Scott Morrison just made a $6.6 billion promise on GST to keep state premiers happy

Stefan Postles/Getty ImagesTreasurer Scott Morrison.

The federal government will give the states an extra $9 billion over the next decade to ensure no one loses during the transition to a new GST formula, and that no state will ever again receive less than 75¢ in the dollar.

Once the transition is complete, every state will be better off but Western Australia will be the clear winner.

By 2026-27 when the new formula and other changes are in full effect, WA would have received $4.5 billion of the $6.6 billion in extra Commonwealth money that would be so far spent.

By 2028-29, the Commonwealth will have kicked in a total of $9 billion.

In the biggest overhaul of the tax since it was introduced in 2000, Treasurer Scott Morrison will change the distribution formula to ensure there is no repeat of WA’s share dropping as low as 30¢ in the dollar. From 2026-27, the formula will be changed so only the fiscally strongest and most stable states, NSW or Victoria, will be used as the benchmark for how the GST money is distributed so the stronger states always support the weaker ones.

To ensure there is no backlash from other states which would otherwise lose money as it flows back to WA, the government will introduce a floor under which no state can fall and this requires making federal compensation a permanent feature of the GST pool, which for this financial year was almost $70 billion. The federal government contribution quickly rises to $1 billion a year and will be indexed at the same rate as the GST collections grows.

If accepted by the states, as anticipated, the changes will bring to an end a problem which has vexed governments for several years and become the most politically sensitive issue in WA.

“This problem has been kicked down the road for too long and it is time we now got on and fixed it,” Mr Morrison said.

The changes, which follow a review by the Productivity Commission, will be introduced in three steps.

First, in 2019-20 and 2020-21, the Commonwealth will spend $1.47 billion in total to bring WA’s share of the GST, which is currently about 47¢, back above 70¢ for each dollar of GST revenue it raises. A small portion of this, $69 million, will be used to stabilise the Northern Territory’s volatile share. This is similar to a Labor election promise.

The second stage starts in 2021-22 and over the next six years, the Commonwealth will contribute another $5.2 billion to ensure no one falls behind during the transition to the new formula for distributing the GST revenue. Stage two also includes the introduction of a 70¢ floor in 2022-23 and a 75¢ floor in 2024-25.

The current GST formula of horizontal fiscal equalisation (HFE) was designed to ensure all states could provide the same standard of services with the benchmark being the fiscally strongest state.

This was typically NSW or Victoria with their broad-based, diverse and stable economies which were not subject to volatility should one sector suddenly boom.

But the HFE system was not designed to deal with such aberrations as small states like WA becoming the fiscally strongest due to a single event like the mining boom.

“It is only recently that the benchmark has shifted to WA as a result of the mining boom which, with its reliance on one particular sector, has led to substantial volatility in the HFE sector,” the government response says.

It meant GST revenue was stripped from WA and distributed to the other states.

“This level of volatility in the HFE system was not, and could not, have reasonably been foreseen when the GST was introduced at a time when the Australia economy looked very different to how it is today,” the response says

The key change will be to keep the current HFE formula but only ever benchmark it to NSW or Victoria, whichever is the strongest.

“The diverse and broad-based economies of these states provided a much more stable standard against which to equalise the GST revenue, which limited volatilities in GST relativities.”

Stage three of the plan involves ongoing Commonwealth top-up funding.

The government ignored the Productivity Commission’s preferred recommendation to shift equalisation to an average of all the states. This would have been prohibitively expensive and politically volatile. It would have cost between $16 billion and $23 billion in compensation over the first eight years, depending on how quickly the change was phased in.

Mr Morrison said this would have created “a level of unnecessary disruption and transition costs that most states and the Commonwealth would not be able to reasonably accept or absorb”.

Mr Morrison will seek the agreement of the states for the new formula at a meeting of treasurers in September.

Government sources said any state that wasn’t happy with the new formula could have the option of staying under the current formula, but that meant they would lose money.

The government will also give the assurance that the top-up funding will never come at the expense of other grants to the states.

A new intergovernmental agreement, like that first signed between Peter Costello and the states in 1999, is expected to be negotiated.

The government will hope the announcement shores up its prospects in WA which was once a Liberal stronghold at both a state and federal level.

Last year, however, a state Labor government elected and the federal government, which holds 11 of the 16 seats in the states, is at risk of losing about three.

The government chose not to contest the Labor seats of Fremantle and Perth in the July 28 super Saturday byelections. While it had little prospect of winning either, it wanted to avoid the spectre of a large swing towards Labor and any negative consequences for Malcolm Turnbull.

This article was originally published by the Australian Financial Review. Read the original here, or follow the AFR on Facebook.

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