10 November 2010

The slow breakdown of COAG – Part 2

Gerry Gleeson formally ran the NSW Public Service.

He said in a recent speech:

Both parties, nationally, seem determined to diminish and erode the powers of the states.

State governments must accept that the Council of Australian Governments will play an increasingly important role in formulating national policies. NSW must not abdicate policy development. We must be leaders and not followers. NSW must be represented at COAG by highly talented officers with passion, purpose and policies to ensure the state gets a fair go.

Gleeson implicitly gives COAG the status of a parliament – something the political players have now tumbled to:

Critics of COAG have included Mr Barnett, who has said that COAG has become almost a new tier of government and lacks accountability and transparency. Mr Barnett has said that with 43 ministerial councils, it was too much....

A review of the COAG process is to be conducted by the heads of Australian treasuries.

The review will look at how well the interlocking COAG agreements are operating as well as whether there is a need for clearly specified responsibilities for governments as well as the development of sufficient performance benchmarks.

Unfortunately, one thing not reviewed is the overall capacity of the states and territories to fund any identified ‘clearly specified responsibilities’.

In that context it is interesting to see the emergence of the relationship between the payment of the proposed mineral resources rent tax (MRRT) and state based royalties as an issue.

According to the mining companies (BHP Billiton, Rio Tinto and Xstrata) a term of the document that allowed the ALP to say there was an ‘agreement’ about a mining tax before the election was a promise the Commonwealth would refund the value of state and territory royalties paid by the mining industry.

The Feds now claim that refunds will be paid on the basis of the relevant formula (or any announced variations) in force as at 2 May 2010 - the day the agreement was made was made.

This poses the question of what happens if a state increases a royalty amount.

The Sydney Morning Herald reports that the Government may withhold transfer payments to the States such as the GST if they effectively challenge the collection rate from the mining tax by increasing royalties.

We had anticipated this probable outcome:

The fact is the federal government requires a lot of money to fund the broad ‘social democratic project’ established by pl.51(xxiii) and (xxiiiA) of the Constitution –income transfer payments, health, hospitals and (undoubtedly in the immediate future) disability support and will need more money (and not less) as an increasing number of worthy needs are identified as requiring support in a country with an aging population and an atomising society.

A simple illustration: an portion of the proposed RRT is to help ‘build the roads, rail, ports, electricity and water supply, and other facilities needed to unlock Australia’s resource wealth’.Like housing, health and education, these are subject matters formally considered to be largely state responsibilities increasingly falling under Commonwealth control.

The Feds will increasingly need tax revenues to fund their projects in these areas on their terms. Then there is the ‘seamless economy’ and the wish to remove duplication.

Currently, the Government proposes that miners pay both royalties and the RRT, with royalty payments a claimable tax rebate. But it won’t be too long before calls are made that this is an inefficient way of doing things – only one tax should be levied (in this case) on the extraction of minerals. There isn’t much doubt which tax will go. (our emphasis)

As The Australian reported, the WA Premier has made his views clear:

Referring to the Rudd government's initial resource super-profits tax, Barnett says: ‘With 65 per cent of this revenue coming from Western Australia, it was seen as an attack on the mining industry and on our resource income base. People talk about these resources belonging to all Australians. Well, constitutionally, they don't. They belong to the people of each state.

In its 28 October letter to the Policy Transition Group (the Committee assisting the Government in implementing the MRRT) the Chamber of Minerals and Energy of Western Australia’s (CME) makes some pretty obvious points:

In relation to state royalties, CME has always maintained a strong preference for retention of the current state regime, administered by the state government and with revenues flowing to the state. The state has prime responsibility for resource project approvals and the provision of non-privately owned infrastructure. As such, it is imperative the state government maintains and receives a dividend for WA resources.

It is now reported in The Age that the Treasury ‘is considering using its tax power in the constitution to 'pursue unilateral legislation’ for poker machine reforms.’

Whatever the merits of having the Commonwealth regulate gambling, the decision again attacks the capacity of states and territories to make spending decisions confident that there is a stream of ‘own source’ income available to support the decision.

Whilst it may not be immediately apparent to the players, the issues of who does what in the Australian federation and how states should receive the funds to discharge ‘allocated responsibilities’ are now coming to a head.

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