Decimal changes make the point on GST reform

First they were tantalised by a modest company tax cut in a decade, then by tiny income tax “cuts” in seven years. Now, voters have Clayton’s GST reform to look forward to — in nine years.

That’s right, by 2027, by which time a big chunk of the population will have departed this world, the government will have rolled out a series of tweaks to the perverse way GST is distributed to state and territory governments.

Indeed, part of the Treasurer’s announcement includes a plan to consult the states about whether to round their GST shares to two rather than five decimal places. Heady stuff.

GST distribution is arcane, but it matters. The current, opaque system — which tries to give every state government the same “fiscal capacity” — retards growth by directing GST revenue away from successful states.

Indeed, Western Australia has emerged from a profound resource boom in a parlous fiscal state, partly through its own mismanagement but also because for years it received barely 30 per cent of its population share of GST. No wonder Victoria sits on its vast gas reserves, and states remain loath to fix their own highly inefficient tax systems.

Introducing a 75 per cent GST share floor and making NSW and Victoria the permanent benchmark for the appropriate level of “fiscal capacity” — the centrepiece of today’s announcement — will fix a political problem issue in WA but it does nothing to fix the opaque distribution formula, which acts as a handbrake on growth.

In particular, it entrenches a large annual subsidy to Tasmania and South Australia, which hampers their long-term development.

Distributing GST according to population, leaving the commonwealth to top up states in need, or along the lines of the Productivity Commission’s May recommendations, would have been far better. But that would require political courage.