The Conversation · Republished article
The PM has ruled out changing WA’s GST deal. But there’s another option to consider
Chris Murphy, Australian National University
\nAnthony Albanese is standing by his promise this week that “there will be no change […] whilst I’m prime minister” to Western Australia’s current share of the goods and services tax (GST).
That declaration came less than a fortnight after the federal government’s independent advisory body, the Productivity Commission, recommended a “substantial” overhaul in how GST revenue is shared between states. Its review found a 2018 Morrison government deal that continues to this day had been “a costly mistake”.
The Productivity Commission is still due to hand down its final report and recommendations by December 31.
But given the prime minister has now guaranteed WA’s GST arrangements won’t change, where does this debate go from here?
My research suggests an alternative way to tackle the problem.
Australians pay more for this deal
The Productivity Commission’s recent interim review found the current way of carving up GST income had cost Australian taxpayers almost A$23 billion – far more than expected. Most of that money has flowed to WA.
The current deal guarantees that no state can be assessed to be more advantaged than the so-called “standard state” (NSW or Victoria). Yet WA is the most advantaged state because of its mining royalties, so it benefits from the guarantee.
Read more: ‘A costly mistake’: new review finds giving WA billions in extra GST was unfair to other states
In 2026/27 alone, the Western Australian government will receive an extra $6.6 billion more than it would have received under the old arrangements. This extra amount is a cost to the federal budget.
This cost has to be funded somehow. For example, if funded through personal income tax, the $6.6 billion would add an extra 1.7% on top of the $382.4 billion in personal income tax that Australians already pay.
A principled way to share GST
The current deal undercuts a principle known as “fiscal equalisation” – a concept Australia has applied for generations.
The idea is for each state and territory to have enough money to deliver broadly similar quality government services in areas such as education, health and public transport, without some states needing to charge more taxes to cover those costs.
This applies to states with different populations and needs, so that the way governments share, raise, and distribute public money doesn’t end up unduly influencing where people choose to live.
The Productivity Commission’s number one recommendation for reforming the current GST deal is to wind back the 2018 changes, so that full fiscal equalisation between the states is restored.
What the old system got right and wrong
The best way of resolving this standoff between the prime minister and the Productivity Commission is to consider what system of fiscal equalisation would deliver the best outcomes for Australians’ living standards and our economy.
My research shows that the old, pre-2018 system of full equalisation, advocated by the Productivity Commission, operates in the right direction – but actually goes too far.
It operates in the right direction because of the fixed revenue advantages that some states enjoy, which need to be shared with other states on efficiency grounds.
For example, when iron ore prices are high, WA has an advantage over other states because it’s collecting higher mining royalties. This is also true of the extra money New South Wales receives in stamp duty and land tax from higher NSW property prices, compared to other states.
Without fiscal equalisation, these two states could use their revenue pots of gold to attract businesses from states where they are already operating more productively, reducing national living standards.
But my research suggests fiscal equalisation has gone too far in some respects.
For example, it compensates thinly populated states and territories for the higher costs of providing government services in remote locations. That practice heavily subsidies people to live in higher cost areas – in doing so, dragging down national living standards.
An alternative proposal
If we redesigned fiscal equalisation to maximise national income, my research shows that about 70% of fiscal equalisation would be kept, while 30% would be removed.
In practice, it may be easier to keep the existing method of equalisation, but apply it at a 70% rate. (The exception is that we would maintain full equalisation for Indigenous disadvantage, which is a widely accepted principle.)
For WA, 70% equalisation would mean less than full sharing of its mining royalties with other states. It would leave WA receiving $2.4 billion more in 2026/27 than it would get under the Productivity Commission’s preferred option of returning to full equalisation.
That extra $2.4 billion under my proposal for 70% equalisation would be more than enough incentive for WA to keep growing the mining industry and mining royalties.
That is not as much as the extra $6.6 billion in 2026/27 WA receives under the special deal now. But no one expected WA would get so much when that deal was first announced in 2018.
For other states, 70% equalisation would mean smaller changes. NSW and Queensland would each receive about $1 billion more in funding than under full equalisation. The three other states and the Northern Territory would each receive about $1 billion less.
However, those changes are relatively small. And this option is better than keeping the special deal for WA at the expense of higher federal taxes for everyone, while artificially sucking economic activity westwards.
Have your say
The Productivity Commission’s interim report on how to share GST revenue is open to public submissions until September 30.
I will be making a submission with this 70% fiscal equalisation proposal. Let’s hope that the federal government is still open to listening to the commission’s independent recommendations – or else that a future prime minister is willing to revisit this in the interests of better economic management.
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\nThis article is republished from The Conversation under a Creative Commons license. Read the original article.