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An interstate argument has erupted over revelations that the system that carves-up the GST is so broken that a bushfire in NSW would deliver a multimillion-dollar financial windfall to Western Australia, with accusations “east coasters” are whingers and that WA has become a petrostate.
A scathing interim report by the Productivity Commission into the GST allocation system put in place by Scott Morrison in 2018 labels the deal a “mistake” that could end up costing federal taxpayers up to $12 billion a year or more than is spent on the nation’s air force.
As revealed by this masthead, the commission found the current allocation system is on track to cost federal taxpayers up to $60 billion and is failing all of its key objectives while making the annual GST carve-up less equitable and more complex.
The 2018 deal was put in place after a collapse in Western Australia’s share of the GST despite the state being in a domestic recession caused by the end of the decade’s mining boom.
Morrison, the then treasurer, came up with a new system that topped up Western Australia’s share until it received the equivalent of 75¢ for every dollar of GST notionally raised by the state. It would then change to the current system, 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, which has been extended by the Albanese government, to 2030, that ensures the GST of every other state and territory is not reduced.
The Productivity Commission report, delivered to the nation’s treasurers on Friday, found the 2018 deal had effectively created a two-tier GST allocation system where only one state – Western Australia – got ahead.
Commission deputy chair Alex Robson said the GST system was meant to deliver each state and territory enough cash so they could provide similar levels of services and infrastructure to their residents.
Instead, the 2018 reforms had undermined that principle while also not working as the Morrison government had expected.
“The 2018 changes tried to achieve too much and moved too far away from the system’s core objective,” he said.
“The result is a system that is now more complex, less consistent and more costly.”
The commission found the 2018 changes created perverse outcomes, almost all of which benefit Western Australia at the expense of the rest of the federation and federal taxpayers.
Commissioner Angela Jackson said under the pre-2018 system, if NSW suffered a substantial bushfire, then it would receive extra GST to deal with the disaster’s impact. That extra money would come from every other state and territory.
But that has been upended by a “perverse” system under which NSW’s share of the GST is a floor, below which no other state or territory’s share of the tax can fall. That means Western Australia gains a windfall from a NSW disaster while the government of NSW would receive slightly less.
“Under the current system, if NSW is hit by a natural disaster and spends money on the recovery, it receives more GST to reflect its increased need,” she said.
“But under the standard state benchmark, Western Australia also receives more GST from the other states, for a natural disaster it didn’t have.”
Victoria could end up in the same position as NSW if, as expected, its share of GST declines over the next few years.
Not only is Western Australia better off from a NSW bushfire, an increase in the price of iron ore – which would previously be shared among the rest of the federation – means it could keep the windfall from higher mining royalties and enjoy an increase in the GST pool.
If iron ore prices, currently around $US95 a tonne, were to climb towards $US200 a tonne, then the annual cost to federal taxpayers of not leaving states and territories worse off would reach $12 billion.
The 2018 system has delivered Western Australia so much extra revenue that the federal government would have to find $47 billion this year to share with every other jurisdiction to match WA’s financial position.
The Productivity Commission, however, has offered three possible changes. They include returning to the pre-2018 system but with the federal treasurer able to direct the Commonwealth Grants Commission, which calculates the annual GST carve-up, to take into account situations where a single state may have a dominant financial position in a particular part of the economy.
Another option is to return to the pre-2018 system with the federal government then making direct grants to WA to offset its small share of the GST.
WA Premier Roger Cook lambasted the report’s findings, saying it was an assault on his state receiving its fair of the GST which needed the cash to continue to be the nation’s economic engine room.
He labelled all other premiers and chief ministers who want the system to change as “east coast whingers”.
But NSW Premier Chris Minns said every other state and territory needed a fair share of the GST, likening WA’s demands to the behaviour of a petrostate.
“We’re now in a situation where WA is so wealthy and so rich they are competing and bidding on NSW rugby league games and putting tens of millions of dollars on the table,” he said.
“You’re seeing similar behaviour from Gulf states like Saudi Arabia and the UAE and Dubai, and almost for the same reason because they’re digging up natural resources and they’ve got billions of dollars to spend.”
Prime Minister Anthony Albanese reassured West Australians they would continue to get a “fair deal”, while the Liberal Party also vowed to protect the 2018 arrangement.
The commission plans to hold hearings into its interim report through September, with a final report due by year’s end.
Independent economist Saul Eslake, a long-time critic of the Morrison deal, said the commission’s recommendations were a test for both the government and opposition if they believed in protecting the federal budget.
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Shane Wright is a senior economics correspondent for The Sydney Morning Herald and The Age.Connect via X or email.From our partners
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