Australian Financial Review
8th March 2006

In Defence of the Grants Commission

Whoever heard of a government imposing higher taxes to make itself more efficient and attractive to investors? This is apparently favoured by Alan Mitchell (6 March) as the economic rationalist approach to fiscal equalisation. What he should have said is that it would be the end of that policy.

True, he does favour joint Commonwealth-State policies to provide additional finance to those states that experience a "disproportionate" demand for key services. But that is what the existing equalisation approach does already through the Grants Commission, subject only to any disproportionate demand not being due to a deliberative state policy.

The advantage of the existing system is that it allows individual states, rather than the Commonwealth, to decide on the standard of services and level of state taxes they will apply. This is what is sometimes called a federation, albeit one which the Commonwealth is increasingly undermining.

Mitchell also suggests that his joint Commonwealth-State polices would not provide additional finance to overcome economic "disabilities". In short, if it costs more to educate or doctor the residents of, say, Tasmania, they would pay with higher taxes. That is not something that would happen if everything was run from Canberra.  In reality, the present system of distributing GST revenues produces a situation similar to what would occur if there were no States.