The commentariat is giving Pete Costello plenty of advice about not getting carried away with tax cuts in next month’s budget. He’ll quite probably take that advice, but not for the reasons Access Economics et al suggest.

It won’t be fear of inflation that keeps a (relative) lid on the budget, but the political benefits of waiting until the election campaign proper before rolling out the barrel.

With the budget in mind though, it is a shame that Rory Robertson’s update of tax and federalism has been ignored by the news cycle. When he first shone a bright light on Canberra’s big tax fibs last June, at least some of the media noticed, but this week’s analysis of the ABS tax report has gone largely unreported.

That must please the federal treasurer. See, if you just ignore them, they will go away…

One of Robertson’s graphs tells the unreported story very simply. Australia’s biggest-taxing treasurer is getting away with using the GST as a ruse.

Robertson’s full analysis continues below:

Canberra’s tax/GDP ratio at all-time highs, funding of States effectively at 3-decade lows

By Rory Robertson, Macquarie Bank interest rate strategist

1. Introduction and summary

The publication earlier this month of the ABS’s annual report on Taxation Revenue Australia (5506.0) provides an opportunity to update and extend some of the longer-term analysis on the Federal Budget and Federal/State financial relations produced here last year (Federalism Watch, 4 July 2006). For those already familiar with the issues, the attached charts (pdf) and tables (xls) summarise the updated story.

That Canberra in recent years has produced a series of sizeable Budget surpluses while also delivering income-tax cuts and solid growth in own-spending is well known. These surpluses would be all the more impressive if, at the same time, Canberra’s tax/GDP ratio had been reduced and financial assistance to the States had been particularly generous, as often is suggested in the Budget Papers and elsewhere.

Unscrambling the underlying Budget data, however, it is clear that Canberra’s tax/GDP ratio has not fallen and in fact now stands at a multi-decade high (Charts 1 and 2). Meanwhile, Canberra’s effective funding of the States remains as low as it has been in three decades (Chart 3). While these two observations may be controversial, they are based on a straightforward interpretation of available published information (see Tables A and B, incoming).

According to the latest data produced by the ABS, Canberra’s tax/GDP ratio was 24.9% in 2005-06, the same as in 2004-05 (on a consistent “cash” basis). This is the highest “tax-take” recorded since at least 1961-62 (see Chart 1). Not that there’s anything wrong with that; indeed, the only way to fund lots of spending and tax cuts while still producing sizeable Budget surpluses is to collect heaps of revenue in the first place.

Canberra for most of the 2000s actually seems to have collected more tax revenue – and kept more of it for itself – than ever before. Looking at a century-long chart showing Canberra’s tax/GDP ratio since Federation in 1901 and overlaying it (by sight) with the latest four decades’ worth of ABS data, Treasurer Costello almost certainly now holds the record as Australia’s biggest-taxing Treasurer (see Figure 3.2, p. 77 of 125 (p.63) here.

Recent record tax/GDP ratios would be less interesting if the Budget Papers did not show Canberra’s tax-take in the 2000s actually below its average of the past quarter of a century. Of course, Canberra’s tax-take hasn’t slumped in the 2000s; instead, Canberra’s published tax/GDP ratio and its regular claim of “no increase in the overall tax burden from its 1996-97 level” rely on its, ahem, unusual treatment of GST revenue (see p. 5 of 24 here).

Canberra chooses simply not to count in its Budget the 4% of GDP worth of GST revenue the ABS counts, arguing that the GST is a “State tax”. The problem is that Canberra’s splicing of its post-GST series to the pre-GST series to create its preferred long-run Budget history did not involve a joining of “like with like”.

Let’s be clear upfront: the critical issue here is not whether the GST is recorded as a “State tax” or not, it’s the need for any data series to be consistent over time to be credible. Any respectible tax/GDP measure must either count all tax collected by Canberra (for example, the ABS’s “cash” measure in Chart 1), or present Canberra’s revenues net of taxes collected for State and local governments over the entire period (for example, my measure of Canberra’s “Own tax revenue”).

So, Canberra since 2000-01 has calculated its Budget aggregates in a way that effectively excludes about 60% of the revenue it collects on behalf of the States (Chart 1), without applying a similar downsizing to the 5-7% of GDP worth of revenue collected and transferred to the States in earlier decades.

By comparing “apples and oranges”, Canberra’s ex-GST measure seriously understates its tax/GDP ratio. Yep, if you stop counting a chunk of revenue and spending that still is counted in earlier decades, then of course tax and spending aggregates tend to fall. Regardless, Canberra’s revenue/GDP ratio appears to be at or around multi-decade highs on any/every credible measure (see Charts 1 and 2, again).

At the same time as Canberra has been seriously understating its tax-take, it also has tended to exaggerate the generosity of its tax-sharing arrangements with State and local governments. Despite 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 (see Chart 3). That might be a very good thing, or not, depending on your point of view.

In any case, the net effect of Canberra’s GST-based tax reform on State budgets since 2000-01 is not widely understood. The introduction of the 10% GST (collecting 4% of GDP worth of revenue) has financed the abolition of Canberra’s ramshackle Wholesale Sales Tax (WST, with revenues worth 2.4% of GDP at the end), as well as the abolition or downsizing of a range of inefficient State taxes (worth about 1.4% of GDP in total; see my Table A and Table 12 on p. 12 of 26 here).

The ongoing reform of indirect and State taxes no doubt is a good thing, and Canberra should take a bow. From the States’ perspective, however, the 4% of GDP worth of GST revenue Canberra now collects and transfers to them essentially just fills the gap left by the abolition of Financial Assistance Grants (FAGs; projected to have been worth maybe 2.3% of GDP in 2005-06), and the managed drop in own-source revenue (worth 1.4% of GDP).

Now, net of the GST revenue officially earmarked to replace States’ own-revenue in the tax-reform process, Canberra’s total current grants to State and local governments amount to 5.1% of GDP in each of the past four years, a touch below the 5.3% of GDP recorded for 1996-97 (see Chart 3, and Columns AD, AE and AF in Table A).

Any “GST windfalls” to the States so far are captured in that figure of 5.1% of GDP. Thus, they clearly have been trivial in the general scheme of things, despite Canberra’s claimed generosity. After all, taking into account (net) own-revenue foregone, the States’ effective funding from Canberra remains at the bottom of its 5-7% of GDP range over the past three decades (Chart 3).

When unscrambled, the evidence is that Canberra’s tax-take is at all-time highs, while its effective funding of State and local functions remains at a three-decade low. Canberra actually is not as good at (revenue) sharing as it claims. Accordingly, future debates about Federal/State financial relations should begin with the fact that State governments – whether you like them or not – are under more financial pressure than the Federal Government, despite Canberra having invented tax/GDP and spending/GDP measures that show sharp declines since 2000-01.

The extent to which Canberra understates its own record tax/GDP ratio while exaggerating its effective revenue-sharing with the States is important. Armed with a more-reliable sense of underlying Budget facts, the Australian public would be better placed to decide whether the current arrangements are exactly what they want.

I do not know the answer, but the question boils down to whether the public would prefer the next dollar collected as income tax by Canberra to be allocated to its “Future Fund” to cover pension costs of Federal employees, or allocated to State and local governments, where – depending on your point of view – it either would be wasted or used to better fund public schools, hospitals, police, public transport and a variety of other functions and infrastructure that help to keep the show rolling in communities across our cities, towns and regions.

In any case, Canberra should rebuild the credibility of its Budget aggregates by publishing long-term measures that are consistent over time, that compare “like with like” rather than “apples and oranges”. Producing “Own revenue” and “Own spending” aggregates would be a good place to start.

A key test of the Government’s commitment to Budget transparency will be the extent to which its version of Budget history is straightened-out in next month’s Budget papers.

2. Some facts on Canberra’s record tax-take

As noted above, the latest ABS data confirm that Canberra’s tax/GDP ratio is the highest it’s been in at least four decades (see Charts 1 and 2, and Table A). Despite a series of income-tax cuts over recent years, Canberra’s tax-take these days is 2pp higher than the 22.8% of GDP recorded for 1996-97 and 1pp above the 1980s peak of 23.8% of GDP in 1986-87 (Column Z).

Over the six full years since the introduction of the GST in 2000-01, Canberra’s tax/GDP ratio has averaged 24.5% of GDP, 2pp or so above the average of the previous two decades.

Importantly, the 2pp increase in Canberra’s tax/GDP ratio over the past decade has boosted the “tax take” across all levels of Australian government – Federal, State and local – by about 1pp, to a likely all-time high of 30.4% of GDP in 2005-06 on an ABS “cash” basis (Column AB).

A major driver here has been the surge in company tax to a record 5.2% of GDP in 2005-06, up by 2pp or more from levels near 2-3% of GDP in the 1980s and 3-3.5% in the 1990s (see Table H2 on pp. 51-52 here).

Treasurer Costello, of course, refuses to accept the highest-taxing-Treasurer tag from the ABS, because its figures include the GST – worth a steady 4% of GDP – which he has declared a “State tax”. Like many others, the ABS thinks that’s a stretch: “the GST is attributed to the Commonwealth because the Commonwealth has the ultimate role in the determination and distribution of GST revenue”.

In any case, Canberra’s revenue/GDP ratio has been at record highs in recent years on a variety of measures that are consistent over time, measures that compares “like with like” rather than “apples and oranges”.

For example, looking at just total income taxes – to abstract from the big changes in indirect taxation in 2000-01 – Canberra’s revenue/GDP ratio is estimated at 18.3% in 2005-06, up from 17.2% in 1996-97 and an earlier peak of 16.6% in 1990-91 (see Chart 2).

Probably the fairest approach to measuring Canberra’s tax/GDP ratio involves an “own” revenue calculation: that is, counting all revenues collected by Canberra then subtracting all revenues it transfers to State and local governments.

On that basis, Canberra’s “Own Tax Revenue” also is at what looks to be an all-time high, at 18.4% of GDP in both 2004-05 and 2005-06 (Chart 1). Over the six full years since the introduction of the GST in 2000-01, it has averaged 18% of GDP, not quite 2pp higher than the average of the previous two decades (Column AG).

Only on the measure invented and published by Canberra is its tax/GDP ratio well below record highs. The extent to which this measure understates economic reality – by forcing a comparison between “apples and oranges” – is discussed further in Section 5.

3. Background to Canberra’s embarrassment of revenue riches

Treasurer Costello in recent years has had to deal with a problem faced by no other Treasurer since Federation: an extraordinary embarrassment of revenue riches brought on by a decade and a half of solid economic growth, supercharged in recent years by major upswings in commodity prices and company profits.

A measure of the extraordinary revenue bonanza confronting Canberra in recent years is the fact that four Budget updates in the two years to May 2006 delivered – via stronger-than-expected jobs growth and an unexpected surge in commodity prices and company profits – upgrades to four-year-rolling-revenue projections worth $123b in total (see Table B, at the base of Table A).

Putting all that into perspective, the $96b worth of net Federal debt that accumulated over the 25 years to 1996 (now repaid) was dwarfed by the arrival over just two years of $123b worth of upside surprises on the revenue front. For 2005-06 alone, the upside surprises on revenue that just turned up over those two years totalled $25b, or around 2-1/2% of GDP. The figure for 2006-07 is $34b or over 3% of GDP. That’s a windfall for Canberra worth more than half the revenue captured each year by the GST. Talk about a “financial free kick”!

For Canberra, “balancing the Budget” in recent years probably has never been easier. Sizeable Budget surpluses have been both painless and hard to avoid. Extraordinary revenue bonanzas transformed the standard Budget problem – Where will we find the money to pay for everything? – into a much more pleasant question: How can we get rid of all this excess cash quickly?

So, Treasurer Costello’s main Budget decisions in recent years have been about where to unload the cash. Income-tax cuts were required in each of the past four Budgets to limit the size of projected surpluses and the extent of the uptrend in Canberra’s tax/GDP ratio. The size of the tax cuts was carefully calibrated to reduce potential surpluses from around 2-3% of GDP or more to an acceptable 1% of GDP (see the run of surplus projections at exactly 1.0% of GDP in Table 1 here).

Who knows how long it will last, but the Australian economy in the 2000s has been generating revenues so readily that even (supposedly hopeless) State governments in aggregate have produced an extended run of surpluses and debt-reduction, though without Canberra’s luxury of having room as well for substantial tax cuts along the way (see LHS of page 8 here).

4. Canberra’s effective funding of States at three-decade lows

Counting all taxes including the GST, Canberra’s tax collections in 2005-06 represented about 82% of all tax revenue collected by Australian governments. That’s up from 77-78% in the late-1990s before the introduction of the GST (see here).

Since World War II when the States “temporarily” handed over their income-taxing powers to Canberra to assist the war effort, collecting revenue and distributing it to State and local governments has been an important part of Canberra’s role in our Federation. For the past three decades, Canberra’s current transfers to State and local governments have almost always been around 5-7% of GDP (see Column AD in Table A).

In 2005-06, Canberra’s total (tax plus non-tax) revenues amounted to $261b or 27% of GDP (Column V). From that pile, it transferred about $63b or 6.5% of GDP worth of revenue as current grants to State and local governments (Column AD). (Drawn from Row 24 of Table 17 in the National Accounts, this “Current transfers from Commonwealth” series accounts for the vast bulk of Federal funding to the States: all general revenue assistance plus Specific Purpose Payments for current purposes. A measure of Specific Purpose Payments for capital purposes does not appear to be available in the National Accounts spreadsheets. They were $3.0b or 0.3% of GDP in 2005-06, minor in the general scheme of things; unpublished data from the ABS suggest they were significantly larger in earlier decades.)

As noted earlier, that 6.5% of GDP (including 4pp worth of GST) transferred to the States in recent years includes 1.4pp earmarked to replace own-revenue lost as the States’ tax base was downsized as part of tax reform (Column AE). Importantly, this figure of 1.4% of GDP is an official estimate, the gap between Canberra’s projection of what FAGs would have been and the “The Guaranteed Minimum Amount” (see Table 12 on p. 12 of 26 here).

So, taking into account (net) own-revenue foregone, the States’ current funding from Canberra amounts to only 5.1% of GDP (6.5 – 1.4 = 5.1) in each of the past four years. That’s down from 5.3% of GDP in 1996-97 and something around 6-7% of GDP in the 1980s (Column AF). Indeed, the 5.1% of GDP figure remains a three-decade low (Chart 3).

Not that Treasurer Costello was prepared to concede the point in a recent interview:

JOURNALIST: John Brumby [Treasurer of Victoria] has just told us that, you know, that while the amounts might be at record highs, as a percentage of gross national product, States have never been worse off.

TREASURER COSTELLO: Every indication, including all of the papers today show that every State is in a windfall position. And, if you want the proof of that, to my knowledge no State will be today offering to give back its GST, which presumably it would be doing if it was worse off under this system.

JOURNALIST: Do you dispute these figures that now at 5.2 per cent of GDP [see Column AF] rather than 6….
TREASURER COSTELLO: They don’t dispute these figures, these figures are wrong, completely wrong.
JOURNALIST: So what is the share of GDP then?
TREASURER COSTELLO: The share of GDP that the States are getting is 6.6 per cent [see Column AD]. This is completely wrong.

(see here)

Actually, both Treasurers’ figures look to be correct – each from their own perspective – for 2006-07. The 1.4pp gap between their competing estimates (6.6 – 5.2 = 1.4) looks to be the extent to which GST revenue from Canberra simply has replaced downsized State own-revenue (Column AE).

As explained above, when you unscramble the relevant data, Canberra’s effective funding of the States indeed is flat-lining at the bottom of the 5-7% range of the past three decades (Chart 3). Talk about “GST windfalls” and “the largest financial free kick since the Second World War” seems silly when Canberra’s effective revenue assistance to the States remains at multi-decade lows, despite Canberra’s tax/GDP ratio being at all-time highs (Chart 1).

These figures – check them if you like, the sources are cited in Table A – confirm that Canberra tends to minimise, and then exaggerate, the generousity of its revenue-sharing with the States. That’s not particularly surprising. After all, we’re talking here about a Federal government of one political stripe that has direct control over total payments each year to State governments (all) of another stripe.

What is surprising is that there is not more public debate about whether current revenue-sharing arrangements are in the national interest. The facts – once apparent – certainly leave room for debate (more in Section 7).

5. How did Canberra‘s published Budget aggregates become so misleading?

While Treasurer Costello seems to be Australia’s biggest-taxing Treasurer (not that there is anything wrong with that), you won’t find any record-breaking revenue/GDP figures in his Budget Papers.

Table 1 in Statement 13 of Budget Paper No. 1 provides Canberra’s preferred history of the Federal Budget since the early 1970s (see here). An updated version is published in December each year in the Mid-Year Economic and Fiscal Outlook (MYFEO) (see here).

As noted earlier, the big drops in Canberra’s published tax/GDP and spending/GDP ratios in the 2000s are artificial, reflecting the sudden exclusion of a big chunk of revenue and spending that still is counted in earlier decades.

Defying tradition and ABS methodology, Canberra since 2000-01 has excluded from its published Budget aggregates the bulk of the tax revenue it collects for – then transfers to – the States, while leaving the typical 5-7% of GDP worth of State funding in the pre-GST series spanning earlier decades. Put another way, the GST is absent from both the revenue and spending aggregates since 2000-01, yet the WST and FAGs it replaced remain in the data.

The introduction of the GST has not brought profound change to Canberra’s funding of the States. As always, Canberra retains strict control over total transfers to the States, by controlling the level of Specific Purpose Payments. Earmarking the GST as a “State tax” mostly involves doing a stable 4% of GDP worth of the same old thing. With the stroke of a pen, the States’ post-2000 funding arrangements could (largely) be replicated without any reference to the GST at all, if Canberra simply guaranteed them 4% of GDP worth of untied grants from general revenue.

So, Canberra knowingly publishes long-term Budget aggregates that compare “apples and oranges”, without even a footnote to alert readers to the fundamental break in series in 2000-01. Disturbingly, the extent to which Canberra’s Budget history is misleading has increased over time.

Back in the 1999-2000 Budget Papers, the artificial drops in the revenue/GDP and spending/GDP ratios were acknowledged upfront:

Over the forward estimates period, both revenue and expenses as a proportion of GDP are expected to fall significantly. These reductions are largely driven by the abolition of Financial Assistance Grants to the States and Territories, the abolition of Wholesale Sales Tax and the personal income tax cuts arising from the introduction of A New Tax System.

In 2000-01, there still was at least a footnote that flagged the artificial nature of the drops: “There is an effective break in the revenue and expenses series in 2000-01 reflecting the introduction of The New Tax System” (see Table 3 here).

These days, there’s not even a footnote. The shift from “cash” to “accrual” accounting in 1999-00 is highlighted with a line ruled between the relevant years in the table and a long footnote at the bottom. Extraordinarily, there’s not a peep about the fundamental break in series in 2000-01, a break that dominates the economic picture painted by the published series. Why the integrity of Canberra’s published Budget history was sacrificed (not even a footnote!) is unclear.

Regardless, Treasurer Costello and others have not been shy in claiming credit for the big drop in the published tax/GDP ratio:

If you are disciplined on spending it allows you to cut the tax burden. The Commonwealth’s tax take to GDP peaked in Australia in 1986-87 at 23.7 per cent of GDP [now put at 23.8%, see Column Z]. In 1996-97 it was 22.8 per cent of GDP [yep, Column Z] and since then we have brought it down to 21 per cent [the ABS reckons it’s now a record 24.9%]. (The Sydney Morning Herald, 27 March, 2006)

Going the whole hog, Treasurer Costello also claims credit for the 4pp drop in Canberra’s spending/GDP share, again a drop that largely is artificial (see Chart 4):

Comparing how much we spend now with how much the Government spent 10 years ago it is clear that the size of the government as a proportion of the economy has fallen. In the 10 years to 2005-06 the Australian Government’s spending has declined from 25.3 per cent of gross domestic product [yep, Column S] to 21.6 per cent [now 21.3%]. (The Sydney Morning Herald, 27 March, 2006)

Too bad these claimed drops in the tax/GDP and spending/GDP ratios didn’t actually happen. The clear story told by the underlying Budget information is quite different from the one Canberra likes to tell: own-tax/GDP ratio is at all-time highs (Chart 1), while own-spending/GDP has fallen by only 1pp since 1995-96.

The latter is not a bad effort in the face of widespread demand for higher spending, although buoyant economic conditions and three-decade lows in unemployment obviously have been very helpful in limiting the need for assistance. In any case, the medium-term trend is more flat than down (see Chart 4 and Column Y in Table A).

6. Struggling with Charter of Budget Honesty?

So, Canberra’s tax/GDP ratio has risen over the past decade – not fallen as the published figures suggest – and the trend in own-spending is flat rather than down. Deliberate or not, Canberra’s published Budget aggregates are seriously misleading. Where is the Charter of Budget Honesty when you need it?

In launching his Charter of Budget Honesty in Federal Parliament in 1996, Treasury Costello observed:

It is the right of the Australian people to be fully informed about the current state of the Government’s finances and the future outlook (p. 4 of 11 here).

And last year, Treasurer Costello explained that the purpose of his Charter of Budget Honesty is “to prevent, by law, false and misleading accounting designed to hide or cover up the true situation” (see here).

Well, that’s awkward. In the process of becoming Australia’s biggest-taxing Treasurer, Treasurer Costello looks to breached his own Charter of Budget Honesty in the most basic way. That is, today’s seriously misleading Budget aggregates effectively hide the fact that Canberra is collecting more taxes as a share of GDP – and keeping more for its own use – than ever before.

The Budget Papers contain the suggestion year after year that Canberra’s “supplementary objective” of limiting the “overall tax burden” to “its 1996-97 level” is being acheived. That’s despite Canberra’s tax/GDP ratio on any consistent/credible measure having been above 1996-97 levels for most of the past decade (Charts 1 and 2). How is that consistent with keeping the Australian people “fully informed about the current state of the Government’s finances”?

As usual, the cover-up is more serious than the crime. There is nothing wrong with being the biggest-taxing Treasurer in Australia’s history. It’s a record held for a time by many previous Treasurers, a simple function of the long uptrend in Canberra’s tax/GDP ratio (look again at the century-long tax/GDP series on p. 77 of 125 here).

Moreover, as noted earlier, it’s been sustained economic strength – and recently the extraordinary windfall from company taxes surging to more than 5% of GDP (from around 2-3% of GDP in earlier decades) – driving Treasurer Costello’s record-breaking tax/GDP ratios. That’s a good thing, not a bad thing.

Unfortunately, Canberra’s recent Intergenerational Report 2007 (IGR) provides an example of how far and wide misleading Budget information now is being disseminated. The key chart illustrating long-run revenue trends shows Canberra’s tax/GDP ratio in recent years below its average of the past quarter of a century. Again, that didn’t actually happen (see my Chart 1 and p. 91 of 138 here – or p.75 of the hardcopy).

With the ABS’s tax/GDP (cash) series used in the first three-quarters of the IGR chart sitting today at an all-time high of 25%, there’s a paragraph that explains the flatness of a series that actually is flat only by construction (again, there’s no footnote to alert readers to the misleading break in series):

Over the last [past] 25 years, the ratio of Australian Government taxation receipts to GDP has flucturated over a narrow range of between 20 and 24 per cent (Chart 3.16). This contrasts with an earlier trend for the ratio to increase during the early and middle decades of the twentieth century. This shift from rising to broadly level tax ratios has been observed in most-OECD countries (p. 90 of 138).

Australia’s employment/population ratio at present is at record levels, commodity prices and company profits are through the roof, total income tax is at all-time highs as a share of GDP, Canberra’s Budget is reporting surplus after surplus while “own” spending continues to grow solidly, and yet somehow we are supposed to believe that the best-available measure of Canberra’s tax/GDP ratio has spent the 2000s below its average of the past three decades. Yeah, right.

Again, diligent but unsuspecting readers are being misled – by a comparison between “apples and oranges” – simply to maintain the charade that Canberra’s tax-take is not at multi-decade highs.

7. Endpiece
In any case, Treasurer Costello can relax. Even if he has breached his own Charter of Budget Honesty, it doesn’t matter very much. According to the actual legislation, it’s a law with no real teeth:

(1) The Charter of Budget Honesty is set out in Schedule 1.
(2) Nothing in the Charter of Budget Honesty creates rights or duties that are enforceable in judicial or other proceedings.

Google says it was Jean Baptist Colbert in the 1600s who famously observed that “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing”. Part of the genius of Canberra’s fiscal policy over the past decade is that it has overseen an increase in its tax/GDP ratio to record levels while generating as much applause as hissing.

Revenue windfalls from sustained growth and the commodity-price boom have been a big help, so too the ongoing under-reporting – relative to traditional measures – of both revenue/GDP and spending/GDP. The latter, however, is inconsistent with any general policy of transparency in the Federal Budget.

Canberra’s published tax and spending aggregates are widely used, finding their way into all sorts of analysis and commentary. Many analysts and commentators assume that the information in Canberra’s Budget papers is reliable, that there is no need to double-check facts before proceeding. So Canberra’s ongoing publication of seriously misleading Budget aggregates is a problem.

In particular, it strikes me that the public debate about Federal/State financial relations has been led astray. Unscrambling the revevant data, the facts are that Canberra’s tax/GDP ratio is at multi-decade highs while effective revenue-assistance to State and local governments remains at a multi-decade low. By seriously understating the extent of its tax revenues and simultaneously exaggerating the generousity of its revenue-sharing with the States (via talk of big “GST windfalls”), Canberra has clouded the Australian public’s ability to judge how our record tax revenues should be spent or saved.

Whether you think State governments are competent, hopeless or somewhere in-between, the figures highlighted in this piece provide at least a sense of why the States think they are being dudded, why they forever are 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.

A study published earlier this month by academics Anne Twomey and Glenn Withers (for the “Council for the Australian Federation”) argued that Canberra’s funding of the States is inadequate:

…the particular service delivery functions of the States and Territories mean that their costs are likely to rise faster than those of the Commonwealth for basic economic reasons beyond issues of good management. …Therefore, the States need a greater share of revenue over time to support their functions, but it is the Commonwealth’s revenue share of GDP that has been growing… (see p.39 of 61 here).

Broadly the same story can be found in a major study by Neil Warren last year (for the NSW Government) on Australia’s intergovernmental fiscal arrangements.

As the population ages, the question increasingly will be asked whether the relatively cash-strapped States should hand over their health responsibilities to Canberra or, conversely, whether relatively revenue-rich Canberra should hand over more cash to the States to fund health. Even now, some wonder whether Canberra’s extraordinary retirement subsidies to the well-off – via the latest announced superannuation tax concessions – are a greater priority than extra funding for basic services provided by the States.

Regardless, good public policy would have a better chance of emerging if Canberra’s published Budget history did not provide a seriously misleading guide to underlying fiscal trends. To rebuild its credibility here, Canberra should move back towards aggregates that are consistent – compare “like with like” – over time. Publishing long-run measures of “Own revenue” and “Own spending” would be a good place to start. (The approach taken in this piece could be improved/fine-tuned to ensure complete consistency over time.)

Importantly, by recognising that the GST is collected by Canberra, and that it has funded the abolition of the WST, FAGs and various State taxes, and by acknowledging the full extent of Federal transfers to the States, these “own” revenue and spending calculations seem to cut neatly through the Federal/State issues that for most of a decade have complicated assessments of Federal Budget aggregates.

Peter Fray

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