The Federal Budget has thrown a political grenade to the States – and an increase in the GST and its scope is now on the agenda, as Kevin Naughton explains.

While South Australia’s Treasurer Tom Koutsantonis fed his staff and advisers last night with Chiko rolls, dim sims, chips, chicken and super-large bottles of Coke, a message was on its way via the federal Budget – cut the fat and sharpen up.

By morning, Koutsantonis was starving.

“This is ideology at work through a budget. What they are trying to do is starve states of money,” he told 891ABC radio.

He went head-to-head with State Liberal Leader Steven Marshall who launched an argument that it was a falsehood to say Commonwealth funding had been cut when the Budget papers show an increase.

Marshall and Koutsantonis are both right – but in the argy-bargy of political point-scoring you were never going to hear that.

Here’s what has happened.

Firstly, the States are mostly funded by Commonwealth money.

That money comes through a share of the national pool of a Goods and Services Tax and an extra amount of funding via Commonwealth assistance for health and education, the two major services run by the States.

Secondly, the amount of GST heading our way will be more than in previous years and more than that forecast in the most recent federal document, the Mid Year Economic and Fiscal Outlook of last December.

Thirdly, the amount of Commonwealth assistance for health and education will increase – but not by as much as the States had been expecting.

As Koutsantonis put it this morning when discussing the health funding: “That funding grows exponentially … there are improvements in health care, there are improvements in drugs … in treatments, and they all cost money and we budget those. This funding guarantee being removed is nothing that anyone saw coming.”

He’s talking about the previous government’s commitment to keep funding the high growth in health expenditure; a commitment that Finance Minister Mathias Corman said this morning was “not sustainable”.

Corman told FIVEaa radio that Consumer Price Index growth in health funding should be enough for the States, who might need to re-visit how they run their health services.

Koutsantonis said South Australia needed more – much more.

“All we will get is CPI. When you get CPI in the health sector it doesn’t really take into account the growth in health costs which is about 8 per cent per annum, doesn’t take into account wage increases which is always above CPI, so South Australia over the next decade will be $5.5 billion worse off in our hospital system which is the equivalent of about two hospitals.”

Treasurer Koutsantonis Tweeted this picture of the dinner that he and his advisers enjoyed last night.

Down at the Adelaide Oval’s function centre this morning, Prescott Securities’ chief economist Darry Gobbett had a simple message for State politicians who thought the funding tap would keep delivering: “We’ve become over-dependent on money from the Federal Government, which is really money from the taxpayers and from other states.”

As Gobbett pointed out, South Australia gets a weighted distribution of GST – we get almost $1.30 for every $1 we raise.

Business SA’s Nigel McBride considers the pull-back on ever-growing revenue in favour of spending restraint as well overdue.

“Joe Hockey’s correct, this is mainly about getting rid of inefficiencies, duplication and waste at a Federal Government level and saving billions in doing that and committing to a billion dollars in red tape reduction,” McBride said.

“It hasn’t been dealt with for years. It is a bold Budget to reduce those costs and … when you see them announced there is a lot of inefficiencies, there’s a lot of duplication, there’s a lot of waste and somebody has to grasp the mantel and go for it; it’s about reducing the size of the government.”

There is, of course, an alternative.

If the States can’t cut their cloth, then they will look for a way to raise more revenue and that’s where the political analysts see the big shift.

Flinders University’s Haydon Manning said the revenue pressure will drag the GST debate onto the political stage.

“Now the State Premiers and Treasurers have a huge stick hovering over them and no carrot,” he said.

“The main game is now, how do we fund the States to deliver the services we need most and an increase in the GST or a widening of its scope has a political cause to it.

“For years no politician has wanted to talk about increasing the GST, now they almost have to.”

Adelaide University economist Michael O’Neil agreed.

“The way the feds have underfunded health and education is a chess move to get the States to put the GST on the agenda,” he said.

The GST rate and scope can only be changed by the States and Territories. The ball is in their court.

New South Wales Premier Mike Baird could see the writing on the wall.

“What we’ve seen from Canberra overnight is a challenge for the State,” he said.

Baird said one of the outcomes of Tuesday’s budget is that there has to be a mature debate about tax reform.

“What I’ll be saying to Canberra is that you have a responsibility in this, it’s not just a problem for States to sort out.

“You have handed across the biggest expenditure with the highest growth rates going forward in terms of health, well, we need to find a way to fund it.”

On that issue Tom Koutsantonis agreed.

“Joe Hockey has created that.

“He could’ve made other cuts that didn’t affect health and education but he chose health and education.

“He cuts those services which means we’re starved of funds and then he says: ‘I can fix this if you increase the GST on food, health and education’. That’s what he’s doing and that is fundamentally unfair.”

And so it was that a national debate had started on the GST – a debate almost every politician has avoided since its inception in 2001.

If the State Government wants to keep up the Chiko rolls, dim sims, chips, chicken and Coke, then I guess the taxpayers are in for a hit.