August 25



First ParliamentAustralia is one of the oldest federations in the world. It has too long been afflicted with a sickness that the founders of the United States warned against, technically known as “vertical fiscal imbalance.” This occurs when the revenues of different levels of government do not match their expenditure responsibilities. As a result, the stronger party, in our case, the Commonwealth, transfers money to the less endowed, in our case, the states. Further the Commonwealth moves into state areas of responsibility not approved by the people in a referendum.

What is wrong with that? Apart from the circumvention of the Constitution, the weakness is that the states do not have to face the electorate to explain how they spend the people’s taxes. Nor does the Commonwealth-it can blame the states for any mismanagement while exercising powers not granted to it under the constitution. The electorate becomes confused about which government is responsible , which pleases some politicians immensely. The result is that at times, no government seems responsible. This has been encouraged by the High Court which, for example, some many decades after federation, curiously found that the levying of sales taxes was beyond the power of the states. Mr. Howard endeavoured to correct this by a GST collected by the Commonwealth for the benefit of the states. He received little thanks for this from the states, at least initially. The GST has been a windfall for the all the states, some more than others.

The result is that the states are responsible for about 40 per cent of total government spending, but raise only 16 per cent of total revenue. This was not the intention of the Founders.

The Melbourne based Institute for Public Affairs criticizes the states for spending much of the windfall on additional, recurrent spending, and that most of this “ has gone on more and higher-paid public servants,” rather than to fund new infrastructure.

In any event the GST still remains a federal tax, and according to classical federal constitutional theory must contribute to the lack of accountability of state governments to their electorates.

It was therefore with considerable interest then that we read a report in The Australian  by Imre Salusinszky on 4 August,2006 under the headline: “Hand over GST entirely, Iemma demands.”

This said that the NSW Premier, Morris Iemma, had argued that the GST should be handed over entirely to the states.

Mr. Iemma was addressing an infrastructure industry meeting in Sydney. He challenged federal Treasurer Peter Costello to hand over the GST, just as former prime minister John Gorton did with payroll tax in 1971.

According to The Australian, Mr. Iemma said: "Make it in reality, and not just in Peter Costello’s imagination, a state tax." he said.

The report went on to say that Mr Iemma said under his proposal the states would get to keep all the GST raised within their borders. “Under the present system, the $39 billion raised is redistributed according to a formula designed to assist states and territories with special "disabilities" such as remoteness or a large Aboriginal population,” the report stated. As`a result, in 2006-07, $3.2 billion of GST collected in NSW and Victoria will flow across to the other states. “While the two large states acknowledge the need to subsidise South Australia, Tasmania and the Northern Territory, they are incensed at being "ripped off" by the boom states, Queensland and Western Australia.”

In a separate report in the same edition of The Australian by Mr. Salusinszky and Brad Norrington, we learned that a longer version of the Premier’s speech was distributed to reporters. In it , Mr Iemma questioned the need for state governments at all if the federal-state tax system could not be made more equitable.

"Certainly, the federal system needs fundamental change," the longer version said. "Change that either reinforces the autonomy and the funding base of the states or, alternatively, puts them out of their misery by shifting Australia to a unitary system of government via a referendum."

According to The Australian, Mr Iemma did not include the referendum remarks in his final speech, buthis comments on the GST drew immediate support from Victorian Treasurer John Brumby.

We found this so interesting we asked the Premier’s office if we might have a copy. Our representative was asked where whom she represented and told they would ring back. They did. We were refused a copy. We`are surprised.



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