The distribution of the GST is among the hottest of political potatoes, and so it was little wonder that after Monday’s release of the Productivity Commission’s draft report on horizontal fiscal equalisation, the treasurer, Scott Morrison, steered well clear of any specific recommendations and kept to talk of a “fair go”.

While Morrison did speak of a general need to fix the system, he did nothing to indicate his preference for any of the specific recommendations in the report. This is no surprise given the zero-sum game of goods and services tax distribution, the commission’s recommendations would result in Morrison having to convince every government except Western Australia to be losers.

Perhaps the most accurate statement in the Productivity Commission draft report on horizontal fiscal equalisation (HFE) is when it notes that “there is a dearth of public understanding of how HFE works, and this is compounded by the lack of a strong neutral voice in public discussion”.

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HFE is essentially about attempting to provide each state and territory government with the same capacity to provide services and infrastructure.

That sounds straight forward, but because HFE mostly occurs through distributing GST revenue across the states, if you suggest one state should get more GST revenue to ensure it is fiscally equal, that means other states must get less. It’s very tough to find a “strong neutral voice” in a zero-sum game.

Because different states have both different spending needs and differing abilities to raise revenue, all states get either more or less than they would were we to assume that everything was equal and the GST should be carved up on a per capita basis.

In 2017-18 New South Wales, Victoria and Western Australia received less GST revenue than their share Australia’s population would warrant. If the GST was carved up purely along population lines, WA this year would have received $4.4bn more:

The reasons for the difference is due to both revenue and expenditure. The massive amount of revenue that WA is able to raise via mining royalties reduces its share of GST by $5.5bn, whereas the housing boom that brings with it stamp duty means NSW receives $1.8bn less than it otherwise would – because those states in effect have an unequal ability to raise revenue:

But each state also has different issues that affect its spending requirements – such as the age of the population and the share of Indigenous people. Some states also have higher public sector wage costs (which might be due to remoteness and the distance required to service – as is the case with WA):

Easily the biggest impact on GST is mining revenue, and this is the main driver behind the decision to review HFE. From the Western Australian point of view, the current system is unfair because its massive mining royalties means it receives less GST per capita by far than any other state. Its current relativity per capita share is 60% lower than the NSW, which has the next lowest share:

But we need some context.

Until the arrival of the boom in mining royalties, WA was the biggest winner from HFE.

Starting from federation, WA until around 2010 had been a much greater beneficiary of commonwealth money than any other state. NSW and Victoria, as the biggest states, are easily the ones who have “lost” the most money to other states in the interests of HFE:

And while WA is not doing all that well out of the GST carve-up now, the Productivity Commission notes that because the GST distribution is worked out using a three-year average of revenue such as mining royalties, the state actually received more GST than it would have had its share been worked out using the actual mining royalties.

The report notes that the Commonwealth Grants Commission (CGC) has estimated that the growth in iron ore royalties saw WA retain an extra $7bn in GST over the six years to 2015-16:

And no one should pretend they did not see the fall coming.

The Western Australian government in its 2011-12 budget even noted that it estimated in 2014-15 it would receive only a 33% share of its GST (an amount that was actually slightly conservative). However rather than budget for this fall, in perhaps one of the most disgraceful public finance decisions in Australian government history, the then WA treasurer Christian Porter instead assumed that the GST rules would be changed.

In his budget speech, he told the WA parliament that “what we reasonably anticipate is that in 2013-14 the CGC will have brought in a new GST system. We expect it will produce a floor of about 75% of our population share of the GST. Therefore we expect extra revenue of $1.8bn in 2013-14 and $2.5bn in 2014-15.”

He might as well have assumed that fairies at the bottom of the garden were about to invent a money tree.

We should note that the author of this manifestly wrong assumption is now the federal minister for social services. Never let it be said that gross budgetary incompetence is any hindrance to promotion in government.

But the Productivity Commission does note that there are problems with the current system. At the moment, the system works to get each state equal to the best performing state. The commission notes that this has worked well in the past, but is less effective now because Western Australia’s revenue capacity is abnormally large and somewhat erratic. It means that “the redistribution task is considerable and the standard being equalised to is potentially volatile.”

The commission therefore recommends that “equalisation should no longer be to the highest state, but instead the average or the second highest state”. Such a move would be – to put it mildly – political difficult. Every state would be worse off except Western Australia:

Good luck getting Queensland and South Australian governments – who are both worried about losing seats at the upcoming state elections to One Nation or the Nick Xenophon party – to agree to a system that would cost them, in Queensland’s case, to $1.5bn.

The commission also used the report to bang its drum for economic reforms it has long favoured – including a congestion tax and a shift from stamp duty to a land tax.

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It argues that the current system is a disincentive for tax reform because were a state to introduce a new tax it would likely lose GST revenue. Although, rather crucially, it notes that “there is no direct evidence that such incentives have changed specific policy decisions”. It excuses this lack of evidence with the rather philosophical view that “an absence of evidence is not evidence of absence”.

However it rather strains credibility to suggest the reason states have not pursued a congestion tax is a worry over a decline in their share of GST rather than the actual worry over the massive political unpopularity of the policy.

But there is no need to question the difficulty of the proposed changes for distributing GST. Six years ago, Porter thought it reasonable to assume that a change to the GST distribution would have occurred four years ago – such a change never came close to occurring.

On the back of this draft report however we are at least closer to knowing what a change to the system would look like, but we are no closer to altering the political challenges such a change would face.