WHO wins, who loses from the West Australian government's decision to end a $2 billion loophole in its iron-ore royalties? WA wins in the short term probably. Victoria and other states stand to win big in the medium term. The miners will get off scot-free, thanks to Canberra's pledge to pay their royalties.
And that means the Commonwealth will be the loser but an angry loser, with many ways to get even.
The WA royalties won't kill off Wayne Swan's budget surplus. On Treasury estimates, there would still be surpluses of $3 billion to $5 billion each year from 2012-13 to $2014-15. And Labor will find ways to get back its losses.
The key result will be to heighten WA's bitter complaints over the split up of Commonwealth grants by pushing the system to breaking point.
WA Treasurer Christian Porter says that under current rules, the Commonwealth Grants Commission eventually will take the new revenue off WA so that by 2014-15 it would receive just 33 cents in every $1 that WA taxpayers pay in GST.
For decades, Victoria and NSW have subsidised other states (including WA), but never on that scale.
We now face a new reality. One state can raise far more revenue than the rest. WA estimates its iron-ore royalties will grow from $305 million in 2003-04 to $4.75 billion in 2013-14. It's a colossal windfall. It would be like Victoria seeing an extra $10 billion fall from the sky.
But WA has one problem: the Grants Commission. Its job is to distribute GST money to even out the differences in state revenue capacities. That means, over time, it takes all that extra money off WA to give to other states including Victoria.
It's happening now. Before the resources boom, WA was always subsidised by NSW and Victoria. But next year the Commission will give $1.5 billion of WA's GST revenue to poorer states and territories. WA projects that by 2014-15, it stands to lose $4 billion almost all the money it raises in iron-ore royalties.
There is not space to explain the technicalities. But Swan is right: over time, WA stands to lose all its new royalties, and more. It could even lose them next year, although it is likely to keep them for a few years before the commission's formulas claw them back.
Resources Minister Martin Ferguson says the Commonwealth will honour its pledge to pay the miners' royalties when it brings in its own mining tax. It will continue existing infrastructure projects in WA. But WA could lose the rest of the $2 billion of infrastructure projects promised with the mining tax.
So why did WA do it? I suspect it's a deliberate strategy to change the Grants Commission formulas, by raising the stakes so high that they become politically unworkable.
