Archives for posts with tag: western australia

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. That 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.  Let’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.

Yesterday I posted an extended tirade against the frequently espoused view that “WA doesn’t get its fair share”.

Some secessionist challenged me on Twitter, suggesting that WA has “out-produced” the rest of the country for most of federation.  False!

Here’s an excerpt from a paper by the WA Department of Treasury and Finance:

“…in the early days of Federation, the Western Australian economy bore little resemblance to its present prosperous form. Isolated by geography and unable to exploit the free trade between States that resulted from the newly formed Constitution, it became necessary in 1925 for the Commonwealth to establish a Royal Commission into Western Australia’s financial disabilities. As a result, in 1933 the Commonwealth Grants Commission was formed to oversee a more equitable distribution of Commonwealth finances, which resulted in Western Australia being given the status of “claimant State”, and being in receipt of special grants from the Commonwealth for the next 30 years or so.”

WA was so economically disadvantaged in the 1920s that a Royal Commission was established! In fact, WA’s economy was so stagnant in the first half of last century that it’s “estimated that the level of per capita income reached in 1913 was not surpassed until 1950” (according to another DTF paper).  Doesn’t sound like an economy that “out-produced” the country to me.

So, the very principle of horizontal fiscal equity, with funds redistributed from rich states to poor states, was instigated at the behest of Western Australia. The Commonwealth Grants Commission was created to help WA, and it operated under the same basic principle it does today: it seeks to ensure that citizens of each state can have a reasonable expectation of equal levels of service provision. WA spent the first 30 years of the Commission’s life as a ‘claimant State’, and for the four decades after that it received a share of national income roughly commensurate with its population (ie. it didn’t subsidise, nor was it subsidised by, the other States to any great extent). WA spent roughly two-thirds of federation as a poor state, then a few decades as an average state, and now it’s (temporarily?) a boom state.

It benefited greatly from decades of subsidy from the East. Now that the money flows the other way, the whole process is suddenly regarded as an unfair socialist conspiracy.

Those of you who are not from Western Australia will be unaware of Paul Murray, and for that I envy you. Murray is like Paul Kelly without the sparkling wit and partisan neutrality. His stentorian prattlings fill the pages of the West Australian, managing to be at once infuriating and utterly boring.

Today he leads off his tedious screed with the following predictable quasi-secessionist burbling:

The productive parts of Australia gave Labor a big kick in the backside – but maybe not quite hard enough to dislodge it from office. Those parts reliant on Labor’s handouts – Victoria, Tasmania and South Australia – stuck firmly on the teat.

I don’t want to talk about his election “analysis” today, such as it is, but instead the WA hard-done-by-ism that underlies the quote above.

I am a bit sick of hearing about how WA pays more than its fair share and about how it’s the productive part of the country and the ‘Eastern states’ are just a big rust belt.

Do you own the ore?

I don’t understand what makes West Australians, particularly anyone other than the 79 600 people who work in mining, feel some sort of proprietorial pride at the mineral wealth under the ground in the State’s far north. I speak as someone born in Perth who lived there for 27 of my nearly 28 years. I never felt as if I had done something special to deserve any greater share of revenue from iron ore than, say, Tasmanians or Northern Territorians.

Cross subsidy was OK when the money went the other way

WA has spent most of federation living off transfers from the more populous states. Lang Hancock didn’t discover iron ore until 1952, and then he spent twenty years trying to get the West Australian iron ore and steel industries off the ground. Then there was a long term decline in global commodities prices, reflected in our terms of trade, that meant that WA still received a slight subsidy. In fact, let’s have a look at how things stood in 1993-94, when the Commonwealth Grants Commission undertook a review of intra-federation financial transfers.

Here are the fiscal transfer relativities from 1993-94, adjusted to include the Medicare Agreements. A relativity of less than 1.0 means that the State or Territory received less revenue in grants or other transfers than it would have done if the money had been evenly divided among states according to population. In other words, it received “less than its fair share”, in Paul Murrayesque terns. Conversely, a relativity greater than 1.0 means that the State received “more than its fair share”.

State/Territory 93/94 relativity
New South Wales 0.852
Victoria 0.836
Queensland 1.093
Western Australia 1.119
South Australia 1.222
Tasmania 1.481
Northern Territory 4.785
Australian Capital Territory 0.867
Australia 1.000

Well, look at that. Those ‘unproductive States’, Victoria and New South Wales, were subsidising Western Australia.

What has happened since? Well, of course, there has been a spike in global commodity prices, driven by increasing demand from China and India. As a result, WA has been able to raise more of its own revenue (from mining royalties, stamp duty and payroll taxes) and hasn’t had to rely on transfers from other states. Here’s what WA’s relativity has looked like over the past decade:

Year WA’s relativity
00/01 0.98
01/02 0.98
02/03 0.98
03/04 0.97
04/05 1.03
05/06 1.03
06/07 1.00
07/08 0.95
08/09 0.86
09/10 0.78

In the early part of the decade, WA’s relativity was very close to 1.0, meaning that it received very close to what it would have if the national pool of money was divided by population. In the middle part of the decade, the State received slightly more than its “fair share”. Since then, WA’s relativity has come down. The Grants Commission calculates the States’ shares based on a five-year rolling calculation that includes the States’ revenue from other sources. That means that in the 04-07 period, when mining was in full swing, WA’s royalties hadn’t yet been fully factored in. Now they have, and WA’s share has fallen accordingly.

Now, perhaps West Australians don’t think it’s fair that they should receive less than their (somewhat crudely determined) ‘fair share’. I personally find it a bit hypocritical that a State that has spent most of its existence being subsidised by NSW and Victoria now regards the fiscal equalisation system as unfair.

Note that NSW and Victoria still pay more than their “fair share” too. Tasmania, the ACT and South Australia receive slightly more than an equal proportion per citizen. The Northern Territory receives a lot more than an equal proportion, because it has less capacity to raise its own revenue and has a big population of extremely disadvantaged Aboriginal people.

Some states receive less than other states, per head of population, because of the principle of ‘horizontal fiscal equity’. It sounds horribly wonkish, but really it just means that all citizens should have a reasonable expectation of receiving the same quality of services, no matter the State they happen to live in. Funds are redistributed across the federation to allow this to occur. The principle that is in use to distribute GST funds is:

State governments should receive funding from the Goods and Services Tax revenue such that, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each would have the capacity to provide services at the same standard.

Is that really a controversial suggestion? Would Murray and his ilk prefer that we have an American style system of fiscal disparity, in which being born into a poor area means going to a poor school and attending a poor hospital? Would they really suggest that rather than transferring some of its windfall mining gains to poor Aboriginal kids in the Northern Territory, the West Australian Government should keep all the money for itself? Perhaps they would.

Now, I need to make one thing clear: I am very aware that there is a lot of poverty and disadvantage in WA, and that there are extremely remote parts of the state that are in dire need of more government-funded services. I used to work for the WA Council of Social Service, and before that in the WA public service; I am all too aware of the challenges of delivering services in remote and regional WA. I am not suggesting that WA is all some golden nirvana. Instead, I’m just supporting the principle that Australian citizens should receive government services based on need, not on what state they happen to live in.

WA’s ‘powerhouse’ economy is oddly fragile

WA’s economy actually deteriorated faster than the national economy during the global recession. WA didn’t “get us through” the recession. Its economy has since rebounded more rapidly, but that just demonstrates the State’s reliance on the mining industry and the strongly cyclical nature of that industry (remember that in the six months from November 2008, the mining industry shed 27 300 workers, 15% of its workforce).

Here’s a comparison of the Australian and WA unemployment rates from July 2008 to July 2010:

WA entered the global financial crisis with its unemployment rate a full percentage point or so below the national figure, but then unemployment in that State rose much more quickly than the national average. By mid-2009, the unemployment rate in WA was basically equal to the national unemployment rate.

Another way of evaluating WA’s performance over that period relative to the national economy is by looking at the proportion of Australian employees who are employed in WA, ie. the total number of WA employees divided by the total number of Australian employees.

Around the time the financial crisis hit, nearly 11% of Australian workers were employed in WA. This fell steadily over the next year or so.

The point of this is to show that the WA economy is heavily cyclical, as it’s very dependent on the fortunes of the mining industry, which in turn are determined by the global prices for various commodities, which in turn are determined by global demand, which in turn is driven by the surging fortunes of China.

If things were to change and China were to falter then WA’s miracle economy may begin to appear a lot less miraculous. I suspect at that point we’d stop hearing from Paul Murray et al about West Australian exceptionalism and the need to receive a “fair share”, because the “less productive” States would once again be shovelling funds back across the Nullabor.