The GST distribution dispute is an ongoing political controversy concerning the distribution of goods and services tax (GST) revenue amongst the Australian states and territories and the federal government. The dispute was originally based upon Western Australia's (WA's) dissatisfaction with its low returns, which led to reform in 2018. The 2018 reform guarantees all states and territories a minimum share of GST revenue.
As a result of WA's improved financial position during and after the COVID-19 pandemic, debate has since centred around the suitability of the minimum payments floor introduced and the perceived inequity of the reform. Currently, the federal government provides a no worse-off guarantee, meaning that states and territories receive either the funding they would have under the old system or the new system, whichever is higher. This prevents the reform causing disadvantage to any jurisdiction during the transition period, which will expire in 2029–30. Several states have held inquiries and have alternatively demanded the federal government undo the reform or continue contributing to the GST pool. The Commonwealth Grants Commission, which is responsible for calculating the GST shares paid to each state and territory, is scheduled to review the GST scheme twice by 2027.
Critics have pointed to the high cost the federal government incurs subsidising states under the no worse-off guarantee and the relative inequity in funding that the reform introduced. Alternative proposals have suggested using a per capita distribution system. Supporters of the reform contest that WA cannot be expected to indefinitely subsidise other states, that undoing the reform would disincentivise WA from developing its natural resources, and that gambling taxes (which are a major source of revenue in the eastern states) should be included in the distribution calculation just as mining royalties are. The reforms continue to be supported by both the Coalition and the Labor Party at a federal level, and both have campaigned on their support for the reform. Despite the criticism and proposed alternatives, it is generally understood that altering the distribution arrangements would be political suicide due to WA's status as a key swing state in federal elections.
Background
The GST system was originally legislated by the Howard government (Coalition) in 1999 and introduced in 2000. It is a value-added tax set at 10% of the price of most goods and services sold in the country. Upon its introduction, it replaced several state taxes as part of a broader taxation reform.
In Australia, GST revenue is paid to a central pool and then distributed between the states and territories according to the principle of horizontal fiscal equalisation (HFE). The HFE system is designed to equalise revenue between the states and remedy fiscal imbalance. Recommendations for the share of GST revenue for each state and territory are made by the Commonwealth Grants Commission (CGC), originally with the goal of providing equal quality government services between all states.
Origins
WA's budget is supported in large part by resource royalties. The GST share received by WA was relatively steady from 2000 to the mid-2000s, taking its first plunge as the iron ore and gas boom began and resource tax revenue rose dramatically. To account for the rise in resource royalties revenue, the CGC began to reduce WA's GST share and increase the share of other states and territories. It was during this time that the state's criticism of HFE first began. By 2010, the share was around 70 per cent of its population share, and this continued to decline until the reforms were imposed.
WA ran in deficit for much of the 2010s, and Liberal Premier Colin Barnett consistently blamed these deficits on a lack of GST revenue, particularly given the state's GST share fell at the same time as iron ore royalties. This was due to the "lag" in the HFE system, since the CGC included royalty revenues in their calculations based on three-years of past data. For example, in 2014–15 GST relativities were calculated based on past royalties when the iron ore price was per tonne, when the current price was . The state had accumulated debt of around by the financial year 2016–17, equivalent to in . That year, the state ran a budget deficit of . In 2016–17, of WA's GST revenue had been distributed to other states. The Liberal Prime Minister Malcolm Turnbull subsequently committed to implementing a GST floor to ensure a minimum GST share for all states and territories, but said it would not be implemented until WA's share had risen to around 75 per cent of its population share under the HFE system, which was not projected to occur for at least another four years. The commitment was heavily criticised by the state Labor opposition, who argued that federal government had given no timeline for change. Barnett later wrote that the federal Coalition's indecisiveness during 2016 and ahead of the 2017 state election had left him "the proverbial shag on the rock."
Change in state government +GST return by state (FY2017–18) State/territory Western Australia0.34434 Australian Capital Territory1.19496 New South Wales0.87672 Northern Territory4.66024 Queensland1.18769 South Australia1.43997 Tasmania1.80477 Victoria0.93239
By 2017 the existing system had resulted in a situation in which WA was paid approximately 34 per cent of its population share of the GST pool. The next lowest share was received by New South Wales (NSW), who received approximately 88 per cent of its population share, with the highest share being the approximately 466 per cent paid to the Northern Territory.
The newly elected McGowan Labor government in WA had been relying upon a GST payment of 38 per cent of its population share to help return the state budget to surplus by 2019–20 financial year. Although 34 per cent was an improvement on the 2016–17 rate of approximately 30 per cent, the reduction left the state with $241 million less than expected for the 2017–18 state budget. State treasurer Ben Wyatt called the situation a "joke" and requested a top-up payment of $226 million, claiming the state was "in the fourth year of what is effectively a domestic recession". Members of the federal Liberal government weighed in, with treasurer Scott Morrison stating he would consider the request for additional payments, while senator Dean Smith labelled HFE "terminally diseased".
However, Turnbull again stated that no floor would be introduced until WA's share had been raised to between 70 and 75 per cent of its population share under the HFE system, which was not projected to occur for at least four years. He added that no change could occur without the agreement of other states and territories, which WA Premier Mark McGowan asserted was false given the CGC was a federal body. One Nation senator Pauline Hanson said she would support a reduction in Queensland's payments to improve WA's share, but backtracked when asked to clarify her comments by the Queensland state government.
The WA Opposition Leader Mike Nahan, a Liberal, went as far as to suggest that his party would sue the federal government in the High Court. He stressed that WA "want no more taxation, but fair distribution of existing revenue raised." However, state Attorney-General John Quigley rejected the idea, stating that he had already received legal advice which ruled out that possibility.
The GST distribution was expected to become a political issue for the upcoming federal election, which was due to be held in 2019.
A review of the HFE system by the Productivity Commission was requested by Morrison in April 2017. A draft copy of the report was released in October, recommending that WA's share rise by $3.2–3.6 billion at the expense of all other state and territory shares. This provoked a vigorous reaction from South Australian Premier Steven Marshall, a Liberal, who said the state would not support any change that would reduce its share.
Morrison directed the Productivity Commission to undertake a second review of the HFE system in May 2017. Victoria made a submission to the Commission opposing any changes to the distribution system. The report was handed down in May 2018, and recommended that the returns should be determined so as to allow for states to provide "a reasonable (rather than the same) standard" of infrastructure and services. However, the federal government decided to use the payments made to Victoria and NSW as the benchmark for future payments, offering a series of top-up payments to WA that would not come from the existing GST pool but from federal revenue.
Introduction of GST floor and new equalisation benchmark The federal government announced its final model in July 2018. The plan, which began in 2019–20, consisted of a floor of 70 per cent of population share in the financial year 2022–23, rising to 75 per cent from 2024–25, a guarantee which applies to all states and territories. The federal government would add additional federal funds to the GST pool to smooth the transition through to 2026–27, to make a "no worse-off guarantee" that no state or territory would have its share fall during this time. The WA government called the plan "compensation" for the state's previous low shares, and stated the new formula would ensure its return to a budget surplus.
Prior to the reforms, the CGC had used the fiscally strongest state as its equalisation benchmark. However, the new changes meant that the each state or territories relativity must be at least as high as the relativity of the standard state (the standard state being the fiscally stronger of Victoria or NSW).
At the 2019 federal election, the government campaigned on its GST solution in WA, as many of the state's sixteen seats were under threat from the opposition.
Dissatisfaction with the reform
During the COVID-19 pandemic WA recorded very low levels of infections by both national and international standards during the COVID-19 pandemic, allowing the state to live under only limited restrictions compared to the lockdowns seen in the eastern states. This resulted in little disruption to the state's economy relative to other states and territories. This, combined with substantially increased iron ore royalties (one of the state's main exports that saw a substantial price rise in 2020 and 2021), meant the state recorded the only surplus in the nation: $5.8 billion in the 2020–21 financial year.
On 4 August 2021, the Victorian Legislative Assembly established a public inquiry into the state's "share of federal GST funding". The governments of Tasmania, the Australian Capital Territory (ACT), and SA all made submissions opposing the new model of distribution, while WA made a submission supporting the reform. The inquiry tabled its report on 10 March 2022, concluding that WA was being unfairly advantaged over the other states and territories, and called for a return to the original HFE system without a payments floor.
The NSW Liberal treasurer Dominic Perrottet called McGowan the "Gollum of Australian politics" and demanded a review of the GST floor. The Victorian Labor treasurer Tim Pallas claimed the GST formula was being "manipulated" in WA's favour at the expense of the other states, and suggested the federal parties' support for the reform was intended to win support in Western Australia for the 2022 federal election.
Perrottet became NSW Premier in October and said his government would pursue a new GST distribution scheme. However, Morrison (who became leader of the federal Liberals and Prime Minister in August 2018) and federal Labor opposition leader Anthony Albanese both said they would not consider changing the formula implemented in 2018. McGowan drew some media attention after joking he would take a spear to meetings with Perrottet during a press conference in which he dismissed the NSW complaint.