When the GST was introduced almost 20 years ago, it was decided that every dollar collected would be distributed to the states and territories to spend on services such as schools and hospitals, as they saw fit. The point was to give the states a stable source of revenue, rather than rely on grants each year from the federal government.
On average, the GST accounts for about 30 per cent of state revenue, ranging from less than 10 per cent for Western Australia to almost half for the Northern Territory.
Each year the revenue is distributed based on independent recommendations of the Commonwealth Grants Commission using a “fair go” formula that tries to make sure your state has the same capacity as other states to deliver the services you rely on.
This means financially stronger states such as NSW, Victoria and now Western Australia receive less GST, so they can subsidise the smaller states.
During the past year we have been taking a close look at how the GST has been distributed. We tasked the independent Productivity Commission to give us advice. From the commission’s work it is clear we have a real problem, one that has been kicked down the road for too long.
It’s a national problem because the system has to work for all states and territories, not just some. The problem can be traced back to the mining boom when the formula produced some very unfair results.
In WA, its share of GST revenue fell from about a dollar for every West Australian to less than 30c. That’s a big drop. It also compares with $1.12 for every Queenslander. It meant that last year WA, with about 2.6 million people, received less GST revenue than the Northern Territory, with a population of less than 250,000 people.
It’s no one’s fault. Those who put the formula together could not have foreseen how the mining boom would affect the GST outcome, especially in WA. But, as the government, it is our job to fix it so it is fair for everyone and ensure it doesn’t happen again.
Part of our solution has been to shut down GST loopholes, making sure everyone is paying GST on all the goods and services they are supposed to. Our changes mean that next year alone almost $2 billion in additional GST will be collected for the states and about $6.5bn will be collected across the next four years. So even if a state gets a lower share, it can still receive more revenue because the pool of GST funds is bigger. If you increase the size of the pie, then all the slices are bigger.
The second thing we have done is to provide WA with additional grants for infrastructure projects to top up its low GST. This year we also provided a one-off grant to the Northern Territory. While this provides some short-term relief, it’s not a real solution to the problem. So here’s how we propose to fix the problem with a fairer and more reliable system.
• We will provide top-ups from the federal budget for three years to a new level of 70c a person per dollar of GST. WA is expected to be the only state where this will be necessary. There is expected to be a further top-up payment to the Northern Territory needed in 2019-20.
• Starting in 2021-22, we will change the GST formula slowly across six years to target a standard that removes the peaks and troughs created by economic shocks, such as the mining boom. The new standard will be the better of what is happening in NSW or Victoria.
• In 2022-23, top-ups for individual states will end and we will introduce a GST floor so no state can receive less than 70c a person per dollar of GST. This will move to 75c in 2024-25.
• To ensure all states are better off, from 2021-22 additional contributions will be made from the federal budget to what is collected from GST to distribute between the states based on the new formula. These will be large enough to ensure any possible adverse effects are outweighed by the bigger pool of revenue being distributed.
• In 2027-28, we will have fully transitioned to the new formula. The stream of revenue distributed from ongoing payments from the federal budget into the GST pool will be permanently greater to offset any adverse effects.
This plan means that services in smaller states will continue to be cross-subsidised by the larger ones. And by phasing in the changes carefully, all states and territories will receive increased revenue each year. They will all be better off.
This is a real plan for dealing with the GST problem. It’s not a political quick fix, nor does it try to buy off individual states forever with endless one-off deals. The next step is genuinely to consult with states and territories on our proposal to get the details right. There is still a lot of work to do, but we hope to get it done by the end of the year.
Opinion piece for The Australian, 5/7/18.