Welfare for the states

Most Australians support some degree of welfare for the needy, where a taxpayer effectively transfers money to a non-taxpayer. But many do not realise there is a bizarre welfare system sitting on top of this, in which taxpaying states effectively transfer billions of dollars to non-taxpaying states.

This welfare system involves two states – Western Australia and New South Wales – transferring funds to the other states and territories. WA transfers $20 billion a year, equivalent to more than $8,000 a year from each West Australian, while NSW transfers more than $2 billion a year, over $300 per person.

Out of this system Tasmania and the Northern Territory draw nearly $4 billion a year each. That means each Tasmanian, rich or poor, gets nearly $8,000 per year from the people of WA and NSW while Northern Territorians get more than $16,000.

The state-to-state welfare system is complicated and to unravel it is no easy task. Some think it simply involves the GST, but that only plays a small part. Of the $8,000 a year that each West Australian transfers to the east, only $600 is a result of paying GST to Canberra.

The real cause of the system is the Commonwealth government's collection and use of income tax revenues.

The workers of WA and NSW tend to earn higher wages than other Australians, and thus pay more personal income tax - particularly because of the euphemistically named 'progressive' system where the taxman takes a higher and higher share of your income as your income rises. The businesses of these states also tend to earn higher profits than businesses elsewhere and pay more company tax as a result.

These higher wages and profits are partly a result of some natural or historical advantages enjoyed in those states, but they are also the result of hard work and risk-taking. In addition, the state governments in WA and NSW play a role through building the infrastructure that underpins business activity, and by approving developments despite political opposition.

The income taxes disproportionately paid by the people of WA and NSW tend not to find their way back to those states. For instance, the Commonwealth government uses the revenue to fund unemployment payments. As unemployment is relatively low in WA and NSW, these states get little benefit. The government's failure to require recipients of unemployment payments to move to places with better employment prospects, like WA and NSW, serves to entrench the problem.

The Commonwealth government also uses the income taxes paid by the people of WA and NSW to scatter grants across the country for public housing, public schools and public hospitals. These grants are insidious. Not only do they result in bureaucracies in Canberra that duplicate those in the state capitals and undermine the states in carrying out their own responsibilities, but they also discourage people in economically-depressed states and territories from moving to where economic prospects are brighter.

In addition, they discourage people in those states from supporting local economic development. After all, if there are public services funded by economic growth generated elsewhere, why bother trying to generate economic growth at home?

For many reasons the state-to-state welfare system should be abandoned. But this will not occur by simply tinkering with the distribution of GST revenues. It requires a marked reduction in Commonwealth income taxes, a rejection of 'progressive' taxation and unconditional unemployment benefits, and the withdrawal of the Commonwealth government from areas best managed by state and territory Governments.

Australia was established as a federation in the expectation that the states would compete with each other to create the most jobs and prosperity, and most pleasant environment in which to live. The steady concentration of powers in Canberra, especially the power to levy taxes, has seriously undermined their ability to chart their own course.

If this is to change, it won't be led by the states that benefit from state-to-state welfare. It will be up to the people of WA and NSW to return Australia to genuine federalism.