Premier Colin Barnett’s weekend assertion that WA’s relationship with the Commonwealth Government was becoming “negligible” was dramatic, but not without grounding.

While Western Australia’s declining share of GST revenue raised by the Commonwealth has been somewhat offset by increases in other Commonwealth Grants, the proportion of the WA State Budget funded by the Commonwealth is steadily declining.

In 2007/08, GST revenue and other Commonwealth Grants made up 42 per cent of the State Budget.  By 2012/13, this has dropped to 35 per cent and is projected to drop to 28 per cent by 2015/16.

This decline in the Commonwealth’s relative contribution to the WA Government’s budget is predicated on terms agreed between the Howard Government and the Court Government in 1999, as a part of the Intergovernmental Agreement to carve up revenue from the incoming Goods and Services Tax.  Under the principle of horizontal fiscal equalization, the Commonwealth adjusts the GST payable to each State on the basis of the State’s ability to raise its own revenue.  This process is designed to redistribute income from States with greater ability to generate revenue to those with a smaller economic base.

In 1999, WA had a very different economy than we do now.  For many years, WA had been a net beneficiary of the redistribution of Commonwealth revenue.  When signing the Agreement with John Howard and Peter Costello, then Premier Richard Court probably didn’t envisage the huge growth in mining royalty income that would occur over the next two decades and the impact this would have on the State’s share of GST revenue.  Mr Court presumably didn’t notice that poker machine revenue raised by other State’s wouldn’t affect their GST share.  If he had factored in either of these, he may have struck a different deal.

That said, the WA Government is hardly destitute as a result of the Agreement struck.  Mining royalty income has increased significantly more than our share of GST revenue has declined and total State Government revenue has increased by 30 per cent since Mr Barnett was elected.

In arguing for a new model of calculating the distribution of the GST, Mr Barnett is focused on improving his budget bottom line now.  However, with the State Budget increasingly dependent on royalty income, the Premier needs to be careful what he wishes for.  Demand for WA’s natural resources may decline in the future, either through the deterioration in the economic conditions of our trading partners, or through the emergence of more competitive suppliers.  In this event, future WA Governments will be highly exposed if any new method for calculating the distribution of the GST doesn’t build in a mechanism to support WA when we are no longer booming.

Download our May 2012 edition of the Capital Report here.