WA defends skewed GST distribution putting it $47bn in front

In response to the Productivity Commission’s interim report on GST distribution reforms, Western Australia Treasury preferred none of the recommendations made in the report to address “dominant-state effects” on Australian GST distribution that favour the west coast.

In the 14 August interim report, the commission recommended that the government return to its pre-2018 GST model to rebalance GST distribution in Australia.

GST revenue distribution in 2024-25 for six states and territories meant 98 per cent of their assessed fiscal needs were met, compared with Western Australia, where 113 per cent of its needs were met.

The report noted that other states would need a $47 billion injection to keep up with WA’s fiscal capacity.

Warring states

Despite the imbalance, WA Treasurer Rita Saffioti (pictured) defended the 2018 reforms: "Western Australia has worked hard to become the economic powerhouse of the nation and create the wealth that benefits all Australians.”

"Of the three recommendations, our preference is none of the above - we want to keep the existing deal,” Saffioti said.

“Western Australia is the economic powerhouse of the nation. When WA does well, so does Australia,” said Roger Cook, Premier of WA.

Currently, the Western Australian Treasury is the only jurisdiction supporting the 2018 GST reforms.

“Prior to 2018, all states received enough GST revenue to meet 100 per cent of their assessed fiscal needs, consistent with the principle of horizontal fiscal equalisation,” the report found.

South Australia Treasurer Tom Koutsantonis supported the commission’s recommendation of a return to the pre-2018 GST model.

“A fair GST distribution system is essential to ensuring all jurisdictions have the fiscal capacity to deliver comparable services to their communities,” Koutsantonis said.

“The existing system has imposed a significant ongoing cost on the Commonwealth Government, while realising minimal efficiency gains – frankly, it’s a dog of a deal,” he added.

NSW Treasury said that the 2018 GST model is: “Leading to some Australians having an automatic entitlement to either better services or lower taxes, or in some cases both, than nearly every other Australian.”

"Securing a fair GST distribution system for Tasmania is vital for the future of our State,” said Eric Abetz, Treasurer of Tasmania.

Over budget

The report found that the 2018 GST reforms set the Australian Government back more than four times the expected cost ($23 billion vs $5 billion).

“The 2018 changes have largely not achieved their goals and have cost more than 4 times as much as projected,” said Productivity Commission Deputy Chair Dr Alex Robson.

Extra payments to Western Australia come from this $23 billion GST pool made up of “No Worse Off” (NoWO) payments made to states and territories as compensation for loss of revenue, the report said.

The cost is tied to the global iron ore prices, and if these payments end in 2029-30 as planned, the uncapped cost burden will shift to other states, it added.

“No Worse Off payments currently cost about $6 billion each year, but if iron ore prices or production volumes rise, they could reach $12 billion per year,” said Dr Robson.

“Other states were expected to be better off by about $1.1 billion by 2024–25, but have not ended up benefiting from the reforms. Instead, they only remained no worse off due to the NoWO guarantee,” the report said.

“The extra $6.4 billion spent in 2024‑25 could have delivered a tax cut of more than $450 for each Australian taxpayer,” said Dr Robson.

Dominant-state effects

The report said that, courtesy of the mining boom's onset in the early 2000s, WA became the fiscally strongest state, sending its GST share to unprecedented lows.

It found issues in the 2018 GST model, which exacerbated “dominant-state effects”, where one state dominates a particular revenue source like mining.

It said that when a state that is dominant in mining increases its mineral royalty rate, it will reduce its future GST payments by more than changes to revenue sources they are not dominant, like payroll tax.

“It is important to note that simply returning to the pre-2018 system would not address the concerns about institutional sustainability and fairness, due to dominant-state effects,” the report said.

Productivity Commission Commissioner Dr Angela Jackson said that the current system is built on two sets of rules. One for states in a better fiscal position than Victoria and New South Wales, such as Western Australia, and a different system for those worse off.

“If a state like South Australia improves its fiscal position, they get less GST because they are considered to need it less. If Western Australia improves its fiscal position, it either doesn’t lose any GST or potentially receives even more,” said Dr Jackson.

“Under the current system, if New South Wales is hit by a natural disaster and spends money on the recovery, it receives more GST to reflect its increased need. But under the standard state benchmark, Western Australia also receives more GST from the other states, for a natural disaster it didn’t have.”

The 2018 GST reforms were designed to make annual distributions to states more predictable; however, the report found that they have only substantially decreased volatility for Western Australia at the expense of the Australian Government.

Submissions to inform the final report close on 30 August, and it will be delivered to the Australian Government by 31 December 2026.