Archives for posts with tag: State Government

Like most people I know, I’m obsessed with the Wire. I’ve watched the entire five-series set from start to finish twice, and I’m itching to do it again. One of the strengths of the show is the way it manages to make extremely powerful political points in a subtle way – characters don’t give moralising sermons that are directed at the audience. Instead, we’re left to see for ourselves how the interconnected web of rotting institutions that comprise David Simon’s Baltimore conspire to keep its citizens down.

One of the more heartbreaking storylines concerns the Baltimore school system, which is depicted as a bleak, bureaucratic wasteland in which talented students, teachers and administrators labour in vain to overcome the inherent limitations of the system. A big part of the problem is simple: money. Specifically, they don’t have enough of it.

The school system’s lack of money, in turn, is due to the structure of the American tax system. In the US, a lot of the functions of government like education are devolved to the local level. The amount of money that’s available for schools, police and all the other vital functions of government therefore depends on the amount of tax revenue that the local government is able to raise.┬áThat means that poor areas, in which few people work and there are no significant businesses, can’t devote much money to these services, simply because the tax base isn’t there. Thus begins the horrible vicious circle in which poor areas stay poor.

In Australia, we’ve sought to overcome this problem by equalising the funds available between states. The idea is that each state or territory should have enough resources to fund an equal standard of government services, so that citizens can expect decent schools and hospitals no matter which state they happen to live in. This principle is known as “horizontal fiscal equalisation” and it underlies the Commonwealth Grants Commission’s calculations of the share of GST revenue that each state will receive. Formally, the CGC defines horizontal fiscal equalisation as:

a distribution of GST revenue to State governments such that, after allowing for material factors affecting revenues and expenditures, each would have the fiscal capacity to provide services and their associated infrastructure at the same standard, if each made the same effort to raise revenue from its own sources, operated at the same level of efficiency and maintained the average per capita net financial worth.

Behind that dense, nearly impenetrable fog of bureaucratic obfuscation is the simple idea that all Australians should be able to expect decent government services. In practice, this means that wealthier areas, which can derive a lot of extra revenue from activities like mining, transfer funds to states without the same ability to raise their own revenue. The Northern Territory is the prime recipient state, but Tasmania and South Australia both also receive more GST revenue than their citizens pay.

With the mining boom in full swing, the West Australian government is able to raise a lot of revenue from mining royalties, as well as from increased payroll taxes and stamp duties. That means that its citizens pay more in GST than the state receives back from the Grants Commission, as some of the funds are sent to the Northern Territory and elsewhere.

Colin Barnett, the WA Premier, does not support this system. He has suggested that WA’s diminishing share of the GST funds could incite a “Tea Party style revolt” in the West. ┬áLet’s set aside the fact that WA still received more GST revenue than its citizens paid as recently as 2005/06, when the rivers of royalty gold were already flowing strongly into State Treasury’s coffers. Let’s also forget the inconvenient truth that the Grants Commission and the principle of horizontal fiscal equalisation were created for WA’s benefit when the state was a struggling economic minnow back in the 1920s.

Barnett’s position is morally reprehensible not just for its hypocrisy, but for its callousness. The notion that there should be a special deal to allow WA to retain a greater proportion of its GST payments would imply, necessarily, that WA residents would be entitled to expect better quality schools and hospitals than residents of poorer states. Poor kids in the Northern Territory or Tasmania would have a lower quality education than citizens lucky enough to be born in WA, thus further entrenching and amplifying regional inequalities in future generations.

It’s this sort of ruthless indifference to poorer areas that underpins the American approach, illustrated so vividly on the Wire. I’m not claiming that a recalibrated Commonwealth Grants Commission funding formula would lead us to a situation like Simon’s Baltimore, but I am suggesting that any deviation from the principle of citizens’ equal entitlement to government services would be a disastrous and repugnant step, however tentative, in that direction.

Until January this year, I had never lived anywhere other than Perth. It’s a great city and a great state, but the collective indignation about the state’s share of GST revenue is unedifying and does the state no credit.

In recent days the IMF has publicly argued that “markets need to end their addiction to credit ratings”. They suggest:

[t]he real solution lies in reducing the reliance on credit ratings as much as possible. This should start with removing the mechanistic use of ratings in rules and regulations, which some countries are already beginning to do. Investors must be weaned off credit ratings too. Policymakers should persuade the larger ones, at least, to perform their own risk assessments as part of deciding what to buy or sell.

I wonder what our State governments will make of this advice, given that they behave as if their sole task is to maintain the public balance sheet in a state that will please Standard and Poors.

The IMF has also examined the evidence in favour of fiscal austerity, assessing when and to what extent governments should begin to repair their balance sheets in the wake of a recession. They end up finding that fiscal contractions are contractionary, and fiscal expansions are expansionary, a vindication of Keynes. This might seem obvious, but it’s far from the ‘Washington Consensus’ view imposed on various nations throughout the 1990s.

The results suggest that recessions associated with financial crises tend to be unusually severe and their recoveries typically slow. Similarly, globally synchronized reces- sions are often long and deep, and recoveries from these recessions are generally weak. Countercyclical monetary policy can help shorten recessions, but its effectiveness is limited in financial crises. By contrast, expansionary fiscal policy seems particularly effective in shortening recessions associated with financial crises and boosting recoveries.

I’m not sure what has happened to the IMF, but this sudden rash of common sense is definitely a good sign.