‘A costly mistake’: new review finds giving WA billions in extra GST was unfair to other states

Source: The Conversation (Au and NZ)

The Productivity Commission has recommended undoing the controversial 2018 changes to the distribution of goods and services tax (GST) revenue between the states that has cost taxpayers A$23 billion.

It has proposed reinstating the system that existed before the Morrison government’s deal that gave billions of dollars in extra funds to Western Australia, at the expense of the other states.

The commission’s 124-page interim report finds the reforms were “a costly mistake” and “have not achieved their intent”. It says:

The 2018 changes tried to achieve too much and moved too far away from the system’s core objective. The result is a system that is now more complex, less consistent and more costly.

Credit to the Productivity Commission for producing a clear and rigorous report. The 2018 “reforms” were bad policy. The sooner they are unwound the better. The federal government should adopt its recommendations in full.

How WA benefits

The report confirms what critics have long argued: the deal benefits only WA, and taxpayers in every other state and territory foot the bill.

It also documents potential perverse outcomes. For instance, WA’s GST distribution would rise if another state is hit by a natural disaster and receives extra GST funding.

Estimates compiled from Treasury data by economist Saul Eslake suggest WA would by 2028–29 have received about $43 billion more than under the pre-2018 rules.

Why is the GST redistributed?

Every country with a federal system faces the same issues: which level of government should tax, which should spend, and how to divide revenue between them.

Australia, like other federations including the United States, Canada, Germany and Brazil, splits taxing and spending responsibilities between national and state governments.

All broadly agree on responsibilities for spending. National defence, economic stabilisation and broad social safety net programs sit naturally with the federal government, as they require national coordination.

States tend to do best on services closer to citizens, such as schools, policing, hospitals and local infrastructure. They are better positioned to understand and respond to local needs.

The division of taxation is less clear-cut, and different countries do very different things.

Australia concentrates almost all tax collection at the federal level. Personal income tax, corporate income tax and GST are all collected by the Commonwealth. State taxes, including payroll tax, stamp duty and land tax, account for less than 20% of total revenue.

This creates the first fundamental problem in Australia’s system of federal finance: how is revenue collected nationally distributed to the states to fund education, health and other services? Australia’s solution is to pass on the GST revenue (supplemented with Commonwealth grants).

How much should each state receive?

Before 2018, Australia operated on the principle that every citizen should have access to similar standards of government services.

However, simply dividing the GST pool on a per-person basis does not achieve equal service standards, for two reasons.

First, states differ substantially in their capacity to raise their own revenue. Some states have more valuable property markets, with larger stamp duty and land tax bases; some, such as WA, collect larger mining royalties than others.

Second, the cost of delivering a standard of service varies enormously by state. Providing healthcare, education and infrastructure costs much more per person in remote areas such as the Northern Territory.

Before 2018, both these factors were assessed annually by the Commonwealth Grants Commission, an independent body established in 1933. Since July 2000 that has included advice on how to distribute the billions in revenue collected nationally through the GST.

For most of its history, it took account of disadvantages and gave each state the funds to deliver a broadly equal standard of service provision for schools, hospitals and so on. States more able to raise their own revenue received a smaller GST share.

This approach is regarded internationally as best practice; scholars of federal systems point to Australia’s pre-2018 model as an example to emulate.

The picture changed in 2018

Then, in 2018, Australia largely abandoned its principles. The law was amended to
replace full equalisation.

The new system gave all states a guaranteed minimum share of the GST pool, regardless of their actual revenue. This meant WA actually received more GST revenue than it needed to meet its assessed needs.

The new Productivity Commission review found WA received 113% of its needs, while other states only received 98% of their fiscal needs.

There were also billions of dollars in additional federal top-up payments to the GST pool to ensure no state was worse off. But this wasn’t free and was paid for by all Australian taxpayers.

This was a special deal for a single state, dressed up as a national reform.

Political dysfunction was a side effect

Beyond the direct costs documented in the Productivity Commission’s new report, the 2018 changes produced a further, less visible cost: they encouraged unproductive lobbying and interstate rivalry.

Rather than focusing on serving their own citizens, states increasingly focused on lobbying the federal government for special treatment resembling WA’s deal.

This poor use of political energy and public resources corrodes the cooperative federalism the original distribution model was designed to support.

Three options, one clear answer

The Productivity Commission’s report sets out three options.

Its recommended option is that the government “transition back to the pre-2018 system”, reversing the Morrison-era changes and restoring the Commonwealth Grants Commission’s original processes.

This is the right choice. The government should adopt it.

The alternatives are inferior. The second-best option it outlines has the federal government commit to direct payments to any state that is materially disadvantaged by a “dominant” state effect. This would essentially compensate states harmed by the 2018 formula on a case-by-case basis. In practice, this would amplify state-based lobbying for “special” recognition.

The final option effectively leaves current arrangements in place, preserving WA’s advantaged position indefinitely, at the continuing expense of taxpayers in every other state and territory. It would not address any of the problems the Productivity Commission has identified.

Australia built a budget equalisation system the rest of the world regarded as best practice, then dismantled it in 2018 for political expediency.

The Productivity Commission has handed the government a clear, evidence-based path back to a fairer and more defensible system. It’s a path the government should follow.

Robert Breunig does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Original source: https://analysis1.mil-osi.com/2026/08/14/a-costly-mistake-new-review-finds-giving-wa-billions-in-extra-gst-was-unfair-to-other-states/