Australian Government rejects recommended changes to GST revenue distribution

5 July 2018

Australian Government rejects recommended changes to GST revenue distribution

Australian Prime Minister Malcolm Turnbull said on Wednesday that his government has rejected the Productivity Commission’s recommendation to refocus how GST revenue is distributed.

The Productivity Commission’s report on Horizontal Fiscal Equalisation (HFE), which was provided to the Government on 15 May 2018 and publicly released on Thursday, recommended that “[t]he objective of the HFE system should be refocused to provide the States with the fiscal capacity to provide services and associated infrastructure of a reasonable (rather than the same) standard.” (Emphasis added.)

The Prime Minister instead said that the Government “will set out a model tomorrow where no state will be worse off and indeed every state will be better off.”

“To be quite clear, the recommendation that the Productivity Commission made, that in the formula states’ shares of the GST should be equalised to the average, we have rejected.”

Since Federation in 1901, Commonwealth revenue has been distributed to states and territories to ensure they have the ability to provide services at the same standard.

But the Productivity Commission recommendation would have changed that to encourage a baseline standard, rather than an equal standard. To achieve this, it would use an average figure as the basis of redistribution, rather than using the fiscally-strongest state as the benchmark.

Economist Saul Eslake said that the Productivity Commission’s recommendation “represents an abandonment of the principle that Australians are entitled to similar standards of state-type public services in exchange for similar levels of state taxes, no matter which state in which they live.

“This is a principle which has kept the difference between Australia’s poorest and richest states much smaller than the equivalent differences in other states, such as the US, Canada, and even Germany.”

Changing the basis for redistribution “implies a redistribution of income away from Australia’s poorest states, Tasmania and South Australia, to Australia’s richest states, NSW and WA,” he concluded.

The Productivity Commission’s review was initiated by Treasurer Scott Morrison, in response to complaints from the Western Australian Government that the GST system is treating WA unfairly.

Under the rejected proposal, WA would be $10.6 billion better off after the four-year transition, while all other states and territories except NSW would lose between $376 million and $8.2 billion.

The Australian Government is expected to make a formal response to the Productivity Commission’s report later today.