Does WA get a fair deal?

Those of you who are not from Western Australia will be unaware of Paul Murray, and for that I envy you. Murray is like Paul Kelly without the sparkling wit and partisan neutrality. His stentorian prattlings fill the pages of the West Australian, managing to be at once infuriating and utterly boring.

Today he leads off his tedious screed with the following predictable quasi-secessionist burbling:

The productive parts of Australia gave Labor a big kick in the backside – but maybe not quite hard enough to dislodge it from office. Those parts reliant on Labor’s handouts – Victoria, Tasmania and South Australia – stuck firmly on the teat.

I don’t want to talk about his election “analysis” today, such as it is, but instead the WA hard-done-by-ism that underlies the quote above.

I am a bit sick of hearing about how WA pays more than its fair share and about how it’s the productive part of the country and the ‘Eastern states’ are just a big rust belt.

Do you own the ore?

I don’t understand what makes West Australians, particularly anyone other than the 79 600 people who work in mining, feel some sort of proprietorial pride at the mineral wealth under the ground in the State’s far north. I speak as someone born in Perth who lived there for 27 of my nearly 28 years. I never felt as if I had done something special to deserve any greater share of revenue from iron ore than, say, Tasmanians or Northern Territorians.

Cross subsidy was OK when the money went the other way

WA has spent most of federation living off transfers from the more populous states. Lang Hancock didn’t discover iron ore until 1952, and then he spent twenty years trying to get the West Australian iron ore and steel industries off the ground. Then there was a long term decline in global commodities prices, reflected in our terms of trade, that meant that WA still received a slight subsidy. In fact, let’s have a look at how things stood in 1993-94, when the Commonwealth Grants Commission undertook a review of intra-federation financial transfers.

Here are the fiscal transfer relativities from 1993-94, adjusted to include the Medicare Agreements. A relativity of less than 1.0 means that the State or Territory received less revenue in grants or other transfers than it would have done if the money had been evenly divided among states according to population. In other words, it received “less than its fair share”, in Paul Murrayesque terns. Conversely, a relativity greater than 1.0 means that the State received “more than its fair share”.

Well, look at that. Those ‘unproductive States’, Victoria and New South Wales, were subsidising Western Australia.

What has happened since? Well, of course, there has been a spike in global commodity prices, driven by increasing demand from China and India. As a result, WA has been able to raise more of its own revenue (from mining royalties, stamp duty and payroll taxes) and hasn’t had to rely on transfers from other states. Here’s what WA’s relativity has looked like over the past decade:

In the early part of the decade, WA’s relativity was very close to 1.0, meaning that it received very close to what it would have if the national pool of money was divided by population. In the middle part of the decade, the State received slightly more than its “fair share”. Since then, WA’s relativity has come down. The Grants Commission calculates the States’ shares based on a five-year rolling calculation that includes the States’ revenue from other sources. That means that in the 04-07 period, when mining was in full swing, WA’s royalties hadn’t yet been fully factored in. Now they have, and WA’s share has fallen accordingly.

Now, perhaps West Australians don’t think it’s fair that they should receive less than their (somewhat crudely determined) ‘fair share’. I personally find it a bit hypocritical that a State that has spent most of its existence being subsidised by NSW and Victoria now regards the fiscal equalisation system as unfair.

Note that NSW and Victoria still pay more than their “fair share” too. Tasmania, the ACT and South Australia receive slightly more than an equal proportion per citizen. The Northern Territory receives a lot more than an equal proportion, because it has less capacity to raise its own revenue and has a big population of extremely disadvantaged Aboriginal people.

Some states receive less than other states, per head of population, because of the principle of ‘horizontal fiscal equity’. It sounds horribly wonkish, but really it just means that all citizens should have a reasonable expectation of receiving the same quality of services, no matter the State they happen to live in. Funds are redistributed across the federation to allow this to occur. The principle that is in use to distribute GST funds is:

State governments should receive funding from the Goods and Services Tax revenue such that, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency, each would have the capacity to provide services at the same standard.

Is that really a controversial suggestion? Would Murray and his ilk prefer that we have an American style system of fiscal disparity, in which being born into a poor area means going to a poor school and attending a poor hospital? Would they really suggest that rather than transferring some of its windfall mining gains to poor Aboriginal kids in the Northern Territory, the West Australian Government should keep all the money for itself? Perhaps they would.

Now, I need to make one thing clear: I am very aware that there is a lot of poverty and disadvantage in WA, and that there are extremely remote parts of the state that are in dire need of more government-funded services. I used to work for the WA Council of Social Service, and before that in the WA public service; I am all too aware of the challenges of delivering services in remote and regional WA. I am not suggesting that WA is all some golden nirvana. Instead, I’m just supporting the principle that Australian citizens should receive government services based on need, not on what state they happen to live in.

WA’s ‘powerhouse’ economy is oddly fragile

WA’s economy actually deteriorated faster than the national economy during the global recession. WA didn’t “get us through” the recession. Its economy has since rebounded more rapidly, but that just demonstrates the State’s reliance on the mining industry and the strongly cyclical nature of that industry (remember that in the six months from November 2008, the mining industry shed 27 300 workers, 15% of its workforce).

Here’s a comparison of the Australian and WA unemployment rates from July 2008 to July 2010:



WA entered the global financial crisis with its unemployment rate a full percentage point or so below the national figure, but then unemployment in that State rose much more quickly than the national average. By mid-2009, the unemployment rate in WA was basically equal to the national unemployment rate.

Another way of evaluating WA’s performance over that period relative to the national economy is by looking at the proportion of Australian employees who are employed in WA, ie. the total number of WA employees divided by the total number of Australian employees.

Around the time the financial crisis hit, nearly 11% of Australian workers were employed in WA. This fell steadily over the next year or so.

The point of this is to show that the WA economy is heavily cyclical, as it’s very dependent on the fortunes of the mining industry, which in turn are determined by the global prices for various commodities, which in turn are determined by global demand, which in turn is driven by the surging fortunes of China.

If things were to change and China were to falter then WA’s miracle economy may begin to appear a lot less miraculous. I suspect at that point we’d stop hearing from Paul Murray et al about West Australian exceptionalism and the need to receive a “fair share”, because the “less productive” States would once again be shovelling funds back across the Nullabor.