"We will be reforming the way the economy operates, make no mistake about that. We have to do it, the future demands it, Mr Pallas said. "The way the states derive income needs to be reformed."

The NSW government is also looking to reform stamp duty as part of a major federal financial review commissioned last year by NSW Treasurer Dominic Perrottet. The review is being led by former Telstra chief David Thodey and includes former New Zealand prime minister Bill English and former federal finance secretary Jane Halton.

Ms Halton is part of Neville Powers' COVID-19 commission making recommendations to the national cabinet on the recovery plan.

"NSW has been putting the case forward for Federation reform for a number of years, and we would support moves by the Prime Minister to look at options to get Australia back on the road to economic strength," Mr Perrottet told The Australian Financial Review.

"Now is definitely not a 'business as usual' environment and if reform can enhance our recovery we should look at all the options.

"While the timing of the Federal Financial Relations Review led by David Thodey has naturally been affected by COVID-19, work is ongoing.

"Reform will be a key pillar of the NSW Government’s economic recovery strategy, which is already being developed by NSW Treasury,” Mr Perrottet said.


The distribution of GST would need to be adjusted to cover the transition period. Canberra has shown little appetite for any special coronavirus levy or an increase in the GST.

GST revenues are weakening due to price pressures on retail goods and an increasing spend on GST-free services such as healthcare.

State officials also point out Commonwealth revenues are going to continue being under pressure, with fuel levies likely to fall with the uptake of electric cars and company income tax revenues hit by capital mobility and international tax competition.

Weakening Commonwealth revenues would flow through to lower grant funding to the states.

Stamp duty a running sore

NSW has estimated the gap between revenue and expenditure will grow to 3.4 per cent of gross state product by 2056, equivalent to $20.6 billion or a fifth of revenues.

The issue of stamp duties has dominated the NSW review, with half the submissions raising issues with it.

"Stamp duty on residential properties are particularly costly as they add to the cost of buying a house and therefore discourage people from downsizing, or moving closer to preferred jobs, schools and family," according to the NSW discussion paper.


Half the submissions to the review were about stamp duty. The review has reported it has consistently heard how the transfer duty is a costly tax that affects citizens’ freedom to move through "the seasons of life".

"We also heard how it can often have the worst impact on first-home buyers and seniors. By hindering mobility, we heard stories of people living in housing that doesn’t meet their current needs.”

A 2017 NSW Treasury report estimated stamp duty abolition would lead to a 25 per cent increase in property transfers creating the equivalent of an extra 70,000 homes.

Stamp duty is about a quarter of both states' revenues. NSW estimates stamp duty costs the state economy about $2.35 for every collected dollar in lost income, compared with an estimated 16 cent for an annual land tax.

The ACT government has been slowly winding down its stamp duty and replacing it with an annual land tax, in a 20-year program.

Mr Morrison said this week national cabinet has been told by Reserve Bank governor Philip Lowe major economic reforms would be necessary to recover from the COVID-19 global shutdown.

"There was a very clear message from the advisers, particularly Dr Lowe, that if you think we can grow the economy under the old settings then we need to think again,'' he said.

"We are going to have to have economic policy measures that are going to have to be very pro-growth, that are going to enable businesses to employ people, that will enable businesses to invest and businesses to move forward."