Hon J B Hockey MP

Treasurer

Commonwealth Government

Parliament House

CANBERRA ACT 2600

Dear Treasurer

GST revenue sharing relativities for 2015-16

We are taking the unprecedented step of writing to you as a collective group to reiterate our

shared views regarding the treatment of the GST revenue sharing relativities for 2015-16.

As discussed in detail at the recent Council for Federal Financial Relations meeting, with the

exception of Western Australia, we are unanimous in our support for the adoption of the

Commonwealth Grants Commissions recommended GST revenue sharing relativities for 2015-16.

We believe the Commissions independent role in recommending GST relativities is vital to the integrity of the GST distribution system, and should be respected. The adoption of the Commissions independent recommendations, in line with historical practice, is the only equitable option, and we are unable to support any alternative distribution method. Moreover, the

Commission could find no grounds for special treatment for Western Australia.

All jurisdictions can relate to the difficult budgetary challenges that the Western Australian

Government currently faces. However, we do not agree that the recent downward movement in

Western Australias GST share is unfair or inequitable. Western Australias declining relativity simply demonstrates that the GST distribution system is recognising and responding

appropriately to changes in their circumstances, albeit with a lagged time frame.

During the initial stages of the mining boom, Western Australia were a clear beneficiary of the

GST system, with a significant surge in mining royalties, yet a "delayed" impact on GST revenues.

The Commission has quantified this benefit, estimating that since 2010-11, Western Australia has

received around $7 billion1 in additional GST revenue as a result of the time-lagged assessment

methodology. The Commission states that while the equalisation system has redistributed significant parts of Western Australias royalty revenues to the other states, the lags have provided it with a large and ongoing benefit2.

The Commission also noted that the difference between Western Australias actual and assessed mining revenues for 2015-16 ($308 per capita) is not particularly unusual. It stated that a

1 Compared to a fully contemporaneous assessment. CGC Report on GST Revenue Sharing Relativities 2015 Review, Volume 1, Page 74.

2 CGC Report on GST Revenue Sharing Relativities 2015 Review, Volume 1, Page 75.

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difference of this quantum has occurred in 15 of last 21 mining assessments for Western

Australia. Significantly, these incidences have worked to Western Australias benefit on all but two occasions3.

Further, this issue is temporary in nature. As Western Australias mining royalties decline its share of the GST will rise again. The Western Australian Mid Year Financial Projections Report

(December 2014) shows that it will be compensated through higher GST grants from 2016-17

and will be fully compensated in 2018-194. If actual mining royalties are below these projections,

the increase in GST will occur earlier.

At a time when they were a beneficiary of the GST distribution system (2006), Western Australia

argued against changes to the balance between contemporaneity and other supporting principles

of the assessment methodology, referring to the inherent time lags as largely irrelevant5.

Given the zero-sum nature of the GST distribution system, it is unacceptable to make significant one-off changes to address an issue for a specific state, at the expense of all others.

This is unlikely to be considered reasonable by the citizens of jurisdictions other than Western

Australia.

It is not disputed that the mining boom, in addition to demographic and other structural changes,

have contributed to substantial changes in the distribution of GST revenue among the States in

recent years. The Commissions methodology is specifically designed to recognise these changes and the differences in States revenues and expenditures. In this case, the Commissions calculations have recognised, albeit with a time lag, Western Australias improved ability to raise own-source revenue, and that over time, it therefore needs less GST to enable it to provide the

average level of services.

The principle of HFE will be explored through the White Paper on the Reform of the Federation.

We consider this the appropriate forum to conduct a thorough investigation of HFE and its role

in our federation. Any move away from the current practice of HFE prior to this exploration is

pre-emptive, and risks undermining the fabric of our HFE system and the federation.

In closing, we unanimously urge you not to compromise the GST distribution system to address

what is ultimately a short-term timing issue for one state in our federation. If external assistance

is necessary to tackle Western Australias budget challenges, we call upon you to pursue such solutions outside of the GST distribution system.

3 CGC Report on GST Revenue Sharing Relativities 2015 Review, Volume 1, Page 73. 4 Refer to page 18, Western Australian Government 2014-15 Mid Year Financial Projections Report

5 Western Australias comments on the Architecture of Horizontal Fiscal Equalisation, July 2006, https://www.cgc.gov.au/attachments/article/74/WA_Submission_on_HFEa.pdf

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Yours sincerely

Hon Gladys Berejiklian MP

Treasurer of New South Wales

Hon Tim Pallas MP

Treasurer of Victoria

Hon Curtis Pitt MP

Treasurer of Queensland

Hon Tom Koutsantonis MP

Treasurer of South Australia

Hon Peter Gutwein MP

Treasurer of Tasmania

Hon David Tollner MLA

Treasurer of Northern Territory

Mr Andrew Barr MLA

Chief Minister and Treasurer of Australian Capital Territory

16 April 2015