The Productivity Commission has found that the 2018 GST reforms are failing on efficiency, effectiveness and fairness, while Western Australia continues to benefit from billions in funding.
Under the Orwellianly-titled Treasury Laws Amendment (Making Sure Every State and Territory Gets Their Fair Share of GST) Act 2018 – the legislation which instituted the changes to the long-standing principles governing the distribution of the revenue from the GST among the states and territories – the Productivity Commission is required to report, before the end of this year, whether those changes are working “efficiently, effectively, and as intended”.
On 14th August, the Productivity Commission published its Interim Report in response to that requirement. The Productivity Commission’s assessment was unequivocal and unambiguous: the changes instituted in 2018 “are not operating efficiently, effectively or as intended” (p. 36 of the Interim Report)
Specifically, the Commission says the 2018 changes have:
- reduced the level of horizontal fiscal equalization achieved in Australia;
- introduced perverse outcomes to the GST distribution system;
- come at a significantly higher cost to the Australian Government than expected
- had mixed impacts on states’ fiscal positions – with Western Australia being better off, and other states no worse off – while creating additional fiscal uncertainty for governments; and
- increased the complexity of the GST distribution system, making it less transparent.
The Commission points out that the $6.4 billion which the 2018 changes cost the Federal Government in 2024-25 could instead have paid for a $450 tax cut for each Australian taxpayer, or (alternatively) an increase in JobSeeker payments to 90 per cent of the age pension.
In particular, it is not possible to calculate the amount of GST paid in each state with any level of confidence; there is no way of verifying assertions that a state pays its exact population share of GST or that states are only ‘getting back a certain percentage of the GST paid by their population; and the argument that states are ‘not getting back’ their population share does not align with attitudes towards other key federal taxes – for example, there is no public expectation that income tax paid by an individual is returned to the state or postcode in which they live.
Unsurprisingly, the Premier and Treasurer of Western Australia responded to this report – as they have done to any questioning of the merits of the changes to the GST distribution system instituted in 2018 – by resorting to personal abuse, rather than reasoned argument. It was written by “east coast clowns”, according to WA Premier Roger Cook. It quoted the submission written by this author more often than it quoted that of the WA Government, wailed WA Treasurer Rita Saffioti, moments after accusing the other states of being “jealous of Western Australia”.
Western Australia’s Premier and Treasurer – when they’re not calling people childish names – repeatedly claim that the additional billions of dollars of GST revenue which are now coming their way are justified because Western Australia is the ‘engine room’ of the national economy – a proposition which Anthony Albanese and Jim Chalmers also appear to have swallowed – and because those funds are ‘needed’ to fund the infrastructure required to keep the good times rolling for WA’s resources sector.
There was a time when Western Australia contributed a disproportionate share of Australia’s economic growth. That was in the decade to 2014-15, when Western Australia accounted for one-third of the growth in Australia’s real GDP with one-tenth of Australia’s population. Ironically, that was a decade in which Western Australia’s GST relativity (its share of GST revenues, relative to its share of Australia’s population) fell from 1.03 to 0.37.
But since 2018-19, when the Morrison Government started handing Western Australia extra grants (over and above the GST share recommended by the Grants Commission), Western Australia’s contribution to the growth of the national economy has fallen to less than 21 per cent. And that has been almost entirely due to faster population growth, not to faster per capita GDP growth.
Indeed, over the seven years to 2024-25, Western Australia’s per capita gross state product growth rate has been zero – yes, zero! – the lowest of any state or territory except the Northern Territory, and well below the less-than-stellar national average of 0.6 per cent per annum (Chart 1).
And this is despite the fact that WA’s GST relativity has risen from 0.34 to 0.75 over this period (and will rise further to 0.82 this financial year).
Despite this largesse flowing west across the Nullarbor, productivity growth in Western Australia has been negative since the 2018 changes were instituted (Chart 2).
Chart 2: Real gross product per hour worked (labour productivity) growth, 2018-19 to 2024-25
Western Australia’s present-day prosperity is primarily the result of extraordinarily high prices for its resources exports and massive investments in increased production capacity by resources companies (Chart 3).
Chart 3: Implicit price deflators of gross state product, WA and the rest of Australia
It’s that massive increase in the prices of the stuff which comes out of the ground under Western Australia and the seas surrounding the northern half of it which have lifted its revenue-raising capacity, as measured by the Grants Commission, to more than 50 per cent above the average for all states and territories over the past five years. That’s what Western Australia wants the rest of Australia to ignore.
Most of the infrastructure used by resources companies operating in Western Australia is paid for by the companies themselves. Engineering construction (infrastructure) spending by or for the public sector represents a smaller proportion of Western Australia’s economy than of any other state or territory (Chart 4).
Chart 4: Engineering construction work done by or for the public sector, as a percentage of gross state product, 2018-19 to 2024-25
The billions of dollars which WA has received over the past seven years haven’t gone into productivity-enhancing investments. They’ve gone into underwriting WA’s budget surpluses, and, if continued indefinitely, will result in Western Australians coming to enjoy better public services whilst paying lower state taxes and charges than other Australians – totally contradicting the principles which have governed the distribution of federal grants to states and territories since the 1930s.
The truth of course is that the ‘reforms’ instituted in 2018 have nothing to do with fairness, efficiency or productivity. They were, and are, about the pursuit of political power – the desire of politicians on both sides of the Federal political aisle to retain, or regain, seats from Western Australia in the House of Representatives.
And, sadly, it is likely to be those same narrow partisan considerations, rather than any notions of equity or prudent fiscal management, which will determine the ultimate response to the Productivity Commission’s recommendations.
The views expressed in this article may or may not reflect those of Pearls and Irritations.
