Federal taxpayers footing a $60 billion bill for WA’s GST woes

The cost to federal taxpayers of placating West Australians angry over the carve-up of the GST is on track to reach $60 billion as Treasurer Jim Chalmers prepares to reveal another blowout in the bipartisan deal.

Before the release of the latest allocation of the $94 billion GST pot among all states and territories, this masthead can reveal the Morrison government-era arrangement to funnel extra money to WA is now on track to be 17 times more expensive than originally promised.

Anthony Albanese writes and signs a “No Change To WA GST” pledge on the arm of West Australian reporter Dylan Caporn in February 2024.Credit: AAP

Both major parties have promised to honour a deal crafted by Scott Morrison because of anger in WA, where the state’s share of the GST had collapsed to less than 30¢ for every dollar of the tax estimated to be raised there.

Under Morrison’s policy, originally forecast to cost $2.3 billion over four years, no state’s GST share could fall below 75¢ for every dollar. The federal government would top up the GST pool to ensure WA’s share was gradually lifted.

Under pressure from other states and members of the government’s backbench, so-called “no worse off” payments were put in place to ensure no state or territory would have their GST share cut. That provision was due to end in 2026-27 but the Albanese government has extended that for another three years.

The sharp fall in WA’s share, as the state emerged from a local recession, was caused by the way the GST is allocated by the Commonwealth Grants Commission which, through a notoriously complex process, seeks to ensure all states and territories have sufficient money to provide services of a similar level to their residents.

In last December’s mid-year update, the cost of the deal had blown out to $53 billion over a decade.

But the March 25 budget will confirm the cost has grown and is now on track to hit $60 billion over 11 years.

Iron ore prices, forecast in the mid-year update to fall to $US60 a tonne, have remained around $US100 a tonne, greatly inflating the cost of the GST deal predicated on a sharp fall in iron ore.

The budget will confirm the cost will grow to almost $6 billion in 2025-26 alone or about the total amount the federal government spends on policing, law and order in a single year.

WA, where Labor won four seats at the 2022 election and which returned the Cook government with the second-largest majority in the state’s history, will be pivotal in the coming federal election. Prime Minister Anthony Albanese was in Perth on Thursday, campaigning in the new seat of Bullwinkel.

Independent economist Saul Eslake, a trenchant critic of the GST deal, said it was an increasingly large drain on the nation’s finances.

“This is on track to reach $60 billion,” he said.

The extra GST payments have been paid for partly by the government borrowing money as, apart from surpluses recorded by Chalmers in 2023 and 2024, the budget has been in deficit since the deal was struck.

Gross government debt reached a record $951.6 billion last week. The March 25 budget is expected to confirm gross debt will cross the $1 trillion mark in the coming 2025-26 financial year.

Economist Saul Eslake says progressives and defence hawks should call for an end to the GST deal.Credit: Alex Ellinghausen

The 17-fold explosion in the cost of the deal dwarfs the cost blowouts of other expensive programs such as the National Disability Insurance Scheme. It is on track to cost the equivalent of eight Virginia-class nuclear submarines, the craft Australia is seeking to buy from the United States under AUKUS.

Both Albanese and Opposition Leader Peter Dutton have committed to retaining the deal, which is a key feature of the West Australian political debate.

But Eslake said there should be anger about a policy that has delivered so much money to a state government that is running a budget surplus of $3.5 billion a year while other states face deep budget deficits.

He said progressives and defence hawks should be equally upset that the money going into WA could be spent in other areas.

“That’s money things that ‘progressives’ have long been agitating for such as increases in Job Seeker Allowance or in Commonwealth Rent Assistance could be paid for multiple times over with what’s been spent on this deal,” he said.

“And why aren’t self-styled ‘defence hawks’ similarly outraged when for what we are gifting WA we could have how many more Hunter frigates, or even submarines?”

While the GST blowout will hurt the nation’s long-term finances, state treasurers will be focused on Friday’s release by the grants commission of its report into how the tax will be carved up in 2025-26.

Last year’s GST sharing update from the grants commission delivered a $3.7 billion windfall to the Victorian government while costing NSW (a loss of $310 million) and Queensland (a loss of $469 million).

Victoria’s extra revenue was driven by higher prices for coal which is predominantly mined across NSW and Queensland which had boosted the budgets of both states through higher royalty payments.

Coal prices, however, have fallen sharply since spiking at more than $US430 a tonne soon after Russia’s invasion of Ukraine. Thermal coal is now around $US100 a tonne.

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