GST: 2018 changes can’t – and shouldn’t

And while equity is important, we shouldn’t lose sight of the goal to grow the entire economic pie. State governments should have a decent incentive to invest in whatever it is their states do best, especially at a time when productivity growth is key. Punishing states for investing, even if their bounty is partly down to luck, is harmful when it erases huge amounts of their GST revenue.

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We also need to think about why revenue from taxes on gambling, a fast-growing source of revenue for states such as NSW, doesn’t affect how much GST a state receives when mining royalties do. Revenue is revenue, and should be counted equally.

One argument commonly thrown at WA is that for decades before GST was introduced, the mining state was propped up by others such as NSW and Victoria. But WA was also disproportionately disadvantaged for many decades because of tariffs and taxes designed (at least partly) to protect industries such as manufacturing from foreign competition. WA, which relied more heavily on mining and agriculture, faced inflated costs for imported machinery and equipment which were crucial for its major industries.

Economists Saul Eslake and Chris Richardson have another gripe with the 2018 changes. They say top-up payments from the federal government to the states, to fulfil a promise that no-one would be “worse off” from WA getting more GST revenue, will cost taxpayers roughly $50 billion over a decade. But let’s not forget that money is extracted from taxpayers in all states, including WA where mining giants contribute a lot to company tax receipts, and ends up back with all the states through the top-ups.

Despite the somewhat misleading narrative that the current GST deal will cost taxpayers more than if we’d stuck with the old deal, it’s effectively a just a shift which sees state governments making more direct spending decisions within their state, rather than lobbying for the Commonwealth government to fund its projects.

And WA, just like NSW, Victoria and Queensland, is still effectively sacrificing some of its GST share to help more needy states including South Australia, Tasmania, and the territories.

Whether 70 cents in the dollar is the perfect figure, and whether we need to go any higher is unclear. The balance between promoting equity and encouraging states to develop their economies becomes skewed against equity the higher we lift the floor.

NSW Premier Chris Minns’ latest push for GST revenue to be distributed according to population, which would make the system simpler, is even worse for those who believe in the principle of stronger states supporting weaker ones. It would end up giving WA even more GST revenue than it currently gets, and would need to be paired with targeted Commonwealth spending on vulnerable communities.

As with any family spat, my metaphorical uncles and aunties have been running their mouths on GST, too. Victorian Treasurer Tim Pallas last month called Minns “mathematically challenged” and a “tool” after the NSW premier labelled Victoria a “welfare state receiving a whole bunch of money from the pockets of NSW families”.

Some bickering is a healthy part of being the democratic family that is Australia. But going back to the old GST distribution system, one that overly punishes good outcomes, should be off the table.

Millie Muroi is a business reporter at the Herald and The Age. She covers banks, financial services and markets, and writes opinion pieces with a focus on economics.