Economic Development
Current Commonwealth‑State funding arrangements lead to large imbalances in the bearing of fiscal costs and the sharing of revenue benefits across governments. This potentially discourages economic development.
The Commonwealth Government receives the majority of the fiscal returns from Western Australia’s major resource projects through its broad revenue bases - especially Petroleum Resource Rent Tax, income and company tax (this is partly a symptom of VFI, and a significant contributor to the State’s large net fiscal subsidy). In addition, a large proportion of the State’s share of fiscal benefits tends to be redistributed to the other States by the CGC process. Yet the Australian Government makes very little contribution to the infrastructure and other costs of supporting such developments.
Major current examples of the imbalance between revenue benefits and fiscal costs from developments in Western Australia are the Gorgon gas project, the Burrup Peninsula gas processing developments and the Ravensthorpe nickel project (all revenues in the following are in net present value terms).
The Gorgon Gas project is forecast to improve the Commonwealth’s budget balance by between $11 billion and $14 billion. However, after taking account of State expenditures to service the increased population resulting from the Gorgon development, and the redistribution of net revenue benefits by the Grants Commission, Western Australia’s forecast net fiscal benefit is only $300 million. Other States will receive a net fiscal benefit of around $3 billion.
The Commonwealth will provide no special assistance for the social infrastructure required to service the population increase in Western Australia due to the Gorgon project.
The Burrup Peninsula gas processing developments are forecast to improve national GDP by $3.6 billion and generate nearly $600 million in net fiscal benefits for the Commonwealth Government. However, after taking into account State expenditures and the redistribution of net revenue benefits by the CGC, Western Australia is actually expected to incur a net loss of $60 million. Other States will receive a net fiscal benefit of around $450 million.
The State has committed $160 million in multi-use infrastructure assistance for the Burrup Peninsula to assist the requirements of the Burrup Fertilisers project and other potential projects in that area. In addition, $24 million will be committed if a second project is commenced. None of this will be recognised by the CGC.
The Commonwealth Government’s revenues from the Ravensthorpe nickel project are expected to be almost seven times larger than the Western Australian Government’s. Yet the State Government is contributing $55 million to this project (including in the form of power and water infrastructure, port upgrades, road works and school upgrades), compared to the Commonwealth’s contribution of around $11 million.
A State would have a stronger incentive to fund investments whose benefits are likely to be spread around the nation if Commonwealth funding mechanisms were in place to ensure a fair sharing of the costs or benefits. Without such Commonwealth support, the State’s cost-benefit analysis will compare the full cost against only a fraction of the total benefit, and so is likely to reach the ‘wrong’ conclusion from a national welfare perspective. This is particularly the case where the fiscal benefits for governments are a significant proportion of the total benefit, and these primarily accrue to other jurisdictions (as in the resource developments listed above).
In the lead up to the Federal election, Federal Labor expressed support for infrastructure funding. Kevin Rudd detailed plans for Infrastructure Australia, a statutory authority to overhaul reform, planning and development of infrastructure projects. Its planned first task is to conduct an audit of current infrastructure and assess its adequacy for the future. Based on the audit, an Infrastructure Priority List would be established with Commonwealth funding assisstance. Also planned are the evaluation of best practice procurement processes and project financing options such as private public partnerships. Mr Rudd also promised the establishment of a Western Australia Infrastructure Fund, using Commonwealth revenues from the Gorgon or Pluto gas projects. The fund would be used to invest in State economic and social infrastructure projects over the next 20 years. When fully operational, the fund would have Commonwealth contributions of up to $100 million per year.