Productivity Commission’s landmark review proposes raising WA’s share of GST by up to $3.6bn, with NSW losing $1.2bn and Queensland $1.6bn

This article is more than 2 years old

This article is more than 2 years old

Australia’s eastern states would lose billions of dollars in GST revenue and Western Australia would receive a multibillion-dollar windfall if a radical overhaul of the GST distribution was adopted by the Turnbull government.

In a landmark review of the GST, released on Monday, the Productivity Commission dropped the policy equivalent of a bomb, suggesting the government could improve Western Australia’s share of the GST by adopting methods of distribution that see its GST take rise by either $3.2bn or $3.6bn, at the expense of every other state and territory.

The treasurer Scott Morrison, who initiated the review in April this year following repeated complaints from WA’s government that the system was treating the state unfairly, has welcomed the report and suggested the government is prepared to ditch its policy of a GST floor when the final report is released.

Under the proposed overhaul, New South Wales would lose either $1.2bn or $110m in GST this year, depending on the method, and Queensland would lose $729m or $1.6bn.

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Victoria would lose $920m or $972m, followed by South Australia (-$256m or -$557m), Tasmania (-$77m or -$168m), the ACT (-$60m or -$130m) and the Northern Territory (-$36m or -$79m).

Western Australia would be the only state to gain GST payments. It would see the state receive more than $1,200 per person.

Morrison said the Turnbull government still supported the principle that GST revenue ought to be redistributed to the states that need it, but the report had identified “significant weaknesses” in the system.

“It’s in the national interest to fix the way that the GST has been shared between the states and territories,” Morrison said.

“It’s holding our national economy back. That should be of concern to all Australians, not just those in Western Australia who have been most adversely impacted by the way this has played out.”

In August last year, Malcolm Turnbull committed the commonwealth to introducing a floor in the GST distribution to prevent WA’s GST revenue falling too low in the future.

But the report rejects calls for a minimum per capita share of the GST, warning that relativity floors do not resolve underlying deficiencies in distribution and would “prove arbitrary, and likely to have unintended consequences”.

In a later interview on Sky News, the treasurer said the government’s policy of a floor under states’ GST share was “subject to what the Productivity Commission may recommend”.

Morrison said the government would wait for the final report and announce a “total response” but it was “correct” to say the government had dropped the idea of a floor and “fair” to say its policy was in transition.

The Commonwealth Grants Commission is the institution responsible for redistributing the GST among Australia’s states and territories. It tries to redistribute the GST to ensure “horizontal fiscal equalisation” (HFE) so each state ends up with a comparable level of government services.

Horizontal fiscal equalisation is designed to redress the fact that some states – currently NSW, Victoria and WA – would be able to provide better services than other states purely because of their economic advantages, stemming from population size, geography, demographic makeup and other economic factors.

The Productivity Commission said the Commonwealth Grants Commission was doing a good job but its methods were “beyond comprehension by the public, and poorly understood by most within government”.

It said the Commonwealth Grants Commission should adopt a prominent public role and start informing Australians about its processes so there’s less confusion.

It conceded the system has been placed under serious political strain by the recent experience of Western Australia, where the mining boom has generated billions of dollars in extra revenue for the WA government while simultaneously reducing the state’s GST share dramatically.

WA’s GST share fell sharply to an unusually low 30-odd cents back for every dollar it generates in recent years because of lags in the complicated formula based on how well it was doing during the mining boom.

The former Liberal government in Western Australia campaigned heavily about the fall in its GST share. It blamed the poor state of its budget on the “unfair” federal GST carve-up in the lead-up to this year’s WA election (which it lost).

For a period before the mid 2000s, WA was receiving more than $1 for every dollar it generated.

The Productivity Commission has criticised the former WA government for contributing to the state’s deteriorated fiscal position. It says the state had projected a fall in its GST relativity from 0.72 to 0.33 by 2014-15 but the government based its spending decisions on the assumption that a 0.75 GST relativity floor would be introduced.

The Productivity Commission recommended overhauling the objective of horizontal fiscal equalisation, saying the attempt to raise every state and territory up to the fiscal capacity of the fiscally strongest state has become an “undeliverable ideal”.

“While equity should remain at the heart of HFE, it should aim to provide states with the fiscal capacity to provide a reasonable level of services,” the report said.

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“Equalisation should no longer be to the highest state, but instead the average or the second highest state – still providing states a high level of fiscal capacity, but not distorted by the extreme swings of one state.”

Its favoured alternative methods of redistribution would reduce GST payments to every state and territory but Western Australia this year. The results may differ in subsequent years depending on economic events.

In February, Turnbull said any changes to the GST distribution would be “a few years away”.

The One Nation leader, Pauline Hanson, told a Perth radio station earlier this year that she would be willing to see Queensland’s GST share reduced so WA could get more, but when her comments received national attention she backtracked.

Submissions to the GST report will be accepted up until 10 November.