The Morrison government-era deal to placate angry West Australians over their share of GST is poised to be labelled a $60 billion failure in an independent report that will spark a fresh round of interstate arguments over how the federation is funded.
This masthead can reveal the Productivity Commission is expected to release its much-anticipated interim report into the 2018 arrangement next week in time for a joint meeting of state, territory and federal treasurers.
All but West Australian Treasurer Rita Saffioti favour either dumping or dramatically changing the GST deal, which was only expected to cost federal taxpayers $2.3 billion when it was unveiled.
The commission, however, believes the deal is now on track to cost the budget almost $60 billion by the end of the decade while doing little to encourage the states and territories to embrace reforms that would improve their tax systems and boost productivity.
Western Australia, after a collapse in its share of GST following a domestic recession in the mid-2010s, pressed the Turnbull and Morrison governments for an overhaul of the GST allocation system.
Under this new system, Western Australia would have its GST share topped up with cash over several years until it got at least 75¢ for every dollar of GST it raised. It would then change to the system we have now, where no jurisdiction can get a smaller share of each dollar raised than either NSW or Victoria.
A “no-worse-off” guarantee was put in place, and has been since extended by the Albanese government, to ensure every other state and territory does not have its GST share reduced. The guarantee is funded by all taxpayers on top of the money raised by the GST.
The nation’s GST collection is expected to be worth $102 billion in 2026-27, with an extra $6.7 billion paid for the guarantee.
The commission has until the end of this year to complete a full review of the 2018 deal, focusing on whether it is operating “efficiently, effectively and as intended” and what impact it is having on state and federal finances.
Independent economist and strident critic of the original GST deal, Saul Eslake, said there was little option for the commission but to find the new system had not come close to working as it was expected.
“They cannot plausibly find that the GST deal is working as intended. Given when it was created it was supposed to cost $9 billion over nine years, and instead it will cost $60 billion over 11, it is clearly not working as it was supposed to,” he told this masthead.
Apart from not working as intended, the commission is expected to note there are issues with how GST is allocated through a system overseen by the Commonwealth Grants Commission. The system has long been criticised for being opaque, with the states particularly upset about how it is difficult to anticipate year-to-year changes in grant allocations.
This year, Queensland’s share is expected to climb by 10 per cent to $18.4 billion. But over the past two years, its actual allocation fell by $1.1 billion.
The nation’s treasurers are due to meet on August 14. While the Productivity Commission’s report is not on the agenda, its proposals are expected to be one of the key discussion points.
Every state and territory bar Western Australia wants the commission to back changes.
Some, such as South Australia, the ACT, Tasmania and the Northern Territory, believe the government should return the annual carve-up to its pre-2018 arrangement. These jurisdictions have always been subsidised by other parts of the Commonwealth.
Victoria argues if the federal government believes Western Australia warrants extra support it can provide that cash outside the GST allocation.
NSW and Queensland go much further. According to Queensland, mining royalties – such as those for iron ore and coal – should not be given as much weight in the complex calculations used to determine how much GST goes to each state and territory.
The proposal from NSW is the most wide-ranging. It believes GST should be shared on an equal per-capita basis with top-ups by the federal government to the financially weakest jurisdictions such as the NT and South Australia.
If that doesn’t win support, it wants a floor of 50¢ for each dollar of GST raised in each state and territory, four-year forecasts of allocations by the grants commission and an overhaul of the calculation process.
None of these proposals, however, are wanted by Western Australia, which argues even the 2018 deal means the state continues to contribute “more than its fair share” to the federation.
It argues unexpectedly high iron ore prices have delivered successive federal governments higher company tax profits that have offset the cost of the GST deal.
If there are any changes, the commission should back a change to the importance of mining royalties in the GST allocation – similar to that proposed by Queensland – which would actually increase Western Australia’s share of the GST pool.
Both Labor and the Coalition have promised to maintain the GST system.
But Eslake said Anthony Albanese and Angus Taylor could improve the federal budget, reduce the burden on taxpayers and improve the federation’s operation by overhauling the 2018 deal.
“If the government doesn’t have the balls to say enough is enough to Western Australia, which they should, they will have to continue paying the no-worse-off payments at a considerable cost to federal taxpayers forever.”
The commission is due to hold public hearings next month with a final report due by the end of the year.
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