ESA National Economic Panel Polls

Western Australian GST deal

Scrap the West Australian GST deal set to cost $40 billion – leading economists

Peter Martin, Crawford School of Public Policy, Australian National University

Australia’s top economists overwhelmingly want Prime Minister Anthony Albanese to scrap a special deal with Western Australia that’s set to deliver it an extra A$40 billion in Commonwealth funding by the end of the decade.

Albanese pledged to maintain the special treatment for Western Australia in a visit to Perth in February. He even signed a promise on a newspaper front page and on a reporter’s arm with a marker pen.

The deal was struck in 2018 by the then Western Australian premier, Mark McGowan, and then federal treasurer, Scott Morrison. It gives Western Australia a much greater share of the centrally collected goods and services tax than it is entitled to under the formula administered by the Commonwealth Grants Commission.

In place in various forms since Federation, the formula distributes funds in such a way as to ensure each state and territory would be able to deliver comparable services if it made a similar effort to raise revenue from its own resources. It has been used to distribute GST collections since 2000.

For most of the past 100 years the formula has delivered more to the smaller states (including Western Australia) than would be expected on the basis of population, and less to the larger states of New South Wales and Victoria.

In the leadup to 2018, the mining boom changed that. The amount of GST delivered to Western Australia was pushed down to only 45% of what it would have got if the GST was split on the basis of population, in recognition of its much greater ability to raise revenue.

Morrison and McGowan’s deal phased in a floor under how much of the GST each state could get. In June it will climb to 75% of what the state would get on the basis of population, and from 2026 to no less than the strongest of Victoria and NSW get, no matter how strong the state’s economy.

Haul of $30 billion to $50 billion

The extra payments to Western Australia will initially be funded from general Commonwealth tax revenue, rather than by cutting GST payments to other states.

Estimates of the cost by 2030 range from $30 billion to $50 billion. Independent economist Saul Eslake puts the cost at $39.2 billion, assuming the iron ore price falls in line with budget assumptions.

Beyond 2029‑30, any extra payments to Western Australia will come from the GST total at the expense of other states.

Asked whether the long-standing method of distributing GST revenue in accordance with need and ability to pay is broadly the best one, 25 of the 38 top economists who responded to the Economic Society of Australia poll said yes.

Ten said no, five of them saying it would be better to move towards a system where revenue was distributed on the basis of population or gross state product.

Asked whether the 2018 changes that advantaged Western Australia should be kept or scrapped, 28 of the 38 wanted them scrapped.

Only four wanted them kept.

The 38 experts who took part are recognised by their peers as leaders in fields including tax and budget policy. Two are from Western Australia.

Several observed that the natural resources with which Western Australia is endowed are a matter of luck, “even acknowledging that it takes skill and effort to extract them”.

Sue Richardson from the University of Adelaide argued that minerals were a national rather than a local resource and it undermined the integrity of the nation to have the benefits from mining them concentrated in the part of the nation in which they sat.

Eslake said that even if Australia had no state governments and just one central government, as did Japan and New Zealand, it would still make sense to distribute resources to the parts of the nation with the greatest need in much the same way as the Grants Commission has traditionally done.

Consultant Rana Roy said that distributing resources away from the rich states in order to make the poorer states more liveable was actually in the rich states’ best interests.

“Paris would not benefit if an impoverished rest-of-France were to decamp to Paris,” he said. “And London would not benefit if an impoverished rest-of-Britain were to decamp to London.”

Tasmania’s Hugh Sibly added that Australians move between states and many retire in a different state to the one in which they paid taxes, giving the entire nation an interest in ensuring all parts of the nation were liveable.

Equalisation good, but complex

Others surveyed said the calculations used to deliver what was once known as “full equalisation” and since 2018 has been known as “reasonable equalisation” were complicated – “almost farcical” – and should be replaced by something simpler, even if it made the system less fair.

One suggestion was that GST revenue should be allocated on the basis of the size of each state’s economy. Another was that it be allocated on the size of each state’s population, with top-up grants used to meet particular needs.

Former OECD official Adrian Blundell-Wignall said the needs of Indigenous Australians in particular should be addressed directly rather than by GST distributions as the governments that got GST money on the basis of their high Indigenous populations did a very poor job of spending it on those populations.

Two of the economists surveyed suggested a Commonwealth resource tax of the kind promoted by former Treasury head Ken Henry who said earlier this month Australia should stop revering plunder and dumb luck, and abandon its “finders keepers” approach to minerals.

The Productivity Commission will review the Western Australian deal in 2026.

Individual responses. Click to open:

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Responses (997)


Peter Abelson	YES - This is a very fair principle and has no major (inefficiency) disincentive features that would make it an inefficient principle. Of course, it is a difficult principle to achieve, notably in identifying the differential needs of different communities, but that should be dealt with by open conversation and communication.	Scrapped


Garry Barrett	YES	Scrapped


Adrian Blundell-Wignall	YES - The needs basis seems reasonable.	Scrapped	What's needed is a focus on the needs of Aboriginal communities: not a simple add-on to the bottom lines of state budgets, but a GST allocation into a special purpose vehicle for Aboriginal development. The states do a very poor job in Aboriginal economic and social development. Some of the GST funds should be targeted to this via a dedicated special-purpose vehicle.


Markus Brueckner	YES -	Kept


Matthew Butlin	YES - Moving back towards the longstanding arrangement is highly appropriate. WA has enjoyed a much stronger financial and budgetary position than other states since the deal was struck. This has been largely the result of high iron ore prices. A more equitable division of the GST revenue is needed. The Productivity Commission inquiry is essential.	Scrapped


Melinda Cilento	NO - The current deal is not adequately reflecting and responding to the relative financial circumstances of the states and territories.	Scrapped	The next review should seek to ensure distributions more directly reflect contemporary economic circumstances and needs and should not require a "no one is worse off" approach or outcome. The main issue with the pre-2018 deal for WA was really around timing with the three-year lag in calculations, meaning GST distributions could lag significantly falls in commodity prices and hence other revenues. This means the GST calculations exacerbated revenue cycles. This was a valid concern, but WA's current fiscal position should be better taken into consideration in the current equalisation, particularly given the significant cost of the changes to the Commonwealth.


Ken Clements	NO - We should distribute GST revenue to the states on a per capita basis. This would help mitigate the perverse incentives promoted by the current system. At the same time, the opportunity should be taken to eliminate many of the exceptions to GST, as well as raising the overall rate in order to decrease other taxes.	Not sure


Deborah Cobb-Clark	YES -	Scrapped


Brian Dollery	YES - This longstanding system was widely understood and broadly accepted.	Scrapped	The system should be changed back to the earlier model.


Lata Gangadharan	NO - Over time, emerging considerations such as immigration rates, mining activities, and alternative sources of energy will gain more prominence, meaning disparities among states will inevitably arise. This makes it useful to revisit the formula from time to time.	Not sure


RICHARD HOLDEN	YES - It provides weak incentives for revenue raising, but it is important for a form of horizontal equalization.	Scrapped


Nicki Hutley	YES - Tax - GST and others - is paid according to means and distributed according to needs. This is a sound principle.	Scrapped	We should revert to original principals. The previous government unnecessarily bastardised the distribution principles so "the pie" has to be added to at huge cost to satisfy political rather than economic principals


David Johnston	YES -	Scrapped


Frank Jotzo	YES - The principle of fiscal equalisation is an important element of the Federation. Distributing the GST in line with fiscal equalisation principles makes sense.	Scrapped	The WA deal goes against fiscal equalisation principles.


Michael Keating	YES - Deliberate sharing of revenue to ensure the (potential) equality of service provision wherever you live helps maintain a cohesive society and nation.	Not sure


Geoffrey Kingston	NO - The Grants Commission formula creates incentives for states not to develop resources such as natural gas fields. GST revenues should instead be distributed on a per capita basis. As well, states should have the ability to charge extra GST if they want to. This would further improve the efficiency and equity of the tax system.	Scrapped


Michael Knox	YES - When examining this issue, it is best to stand back and look at the national interest rather than individual state interests. The national interest would not be served by pouring relatively more resources into highly-congested areas such as Sydney or Melbourne. This would be the case if a higher share of GST was given to NSW or Victoria. The current arrangements efficiently provide a flow of resources to the most rapidly growing part of the Australian economy, which is WA.	Kept	The post-2018 arrangements minimize national congestion costs and maximise efficient growth of the Australian economy as a whole.


Guay Lim	NO -	Kept


Margaret McKenzie	NO - The distribution arrangements set up by the Howard government with the introduction of the GST are yet another aspect of a dysfunctional tax system that appears to be politically intractable in Australia, even with Labor governments in almost every jurisdiction. Centrally-collected GST revenue should be distributed to states according to their spending responsibilities under social needs and priorities established at the national level. Deals such as the deal with WA destabilise this. Underlying the current tax issues including GST is the cosy arrangement whereby the mining companies pay less in tax and royalties than in comparable resource-extracting countries. This leaves the burden of taxation disproportionately on PAYG workers and GST instead of big resource companies and other wealth owners paying their way in tax. States are being forced to find more ways to fund their own spending including iniquitous fund-matching programs with the Commonwealth.	Scrapped	Full equalisation is better than nothing. But it is a second best in Australia's deeply flawed and inequitable tax system. The distribution of GST revenue amongst states should not be dependent on resource price fluctuations in which the extractive states can bargain at the expense of poorer people. Australia is a low taxing country overall and it's probably time for another Henry-type tax review. The slight change to Stage 3 tax cuts is a bandaid. The absence of climate in the tax system since the removal of the carbon tax will worsen the distributional issues in the long run. The withdrawal of the state from public provision generally has made it harder to implement decent reform on both sides of the budget.


James Morley	NO - Distribution of the proceeds of a value-added tax like the GST should be proportional to value-added (GDP) of the states, not by population shares or other more complicated formulae. If the federal government seeks to redistribute tax revenues to different states and territories to address inabilities and to fund needed services (such as for the Northern Territories), this should be done from general tax receipts in a transparent way, not as part of a complicated and obscure allocation of GST revenues.	Scrapped	GST revenues should be apportioned based on state-level value-added (GDP). The almost farcical complexity of this "reasonable equalisation" arrangement shows that attempts to conduct redistribution policy within the context of GST apportionment will inevitably lead to more and more complicated arrangements meant to obfuscate the underlying redistribution. Redistribution should be done in a more transparent way to ensure it has backing from the Australian population through the political process.


John Quiggin	YES - The fiscal equalisation principle predates the GST by nearly 100 years	Scrapped	Giving ad hoc carve-outs to individual states is a bad policy process.


Alicia Rambaldi	YES - Subject to regular (say, five-yearly) reviews of the model, modeling framework and the data used in the estimations in agreement with the states.	Not sure	We need a model where actual revenue from natural resources is part of the modeling framework used to calculate the distribution of GST revenue.


Sue Richardson	YES -	Scrapped	The natural resources with which WA is endowed are a matter of luck, even acknowledging that it takes skill and effort to extract them. They are a national, not a local, resource and it undermines the integrity of the nation to have one region receive a highly disproportionate share of this national resource.


Rana Roy	YES - There are good reasons to seek to reduce, as far as possible, the scope for subjective political discretion in large-scale spending, taxation, and (re)distribution decisions ? and to increase, as far as possible, the scope for an objective determination of outcomes by means of pre-agreed formulae and in the service of pre-agreed ends. And there are good reasons to support the particular end being pursued in this instance: namely, maintaining a balance between the various states and territories, as a proxy for maintaining a balance between the various regions of Australia ? also known as the principle of ?equalisation?. The difficulty here is that the pre-agreed formula needs to be, and to remain over time, robust in several particulars. Inter alia, it needs to be (1) sufficiently well-specified in all its relevant elements so as to ensure that we are not simply replacing discretionary decision-making by politicians with discretionary decision-making by bureaucrats (2) sufficiently transparent to ensure that it is sufficiently understood by all the relevant stakeholders (3) sufficiently uncontentious in the literal sense of not being regularly and repeatedly contested by one or more of the said stakeholders. In regard to (1), I am not convinced that the pre-2018 formula was quite as robust as its supporters claim. But the argument is a complex one and I shall not prosecute it here. In regard to (2), it seems clear that the pre-2018 formula was not sufficiently understood by all the relevant stakeholders. Witness, for example, the farcical debate, following the Federal election of 2010, regarding the relative ?generosity? of Abbott?s ?offer? to Wilkie on Tasmanian hospital funding versus Gillard?s ?offer? to Wilkie on the same item ? a farcical debate which nonetheless helped to determine the formation of the Federal Government in 2010. In regard to (3), it is common knowledge that the pre-2018 formula was in fact regularly and repeatedly contested ? including in particular by Western Australia. And here it is important to acknowledge that this contestation is not merely ? or not only ? an instance of opportunism on the part of Western Australia and other ?rich? states. For there is indeed a real conflict here between two well-established principles: the principle of ?equalisation? and the principle of ?equal treatment?. It is a conflict that is present in multiple fields of policy, including most obviously in taxation. But whereas the most well-paid individuals are able to offset the equalising effects of progressive taxation through many a means (raising pre-tax salaries to maintain post-tax incomes, shielding income in safe havens of untaxed or lightly taxed wealth, and so on), even the most well-resourced state is unable to offset the equalisation imposed through the Commonwealth Grants Commission. Finally, in the wake of the collapse of the pre-2018 formula in 2018, we must now acknowledge that the pre-2018 formula has not stood the test of time. It is not a complex matter of evaluating the merits of the formula. On this point, it is simply a matter of acknowledging the facts.	Scrapped	I think there are good reasons to seek to reduce the scope for subjective political discretion in large-scale spending, taxation, and (re)distribution decisions ? and to increase the scope for an objective determination of outcomes by means of pre-agreed formulae and in the service of pre-agreed ends. The post-2018 ?formula? abandons any defensible effort at an objective determination of the (re)distribution of GST revenues and replaces it with a series of ill-defined, arbitrary, and changing aims, targets and constraints: thus, ?reasonable equalisation?, ?not less than 70 per cent?, ?not less than 75 per cent?, ?not less than the lowest of Victoria and New South Wales?, et cetera. The result is an almost-textbook example of a horse drawn by a committee. There are several possible ways to secure a more politically sustainable and more economically successful dispensation. Two such possibilities are described below as Option A and Option B. Option A would seek to re-establish a consensus in support of the principle of equalisation. This would require articulating and communicating the full rationale for this end, including inter alia its contribution to (1) the general welfare (2) the self-interest of the ?poorer? states, and (3) the self-interest of the ?richer? states. Remarkably, (3) is rarely articulated anywhere even though it applies everywhere. Thus, Paris would not benefit if an impoverished rest-of-France were to decamp to Paris, London would not benefit if an impoverished rest-of-Britain were to decamp to London, and so on. Option A would also require developing and agreeing on a new formula by which this end is to be achieved ? one which improves upon the old, including in regard to the particulars identified in my answer to the first question. Thus, the new formula should be (1) sufficiently well-specified (maximising the mathematical determination of the result and minimising the need for discretion) (2) sufficiently transparent (minimising the scope for misunderstanding); and (3) sufficiently uncontentious (once it has been agreed anew at the level of both the Federal Government and the level of the States and Territories). Option B would seek to establish a new consensus embodying a ?historic compromise? between these two well-established principles: the principle of equalisation and the principle of equal treatment. And the most obvious form in which to implement this compromise would be by way of a 50/50 split. Thus, 50% of GST revenue would be distributed to the states and territories on the basis of a formula aimed purely at equalisation and 50% on a per capita basis. Whether or not the ?poorer? states and territories could be persuaded to agree to such a dispensation is not something I care to prejudge here. But there is an important consideration that has been largely missing from the debate and which lends support to a solution such as Option B. The underlying economic issue addressed by the principle of equalisation is not the distribution of GST revenues, and/or pre-GST grants, to the states and territories. For economists, as distinct from constitutional historians, the latter is merely a proxy for something else. The question is whether the underlying economic issue of securing a sustainable balance between regions is best addressed exclusively through the GST formula or whether it requires the Commonwealth to develop the foresight, planning capacity and policy tools to play a more active and responsible role. If the Commonwealth is to do so, it would be well-advised to settle the GST debate once and for all in order to equip itself better to discharge this responsibility.


Elizabeth Webster	YES - All federations that share a common currency need to equalise services and infrastructure across regions to cater for the fact that economically weaker regions cannot deflate their currency to restore economic prosperity. Otherwise, the federation will fall apart and we get the Greek-in-EU style problems.	Scrapped	Equalisation is necessary to prevent vicious cycles of economic decline. The 2018 measures weaken forces that prevent some states and territories from falling into decline.