Is there any hope for a fairer carve-up of the GST between the states?

When the Western Australian state government handed down its state budget on Thursday, it showed a balance sheet solidly in the black with a A$2.5 billion surplus. But, as it has for seven years, the state has received an outsized boost to its coffers from the federal government.

In 2018, the Morrison government – with the full support of the then Labor opposition – handed WA a special deal for the distribution of income from the goods and service tax (GST).

Under the deal, WA gets a much greater share of the centrally collected GST revenue than it would have been entitled to under the methods previously used by the Commonwealth Grants Commission.

So what can be done to ensure a return to a fairer distribution of the GST revenue?

How the GST carve-up is supposed to work

The 2018 deal upended a principle known as “horizontal fiscal equalisation”. This principle seeks to ensure each state and territory has the fiscal capacity to provide its residents with a broadly similar range and quality of public services, while levying a similar level of state taxes. This applies to states with different populations and needs.

That principle is the main reason why the quality of health care, schooling and policing in your community depends much less on which state you happen to live in, compared with other countries with a federal system. Just think of the United States.

But that principle was jettisoned in the pursuit, by both major parties, of seats from WA in the House of Representatives, which in effect determined the outcome of the 2016, 2019 and 2022 elections.

Holding onto the mineral wealth

During the mining boom starting in 2000, WA became rich. While it previously received extra grants from other states, it was now having to share income from mining royalties with other states.

But the 2018 amendment changed how the GST revenue is distributed. Instead of equalising all states to have the fiscal strength of the strongest state (such as WA during the boom), funds were now equalised to the stronger of New South Wales or Victoria. States are also guaranteed a minimum per capita share of revenue.

The only state that benefits from these changes is Australia’s richest state: WA. Since 2018-19 it has received A$24.2 billion more than it would have done had the 2018 changes not been made.

Combined with the $58.3 billion it has collected in mineral royalties over the past seven years, that has enabled WA to rack up cash surpluses totalling more than $18 billion. Every other state and territory recorded cash deficits over that time.

Over the next four years, WA will receive $26.3 billion more from the carve-up of GST revenues than it would otherwise have done.

No one worse off?

To cajole the other states and territories into accepting this “deal”, the Morrison government agreed to “top up” the revenue from the GST to ensure none would be any worse off than if the long-standing system had remained in place.

It estimated this “No Worse Off guarantee” (or NoWO as it is now called) would cost the federal budget $8 billion over the nine years to 2026-27, when NoWO would expire.

To avoid expected pushback from the other states, the Albanese government agreed in 2023 to extend NoWO by another three years. It is now expected it will have cost the federal budget almost $60 billion by its scheduled expiry in 2029-30.

This is the biggest blow-out in the cost of any single policy decision, with the exception of the National Disability Insurance Scheme (NDIS). This $52 billion blowout from the GST carve-up represents a massive drain on the federal budget, at a time when it is forecast to be in deficit for the next ten years, to appease the greed of Australia’s richest, and luckiest, state.

A government that truly believed in equity, and was committed to prudent and responsible budget outcomes, would scrap this appalling piece of public policy. And an Opposition that was sincere in its claims to stand for fiscal responsibility would support any move by the government to do so.

The system is not working as intended

The 2018 legislation requires the Productivity Commission to report, by the end of 2026, on whether the new system is working “efficiently, effectively and as intended”. Since it clearly wasn’t intended for the changes to cost anywhere near as much as they have done, the answer to that question must surely be a resounding “no”.

But rather than giving it such a narrow remit, the Treasurer could, and should, task the Productivity Commission with devising a way of achieving the long-standing objective of “horizontal fiscal equalisation” in a simpler, more transparent and more predictable way.

This should be possible by reference to fewer than a dozen readily available economic, demographic and social indicators. These could replace the “black box” processes currently used by the Commonwealth Grants Commission to allocate GST. WA has been able to exploit this lack of transparency in pursuit of its claims on an unjustified share of GST revenue.

Steven Kennedy, in his new role as head of the Department of Prime Minister and Cabinet, is reportedly open to considering controversial tax changes, including the GST carve-up. Hopefully he will be making this suggestion to the Prime Minister.

An inquiry by the Productivity Commission along these lines would enable the government to step away from the 2018 changes in the 2027-28 budget. That would, in turn, represent a substantial contribution towards the task of budget repair. And it would reinstate a principle that has helped make Australia a fairer, and better, country than it would otherwise have been.