The most surprising aspect of the Howard Government’s 1998 GST (A New Tax System or ANTS) package was the fact that all GST revenue was to be allocated to the States in lieu of existing Revenue Replacement Grants (introduced after the 1997 Ha Case), general Financial Assistance Grants and a host of other indirect State taxes (Eccleston 2004: 137; Hamill 2006: ch. 5). In many ways, this revenue-sharing strategy was a political masterstroke. The prospects of accessing a growth tax ensured the support of State Premiers. Moreover, the Intergovernmental Agreement (IGA) and the commitment therein that the proposed GST could only be altered with the unanimous support of both State and Federal Governments reassured voters that the GST rate would not subsequently be increased (Costello 1998). Yet, in terms of federalism, the most significant aspect of the ANTS package and the subsequent IGA was that it promised to put State finances on a more secure footing. This point was made by the Treasurer, Peter Costello, when he confidently predicted that ‘The GST will provide the States and Territories with a secure source of revenue that grows as the economy grows to secure funding for essential services, such as schools, hospitals and roads’ (as quoted in Hamill 2006: 126).

In many ways, the GST has lived up to the Howard Government’s claims as GST revenues distributed to the States have risen by an average of 8.9 per cent per annum in nominal terms over the seven years since its introduction (Table 1). In fact, buoyant economic conditions and strong domestic consumption over the period have resulted in GST revenues exceeding predictions made when the tax was first proposed. For example, GST revenue in 2007–08 alone is projected to be 7.6 per cent higher than forecast under the IGA (Commonwealth of Australia 2007).

However, this aggregate data obscures a number of subtle, yet significant, impacts which the IGA has had on intergovernmental financial relations. The GST may, as Treasurer Costello promised, have provided a secure source of revenue for the States, but this does not necessarily mean that the State’s funding base is adequate or that the IGA has necessarily enhanced the State’s fiscal capacity, or their ability to control their own taxing and spending priorities (Hamill 2006: 75).

(Source: ABS 2007 — Cat. 5220)

In 2004 Treasurer Costello claimed the GST had delivered a windfall to the States ‘over and above previous funding arrangements’ (Costello 2004). While it is hard to refute the fact that the GST has grown faster than anticipated, it is also easy to overstate the fiscal dividends it has delivered. Firstly, strong economic growth in recent years means that the swag of State taxes and duties which were replaced under the IGA would also have grown more quickly than forecast. Given this, it is slightly misleading to represent the growth in the GST tax base as being a windfall (Collins and Warren 2007). Indeed, it can be argued that Commonwealth actually appropriated a portion of this windfall when it unilaterally decided to phase out balancing payments to the States two years ahead of schedule (Hamill 2006: 174). Similarly, the growth in GST revenue to Western Australia, Tasmania and the ACT actually lagged behind the increase in Gross State Product over the period (Table 1).

Another way of benchmarking the performance of the GST tax base is to compare its relative performance to other federal taxes. As Figure 1 indicates, GST revenues have not grown as a percentage of total federal revenue over the period and, with the exception of the economic slowdown of 2001–02, federal income taxes (despite significant cuts to personal income rates over the period) have tended to increase more rapidly than GST revenue. This finding is consistent with broader claims in the public finance literature that broad-based consumption taxes, such as the GST, deliver stable rather than spectacular revenue growth (Ebrill 2001). In short, the budgetary position of the States has improved over the period of the IGA, but not to the same extent as federal finances and, as a result, the Commonwealth is in a stronger position to fund high-cost public services such as public hospitals.

(Source: ABS 2007 — Cat. 5506)

The second important consequence of the IGA is that it has eroded the fiscal capacity of the States because, with the IGA’s abolition of various indirect taxes and duties and well as the Revenue Replacement Payments, the States are increasingly dependent on revenue sources over which they have no control. For example, in 1999–2000 (the year prior to the IGA) States raised 40 per cent of their total operating income from own-source taxes, whereas by 2005–06 this figure had fallen to 33 per cent (Hamill 2006: 150). The 2006 Ministerial Council agreement to abolish a second tranche of States taxes (with compensation) will erode the State tax base further (Commonwealth of Australia 2007).