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) dissatisfaction with its low returns, which led to reform in 2018. The 2018 reform guarantees all states and territories a minimum return on their contribution.
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. 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 2026–27. Several states have begun inquiries and have alternatively demanded the federal government undo the reform or continue contributing to the GST pool. Criticism has also been levelled at the expenses the federal government incurs subsidising states under the no worse-off guarantee.
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. 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.
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 rate of return 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 return 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 cents per dollar, and this continued to decline until the reforms were imposed.
WA ran in deficit for much of the 2010s, and Premier Colin Barnett (Liberal) 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 a three-year projection. For example, in 2014–15 GST relativities were calculated based on the assumption that iron ore was trading for $118 per tonne, when in reality the price was $37.70. The state had accumulated debt of around A$30 billion by the financial year 2016–17. That year, the state ran a budget deficit of $3.9 billion. In 2016–17, $4 billion of WA's GST revenue had been distributed to other states. Prime Minister Malcolm Turnbull (Liberal) subsequently committed to implementing a GST floor to ensure a minimum rate of return for all states and territories, but said it would not be implemented until WA's share had risen to around 75 cents in the dollar 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.
Change in state government
By 2017 the existing system had resulted in a situation in which WA was paid approximately 34 cents for every dollar of GST it raised. The next lowest share was received by New South Wales (NSW), who received approximately 88 cents in the dollar, with the highest sharing being the approximately 466 cents to the dollar paid to the Northern Territory.