Losing hand

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How are the Prime Minister and the Treasurer going to win their argument with the Western Australian Premier?  Colin Barnett has a winning hand here.  Julie Gillard and Wayne Swan are just going to have to swallow hard and fold their hand.

Politically Barnett has a winning hand.  He is very popular in WA and the royalties/GST issue feeds right into the public belief in WA that they are being screwed by the Commonwealth.  Personally I am not big on states rights, but there is no denying it is a big issue in WA and the Premier is on the right side of it.

So, the more that Wayne Swan threatens to reduce funding of infrastructure projects in WA the higher Barnett’s vote and the lower the Federal ALP vote will be in the next election cycles.  Labour only has 3 out of 15 federal seats in WA and a swing of 5% would lose them those three.  Moreover, because it is infrastructure funding that the Treasurer is threatening to cut, the Premier will have a particular project to point at and focus public attention on.

Tactically Barnett has a winning hand.  The Premier controls the level of royalties on mineral extraction in WA.  The Federal Government cannot change that and they cannot stop him raising royalties further.  Crucially, an increase in royalties will not hurt the mining companies since it will be remitted by the Federal Government.

So, if Barnett increases royalties on iron ore there will be a transfer of funds from the Commonwealth to the State.  The Commonwealth can reduce GST and infrastructure payments to WA, but they are ‘only’ $4 billion anyway (in the medium term) and may go as low as $2 billion as WA’s GST return is reduced to 33%.  Iron ore exports from WA in 2015 will be 700 million tonnes.  If the price of iron ore is $150/tonne in 2015 then an increase in royalties from 7.5% to 10.5% would more than match the projected GST payments to WA and that money would come from the Commonwealth, not from the miners.

Wayne Swan seems to be missing the point that Colin Barnett can take money directly out of his pocket without harming the miners and without damaging Barnett’s electoral prospects.

7 Responses to "Losing hand"
  1. Could the Federal government practically or politically include an allowance for royalties in determining GST remittances, as a way around this?

  2. no Sam it is the Federal government who determines who gets what monies not the states as anyone who has observed FEderal/State relations since the war.

    The Feds can win this very easily

  3. The royalties raised by the states is already including in the determination of the GST distribution between the states.  Under the revenue heading, royalties are classed as either higher or lower royalty rates and adjustments are made according to how much royalty income is raised by a state in the two categories.  One of the current issues is whether the adjustment of royalties applying to iron ore fines will see a reclassification to higher from lower.  In effect, a state loses a fair proportion of the royalty income it raises but because the CGC takes a three-year moving average approach, there is lag in this taking effect.

    All this being said, the loser in the current imbroglio is the Commonwealth government that is committed to rebate all royalty payments to the companies paying the MRRT (although this tax has not been legislated).  This is outside the context of anything that happens to the GST which the Commonwealth government doesn’t receive in any case. 

    Without some massive dimunution in the amount of non-GST monies going to WA – with the political ramifications that this would entail – it is hard to see how the WA decision in respect of higher royalties on iron ore fines will NOT shoot a large hole in the outlook for the federal budget position.

  4. It is a pity Judith cannot read budget papers.
    As Warwick McKibbin pointed out a long time ago most of the MRRT revenue is going to fund other activities.

    so in fact it is quite easy to see how it won’t puch muxch of a hole in the budget

  5. What stops the Commonwealth taking the money back of WA? WA takes b$2 from mining companies, Commonwealth pays b$2 to mining companies. Commonwealth takes b$2 of state grants from WA. Net effect zero. Probably this is difficult to implement under existing agreements. But it wouldn’t be such electoral poison provided the Commonwealth could get the message across that nobody is better or worse of, and that Barnet is just being malicious and mischievous.

  6. ‘But it wouldn’t be such electoral poison provided the Commonwealth could get the message across that nobody is better or worse of, and that Barnet is just being malicious and mischievous.’ – That’s a big ‘but’ on recent history.

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