our tax system, page-4

Interesting that Macquare Bank research doesn't agree.

Stateline NSW
11th May 2007
Story 1

QUENTIN DEMPSTER: A Macquarie Bank research paper on Federal-State financial relations has concluded that the Commonwealth's effective funding of the states is now around the lowest it's been in three decades.

The paper, published last month and now being updated, shows that the goods and services tax, introduced in 2000 - 2001 as an exclusive tax for the states, has not reversed the state funding decline.

Federal Treasurer Peter Costello disputes the findings and there's now a row between the researcher and the treasurer.

In the Federal budget this week Peter Costello revealed the extent of the Commonwealth's revenue riches with substantial surpluses projected well into future years.

The contrast with the cash-strapped New South Wales Government was stark.

Needless to say State Treasurer Michael Costa, now waiting to see if his June the 19th State Budget will go into deficit as projected, has pounced on the Macquarie bank analysis.

MICHAEL COSTA, TREASURER, NSW: The Commonwealth is awash with cash. It is embarrassing in fact, the situation that we see ourselves in as tax-payers in Australia at the moment.

The Commonwealth collects about %80 of national tax revenue and only spends around about %50 on services. The states, to the contrary collect about %18 of total tax revenue and are responsible for around about %45 of expenditure:

QUENTIN DEMPSTER: The tactical hard heads of Labor's Sussex St branch have had Michael Costa hidden away during most of the recent state election campaign. His aggressive, head-butting style, it seemed could scare off the voters and frighten the children.

But Mr Costa's feud with Federal Treasurer, Peter Costello over the adequacy of Commonwealth funding of the states after the introduction of the goods and services tax has now resumed.

A Macquarie Bank Research Strategy paper published by financial analyst, Rory Robertson extracted three decades of Canberra funding of the states.

As a percentage of gross domestic product, Canberra's net funding of the states has gone from around %6.7 in 1975 to a peak of %7.2 in 1984-1985 trending rapidly down in the Hawke-Keating years to bottom out just of %5 of GDP through the Howard years.

The goods and services tax started in 2000-2001 but Commonwealth funding to the states has remained at historically the lowest levels.

MICHAEL COSTA: Well it is absolutely true that the states are getting a smaller share of national GDP in terms of the tax take than they were a decade or two ago. There is no doubt about that. But that is not the frightening thing, it is the expenditure side that you've really got to look at.

In the same period, things like hospital expenditure have gone from about %18 of the total state budget to now around %26 of the total state budget.

The big challenge to the states is the expenditure side.

QUENTIN DEMPSTER: Rory Robertson's Macquarie Bank analysis says that while the Federal Government is now the biggest collector of taxation ever on a ratio of tax to GDP, no bad thing, he says you might argue given the demands on government but:

EXCERPT FROM MACQUARIE RESEARCH PAPER: Meanwhile Canberra's effective funding of the states remains as low as it has been in three decades. While these two observations may be controversial, they are based on a straightforward interpretation of available published information.

QUENTIN DEMPSTER: Did you put Macquarie Bank up to this? Did you commission this research?

MICHAEL COSTA: No I didn't and I haven't actually met Rory Robertson.

QUENTIN DEMPSTER: Mr Costa, you can't blame Mr Costello for this. The Hawke-Keating government started the process of shafting the states in the 1980s. This graph shows Mr Costello and Mr Howard have maintained funding to the states in real terms right through their time in government.

MICHAEL COSTA: What the graph shows is that certainly there has been a decline since the '70s in the take that the states get. But what it doesn't show is that under Hawke-Keating there were direct areas of intervention that the Commonwealth had. It got involved in urban transport congestion. The Federal Government at the moment refuses to deal with those problems.

It is clearly the case that we would see expenditure coming from the Commonwealth directly into areas of need and welcome that, but they refuse to do that.

Dental health is the best example around at the moment. The Hawke-Keating Government got involved with dental health, provided funding directly for those programs. That was removed directly by Howard and Costello and that still hasn't been returned.

QUENTIN DEMPSTER: The Macquarie Bank research paper also observed

(Voice over from Macquarie Research Strategy Paper) (d)espite much silly talk about GST "windfalls" and free kicks, Canberra over the past decade has kept a very tight rein on transfers to the states. That might be a very good thing, or not, depending on your point of view.

QUENTIN DEMPSTER: With the Iemma Labor Government in NSW under attack over its failures in public transport, education and the public hospital system, Macquarie Bank and other recent research seems certain to change the nature of the Federal-State debate particularly with the Feds moving to take over state roles and functions in the universities, industrial relations, water and the river systems.

EXCERPT FROM MACQUARIE RESEARCH PAPER: Whether you think state governments are competent, hopeless or somewhere in between, the figure highlighted in this piece provide at least a sense of why the states think they are being dudded, why they are forever complaining that they want/need more money from Canberra to provide decent services and infrastructure for our growing population, itself boosted by Canberra's record immigration intake.

QUENTIN DEMPSTER: A spokesperson from Federal Treasurer Peter Costello told Stateline Mr Costello rejected the Macquarie Bank analysis as flawed because it double counted state taxes removed under the GST arrangements.

GST payments to the state were growing at %8, a year specific purpose payments %7 a year.

Rory Robertson told Stateline today he stands by the accuracy of his research.

Michael Costa's own state budget is due on 19th June.

MICHAEL COSTA: The bottom line is our expenditure is growing faster than our revenue and that is the pressure that we have got.

QUENTIN DEMPSTER: Would your mate, Kevin Rudd, do anything about it if he got into power?

MICHAEL COSTA: Well, one of the things that I am comforted by with... in terms of Kevin Rudd is that he has put on the agenda the very issues that I have been raising. That is: the relationships between the State and Federal Government both in terms of the fiscal arrangements but also in terms of the service delivery model.

We need fundamental reform. The division of labour that made sense in 1901 does not make sense today. There have been fundamental changes to the services that the community wants but also there have been changes to the revenue that we can rely on to deliver those services. The model is broken. It needs to be fixed