Friday, June 17, 2011

States in crisis mirror EU

As the euro zone teeters on the brink, interested bystanders ask how long Germany will keep bailing out Greece, and why on earth it wants to.  But while we may laugh at Europe's fiscal dilemma, when it comes to how we manage financial relations among our states, Australia is not very different from Europe.

Here in Australia those taxpayers in states encouraging economic development (like Western Australia) subsidise taxpayers in states where industrial development is actively discouraged (like Tasmania).

Tasmanians are entitled to try to turn their island into a Bob Brown-inspired autarkic nirvana, but they shouldn't expect the mainland to pay.

Likewise Greece can keep its average retirement age at 61, but it shouldn't hope to stay part of the euro.  (In Greece nearly 600 occupations are classified as ''hazardous''.  Women in those jobs can retire at 50 and men at 55.  Television presenters and musicians who play wind instruments apparently have hazardous occupations.)

Tasmania gets about 3 per cent of all federal government funding to the states and territories.  If that money were allocated according to the size of its population, Tasmania's revenue from Canberra would be cut by one-third.

Few Australians would deny that some level of fiscal equalisation is appropriate to compensate states for the particular characteristics of their demography or geography.  So Queensland should receive additional funding because of its indigenous population living in remote areas.

It's wrong, though, when states are compensated because of deliberate decisions to make their economies uncompetitive.  Yet this is exactly what happens when the Commonwealth Grants Commission allocates federal government funds among the states.

NSW, for example, is declared by the commission to have a higher requirement for GST revenue than, say, Victoria because of higher wage levels in Sydney compared with Melbourne.

However, part of the reason for those higher wage levels is because of sweetheart deals between the public service unions and successive state Labor governments -- deals which the O'Farrell government is now trying to unwind (It was amazing to see this week the ACTU claim that O'Farrell's legislation to limit public service pay increases is somehow a breach of international human rights law.)

On the other side of the continent there's Western Australia.  Taxpayers in that state send 100 per cent of their GST payments to Canberra and they get back 33 per cent of those payments.  Last month WA Premier Colin Barnett pointed out the obvious:  ''The Commonwealth Grants Commission process is absolutely archaic.  It is irrelevant to a modern Australia.''  He went on to say something, which even leaving aside the rhetorical flourish, is quite important.  Unless the tax system is fixed ''the relationship between Canberra and Western Australia becomes secondary to other relationships.  Our links with South-East Asia, China and Japan actually become more important to us than our links with Canberra.''

Which is how most West Australians feel, anyway.  They're just as likely to have recently holidayed in Bali than visited Sydney.

Western Australia has been gifted abundant natural resources, but these resources nevertheless need substantial public and private investment to be developed.  Governments of all persuasions have talked about ensuring that in the midst of the resources boom Western Australia moves beyond being a quarry, but if there's anything that will definitely ensure the state remains a quarry and nothing more, it is the federal government's policy of squeezing every last cent out of the west and sending its resource revenues to the east, exactly what the original resources super profits tax was intended to do.

State governments are blamed for being bloated, inefficient, and occasionally corrupt.  Sometimes they are.  But our system of federalism doesn't give premiers much incentive to change the way they do things.

The head of the Department of Prime Minister and Cabinet, Terry Moran, called it exactly right in a significant speech last week when he said:  ''Instead of striving to deliver the best results there are incentives for state governments to pass the buck.''

Indeed they do.  They pass the buck to Canberra and to taxpayers in other states.  It's not too different from the yoghurt-throwing rioters in Athens passing the bill for their retirement to the car industry workers in Bavaria.


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