts for the years 2016–17 and beyond shown, so it is difficult to know exactly what those anticipated volumes and prices are. Nonetheless, the anticipated fall in the iron ore price—which would have the effect of reducing the amount of mining related revenue that WA would be assessed by the CGC as being able to raise—has a significant impact on WA’s projected GST relativity. The projections incorporating the Government’s forecasts of iron ore volumes and prices are set out at Table 2.

Table 2: Technical projections of CGC’s 2015 Review report GST relativities incorporating anticipated iron ore volumes and prices, 2015–16 to 2018–19[9]

Year
NSW
VIC
QLD
WA
SA
TAS
ACT
NT
2015–16
0.94737
0.89254
1.12753
0.29999
1.35883
1.81906
1.10012
5.57053
2016–17(p)
0.91576
0.86337
1.20192
0.32014
1.42045
1.79524
1.07212
5.34427
2017–18(p)
0.90023
0.84628
1.23524
0.38325
1.43118
1.79010
1.08585
4.90689
2018–19(p)
0.89176
0.83840
1.21298
0.51668
1.40042
1.74935
1.06741
4.76729

(p): projection

On these projections, WA’s GST relativity will increase in 2016–17 and in every year projected after that. Given the nature of the GST distribution, however, an increase for WA’s GST relativity would result in a decrease in all other state and territory GST relativities, when compared to the technical projection in Table 1 above.

Discussion

Making estimates or projections of the anticipated GST relativity of each state or territory appears to be a fraught task.  Not only does it appear technically difficult, but small variations will inevitably have a significant impact upon the portion that each state or territory will receive of the GST revenue pool. That pool is forecast to be the largest item of Commonwealth expenditure in 2015–16, at $57.0 billion.[10] The Government appears to recognise these difficulties, and advises that ‘[t]he Commonwealth Treasury will consult with the states and territories on the methodology for preparing relativity projections in future budget updates.’[11]

Moreover, the technical projections that incorporate anticipated iron ore volumes and prices show a very rapid rebound in WA’s relativity. This shows that the CGC process may be more effective than assumed in adjusting state and territory GST relativities in response to short-run economic shocks than some of its critics assert.



[1].          Commonwealth Grants Commission (CGC), 2015 GST Review, CGC website.

[2].         Commonwealth Grants Commission (CGC), ‘Key Information,’ CGC website.

[3].          Commonwealth Grants Commission (CGC), 2015 GST Review: Volume 2: Attachments, CGC website, p. 644.

[4].         A Probyn and S Wright, ‘WA flags defiance over GST rejection,’ West Australian, 9 April 2015, p. 1.

[5].         C Barnett (Premier of Western Australia) et. al., ‘transcript,’ Council of Australian Governments Press Conference, 17 April 2015.

[6].         T Abbott (Prime Minister), C Barnett (Western Australian Premier) and M Cormann (Finance Minister), transcript, joint press conference, 6 May 2015.

[7].         Australian Government, Federal financial relations: budget paper no. 3: 2015–16.

[8].         Ibid., p. 80.

[9].         Ibid., p. 82.

[10].      Ibid., p. 77.

[11].      Ibid.

 

All online articles accessed May 2015. 

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