Palaszczuk and Baird need to stop wishing for miracles

Ahead of the COAG meeting, Premier Palaszczuk has written a desperate open letter to the Prime Minister requesting an extra $1 billion to partly fund the $10 billion Cross River Rail (CRR) megaproject and the Gold Coast light rail (GCLR) extension.

Once you excise Palaszczuk's 'Queenslander-under-siege' rhetoric, reading past the incredible words (for a letter between two heads of government in our Federation) like shamefully, iniquitous, coercive, bullied, ransom and heist, the Queensland Premier is arguing that Queensland is 'owed' its per capita 'share' of the Commonwealth's $5 billion Asset Recycling Initiative.

The first point to make is that this $5 billion fund is designed to cover the loss in 'tax equivalent payments' so that the state is no worse off from the sale. Without the Commonwealth covering the states for that loss, states would be less likely to privatise an asset even if it would be better for the economy overall.

The fund also provides an incentive for states to 'do the sensible thing'. This type of fund is neither new nor coercive, indeed previous Queensland Governments have agreed to important economic reforms in return for 'competition payments' that have benefitted the state.

Palaszczuk has signalled that she has no interest in federation reform and would rather build megaprojects whose economics just don't stack up.

Palaszczuk points out that: "This project [CRR] was identified as the number one requirement for the nation in Infrastructure Australia's last priority list." That is certainly true and reflects very poorly on Infrastructure Australia's ability to undertake independent due diligence of business case assumptions as opposed to 'ticking and flicking'.

The business case that Infrastructure Australia reviewed was based on internally-prepared and since discredited passenger demand forecasts. The 'nightmare scenario' painted where we would have a bottleneck on the Maryvale Bridge (rail crossing) by 2015 has simply not eventuated.

The Newman Government shrunk CRR into the $5 billion BaT Tunnel, but even that projects economics were very marginal and some hardhead LNP Ministers were having serious second thoughts by late 2014.

Mega-projects are incredibly risky and governments must opt for the big bang solution only when all other options have been seriously considered. The global evidence on mega-projects makes for sober reading. Across hundreds of projects reviewed by Professor Bent Flyvbjerg's team at Oxford University, on average demand forecasts were double actual demand, and costs were estimated to be half of final costs.

Professor Tony Makin from Griffith University demonstrated in his submission to the Productivity Commission Public Infrastructure Inquiry that bad infrastructure projects reduce economic growth and cost jobs in the long-run because they reduce productivity after the sugar hit wears off.

So before Palaszczuk pulls out the begging bowl, she should carefully consider how major infrastructure projects in Queensland are identified, prioritised, financed and funded, including how to make Building Queensland a truly independent advisor to government. She should also listen carefully to Queensland Treasury's reservations about both projects.

Meanwhile, rather than writing a letter to the PM begging for money, NSW Premier Mike Baird has proposed to increase the GST from 10% to 15%.

This is a very bad idea.

That is not to say that, in theory, the GST is a 'super-duper' tax because, applied broadly and evenly, it raises revenue without significantly distorting consumers decisions or lowering growth.

If you could guarantee that, in return for a higher GST, politicians would lower less efficient income and company tax as well as inefficient state taxes like stamp duty so that the overall tax-take would be the same or lower, then Australia would indeed be better off.

However, Baird's proposal is a lazy $30 billion tax grab to solve an, albeit, very real problem – the projected growth in health spending.

Palaszczuk has rejected the Baird proposal and latched onto the harebrained idea of Victorian Premier Daniel Andrews to raise the Medicare Levy to 4 per cent, which would push the top marginal tax rate more than 50 cents in the dollar and act as a significant disincentive to work.

Baird and Palaszczuk need to stop wishing for miracles and start focussing on restraining spending. Keating in the late 1980s, Costello in the late 1990s and Nicholls in his two budgets showed that stopping unsustainable spending growth is possible while maintaining or even improving service delivery.

But that necessary process of returning to a sustainable fiscal position has been thrown out the back door with the Palaszczuk Government re-starting the spending by hiring 3,000 new public servants (at an ongoing cost to the budget of $300 million per year).

Of course, under the current system the Commonwealth is always there to be blamed so there is little incentive for the states to restrain spending.

That's why the most important long-term reform must be aligning the spending and revenue raising responsibilities of the Commonwealth and the states. And the most important short-term reform is fixing the broken GST distribution system that punishes the growth states.

But these reforms will take years to eventuate.

In the meantime, if Abbott's "current generation of leaders" can simply manage their spending, perhaps the next generation can undertake comprehensive tax reform, and the generation after that can increase the GST.