Saturday Morning Musings - the WA royalties stoush

In yesterday's post I mentioned the growing financial stoush between the West Australian and Commonwealth Governments over mining royalties. This continued to grow as a political storm during the day. This story is an example, this another.

For the benefit on international readers, the basic facts are these:

1. The Australian Government has decided to introduce a resource rent tax on the profits of mining companies to take advantage of the current mining boom so that it has money to spend on what it considers to be national priorities.
2. Under the Australian constitution, mineral resources belong the crown in the right of each state. The states levy royalties on mineral extraction so that they have money to spend on what they consider to be state priorities.
3. Given the constitutional position, the Commonwealth has indicated that royalties paid to the states can be deducted from payments that would be made to the Commonwealth under the resource rent tax, However, the Commonwealth has made it clear to the states that it expects them not to increase royalties. The practical effect is to shift revenue from the states to the Commonwealth; Commonwealth spending priorities have been placed in front of state spending priorities.
4. To sweeten the deal, the Commonwealth has offered to spend part of the money raised from the new tax on infrastructure in individual states.
5. The Commonwealth's financial power has made the states increasingly dependent on Commonwealth funding in their traditional areas of responsibility, funding increasingly tied up in Commonwealth requirements of one type or another. States must meet and report on an increasing variety of centrally imposed requirements with constantly reducing spending discretion.
6. West Australia has become increasingly unwilling to agree to Commonwealth requirements to the point that they have refused to participate in new health arrangements even if it meant loss of funding.
7. West Australia has now varied royalty arrangements to increase revenue, in so doing creating a $2 billion hole in Federal revenue projections.   

Now if I was in the WA Treasury, I think that my advice to my Treasurer would be as follows:

1. It has become increasingly difficult to manage our budget with so much spend tied up in unstable and prescriptive Commonwealth programs.
2. It has become increasingly difficult to set any meaningful state priorities when we can't control what we do.
3. Mining royalties are our main growth revenue source and fund programs including royalties for the regions. There can be no certainty in any countervailing Commonwealth funding offer because of  excessive policy prescriptions and policy instability.
4. We must draw a line in the sand now. If the Commonwealth responds by cutting grants or if the Grants Commission reduces our share of the Goods and Services Tax, then we may have to increase royalties further, increase other state taxes, reduce spend or some combination of them all.
5. We should only move from this position if we are convinced that any Commonwealth counter offer will both meet immediate needs and be sustainable in the longer term.

There are obviously going to be moves and counter moves in all this, and no one can be sure how things will work out. The most likely worst case scenario for WA is no real increase in money, but greater freedom to spend the money that is does have. 

The issue to my mind is whether or not the WA Government has the political fortitude to stick it out. I suspect it does. The results of this dispute may well be critical in the evolution of the next stage of the Federation.