The Productivity Commission has called the WA GST deal a "costly mistake" that must change, saying the arrangement struck with Western Australia in the eighth year is costly and inequitable. The interim report recommends the federal government scrap the deal. That’s the machinery of federal power at work: one state gets a special carve-out, the rest are left to absorb the bill.
The deal struck by then-treasurer Scott Morrison ensures WA gets a bigger slice of GST revenue every year than it would under the national formula, which is meant to give more money per person to states with the highest need and lowest financial means. The commission found the deal had cost the federal budget $23 billion in its first six years, $22 billion of which had flowed to WA. It warned the cost would grow even larger in future and said the deal was worsening inequality between states. The numbers are blunt. The arrangement doesn’t just shuffle money around; it rigs the rules.
Who Pays for the Deal
Prime Minister Anthony Albanese, whose government has endorsed and extended the deal to at least 2029, said WA would "get [its] fair share" of GST but signalled he would wait for the final report in December to comment on specifics. Treasurer Jim Chalmers set the terms of reference for the commission's report. The people at the top get to call it fairness. Everyone else gets the invoice.
New South Wales Treasurer Daniel Mookhey said the report was historic and called the deal "an expensive failure." He said, "An Australian living in Cabramatta in Sydney, Carlton in Victoria, Coober Pedy in South Australia or Cairns in Queensland is worthy of the same supports from their governments as an Australian living in Cottesloe in Western Australia." Queensland Treasurer David Janetzki said the present system was unfair and led to "perverse outcomes." He said, "Jim Chalmers now has a clear choice. He can continue to defend a broken system or finally stick up for his home state and the national interest." South Australian Treasurer Tom Koutsantonis called the GST deal "a dog of a deal." He said, "We do not want to disadvantage Western Australia, but neither do we want one state to have an unfair advantage relative to all others. We agree with the Productivity Commission about what a genuinely fairer system might look like." Victorian Treasurer Colin Brooks said the interim findings "back up exactly what Victoria has been saying for years, and we're glad to see it recognised ... the current system isn't working and the 2018 changes should be scrapped."
How the System Works
The Goods and Services Tax is collected by the federal government and split among the states and territories, accounting for a large share of their revenue. Rather than an even split per person, the money is split based on an assessment of need, a principle called horizontal fiscal equalisation that has guided federal government funding to states and territories since long before the GST existed. A formula computed by the independent Commonwealth Grants Commission assesses each state and territory based on its population's level of need for government services and its own capacity to raise money from payrolls, royalties or other state taxes.
Each state is given an annual score, or relativity, scaled to the number 1. A state with a score of 2 is considered relatively high-needs or low-means and gets double its per-person share. A state with a score of 0.5 gets half of the per-person share. The formula has long been contentious, but became particularly so in WA when successive mining booms made it by far the richest state in the federation, resulting in very low GST relativities because the formula assessed the state as very high means.
WA Treasurer Rita Saffioti said the state has argued that the formula penalises it for "doing the work and developing the projects that support … economic growth nationally and the federal budget bottom line." She said, "[It] does not support national economic growth [and] it does not support national productivity."
In 2018, Morrison's solution was to impose a floor on the relativity score that any state could receive. The result is that no state or territory could get less than either 75 per cent of its per capita share, a score of 0.75, or whatever Victoria and NSW get. In practice, only WA has consistently benefited from this floor, netting $22 billion more between 2018-19 and 2024-25 than it would have otherwise. The no-worse-off guarantee was originally set to expire in 2026 but has now been extended to 2029.
Because the GST pool is fixed, one state's benefit is another state's loss. To prevent others from going backwards, Morrison enacted a no-worse-off guarantee, with top-up payments from general federal revenue to compensate the other states and territories. The commission said this aspect of the deal, in which other states and territories must lose to appease WA concerns, was one of the most objectionable elements of the current arrangements and led to "perverse outcomes." It said, "The benchmark means that Western Australia could gain additional GST revenue when New South Wales or Victoria experiences a natural disaster." Commissioner and co-author Angela Jackson said, "The GST system is now built on two sets of rules: one for states in a better fiscal position than Victoria and New South Wales, such as Western Australia, and another for everyone else." She said, "If a state like South Australia improves its fiscal position, they get less GST because they are considered to need it less. If Western Australia improves its fiscal position, they either don't lose any GST or potentially receive even more."
The commission put the overall price tag of this effect at $47 billion, the amount every other state and territory would have to be paid to get the same level of fiscal capacity that WA now receives under the deal. It said, "Only Western Australia has benefited from the reforms… at the expense of the Australian government." Subject to a tweak to the formula, which it will outline in more detail in its final report, the commission recommended the government scrap the Morrison deal and return to the pre-2018 arrangements. If the government does not want to return to the pre-2018 arrangements at all, its fallback position would be to keep the floor but fix it at 0.75 only, rather than tie it to the outcomes for New South Wales and Victoria. The commission's deputy chair Alex Robson said, "The system should be brought back to its core purpose: ensuring that all states and territories can offer Australians a similar standard of services and infrastructure no matter where they live."
The final report will be published in December.