Western Australia Defends GST Deal

The Western Australian (WA) government has maintained its position to keep the Goods and Services Tax (GST) arrangement established with the federal government in 2018. The state argues that any changes to this deal would deter investment. The Productivity Commission is currently reviewing the national GST arrangement and is expected to provide recommendations to the federal government next year.

Under the 2018 agreement, Western Australia was guaranteed a larger portion of the GST pool than it would otherwise receive.

For the current financial year, WA is projected to receive $7.8 billion in GST payments, representing approximately 8 percent of the total pool. Without the 2018 changes, the state would have received an estimated $1.7 billion.

To compensate other states for WA's increased share, the Commonwealth has supplemented their payments, resulting in an estimated cost increase of over $44 billion over a decade. The WA government created a dedicated team and allocated $1 million for advertising campaigns across the country to present its case during the inquiry.

Arguments for Partial Horizontal Fiscal Equalisation (HFE)

In its submission to the inquiry, Western Australia advocates for a shift from full Horizontal Fiscal Equalisation (HFE) to partial HFE. Full HFE aims to equalize the financial capacity of all states to provide comparable services, often by compensating states with lower earning capacities or higher costs. Partial HFE, as argued by WA, would allow states like Western Australia to retain more of the benefits from their policy decisions and investments, thereby encouraging continued economic growth.

WA's submission noted that other countries have adopted a partial HFE model. However, economist Saul Eslake has expressed criticism of this proposal.

Eslake stated that Australia's comprehensive HFE contributes to the country's quality by reducing disparities in living standards between states.

WA's Historical Contribution and 'Perverse' Outcomes

WA's submission estimates that since 1942-43, the state has made a net contribution of $32 billion to the federation. It further argued that the previous GST system produced “perverse” outcomes, suggesting that New South Wales, Victoria, and Queensland effectively received more in iron ore, lithium, and nickel royalties from WA than WA itself did, while New South Wales largely retained its coal royalties.

According to WA's submission, the cost increases associated with the “no worse off” guarantee resulted from higher-than-expected iron ore prices, which also benefited the federal budget.

The submission estimates that the benefit to the Commonwealth budget from increased company tax revenue alone is three to four times greater than the additional cost of the guarantee.

Proposed Mining Revenue Adjustment

WA Treasurer Rita Saffioti has stated that the current deal should, at minimum, be maintained. If changes are to be made to the GST distribution, WA proposes a 25 percent reduction in the value of mining revenue factored into the calculation. This change, according to WA, would improve states' incentives to develop their mining industries, potentially halving the cost of the “no worse off” guarantee in the coming financial year and possibly eliminating it by the end of the decade.

Ms. Saffioti explained that partial equalisation would lead to greater “fairness” in the tax system. She highlighted WA's significant economic contributions.

WA delivers approximately 17 percent of national economic growth and 50 percent of national exports, asserting that impairing WA's economy would negatively impact the national economy.

Other States' Responses

Victorian Premier Jacinta Allan has expressed reservations regarding WA's arguments. Ms. Allan stated that she would continue to advocate for Victoria to receive its “fair share,” noting that Victoria collects less revenue per capita than Western Australia. She emphasized Victoria's status as a larger, growing state that requires infrastructure development and services for its public health and education systems.