Victoria furious over GST transfer to WA

Victoria has lashed out at new rules for carving up the GST, accusing the Morrison government of siphoning billions of dollars from the east to the benefit of Western Australia in a bid to woo Australia’s richest state.

Eastern states including Victoria, South Australia and Tasmania are furious about a new system for distributing more than $70 billion worth of GST revenue, claiming it unfairly favours the mining-rich state of WA.

A worker at the Mincor Nickel mine in Kambalda Western Australia. The state receives billions of dollars in mining royalties.Credit: Fairfax

In a submission to a Victorian Parliamentary inquiry, State Treasury warns Victoria alone stands to lose up to $1.2 billion a year by 2027-28 once a transitional “no-worse-off” guarantee by the federal government ends.

“The no-worse-off guarantee is currently legislated only until 2026-27, after which many states, including Victoria, face the risk of an entrenched and ongoing loss of GST revenue,” the submissions says.

After repeated complaints from WA, the Coalition announced new rules for dividing up the GST pool in 2018.

Previously the Grants Commission handed out the GST with the aim of giving each state the same ability to deliver basic services and infrastructure as the “financially strongest state”.

The GST is distributed to the states on a per capita basis to help equalise access to services and infrastructure. Under the old system, states that couldn’t raise as much state revenue received more GST per person.

Western Australia typically got a much smaller share of the GST carve up because it receives billions of dollars in mining royalties. This financial year, for example, Western Australia is getting about 42 cents back for every $1 of GST revenue it contributes, compared to 96 cents in NSW, 92 cents in Victoria, $1.35 in South Australia and $1.06 in Queensland.

Under the overhaul, agreed to in the run-up to the 2019 federal election, WA will be paid the same per person as either Victoria or NSW, which is financially stronger.

The Victorian Treasury submission said the new rules lifted WA’s GST share “far above what it would be under the former system at the expense of other states”.

Victorian Treasurer Tim Pallas argues the state is being short-changed on infrastructure funding.Credit: Luis Ascui

“Given the strength of WA’s budget position driven by growth in mining royalty revenue, it is expected to be the only state to benefit from the new system for the foreseeable future,” it said.

To soften the blow, the federal government has guaranteed no state will get less money than it would have under the old system – but only for a five-year transition expiring in mid-2027.

The cost of the guarantee has already blown out dramatically. Having originally suggested all states would be better off, this year’s federal budget shows the guarantee is now expected to cost the Commonwealth about $7.6 billion over four years, including $2.3 billion for Victoria.

Victorian Treasurer Tim Pallas said Victoria was the only state to have subsidised other jurisdictions every year since the GST’s introduction while also being short-changed on its fair share of infrastructure funding.

“The current GST carve-up had nothing to do with making the GST fairer and everything to do with winning the west at the last federal election,” he said.

In a blistering submission to the inquiry, the South Australian Liberal government also suggested the Commonwealth was pandering to Western Australia for political purposes.

“The new system effectively says that people who reside in Western Australia deserve much better hospitals, schools and other government services than other Australians simply because a large proportion of Australia’s valuable mining resources happen to be located within their borders and because states are responsible for mining royalties,” the submission said.

Economist Saul Eslake said from the time the no-worse-off guarantee expired in 2026-27, the cost of the increases in the share of the GST revenues going to Western Australia would be borne by the eastern states and territories. He said taxpayers should be “appalled”.

Economist Saul Eslake Credit: Louise Kennerley

“All Australian taxpayers – including those living in Victoria – should be appalled that the Commonwealth government will be incurring more debt (to be serviced, and ultimately repaid, by future generations of Australian taxpayers) in order to transfer billions of dollars to the government of the richest state in Australia,” Mr Eslake said in a submission.

The Coalition is desperate to retain the Liberal-held Western Australian seats of Hasluck, Pearce and Swan, with polling suggesting a tight contest.

In its submission to the inquiry, the Western Australian Government argued that 90 per cent of its iron ore royalty collections were effectively transferred to other states through the GST distribution.

“If Western Australia decided not to impose a royalty on iron ore, it would gain nearly all the lost revenue back in increased GST (which all other States would lose) – nearly $7 billion yearly,” it said. “Such perverse incentives do not exist for taxes common to all States, such as payroll tax.”

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