COVID blasts $25bn GST hole over three years

Exclusive analysis of state and territory budget papers show a bigger estimated hit to GST revenues in coming years than predicted in the federal budget.

Victorian treasurer Tim Pallas handed down a big-spending budget. Picture : NCA NewsWire / Ian Currie

The COVID-19 recession will blow a $25bn hole in state and territory finances over coming years, further complicating the task of fiscal repair following big spending budgets announced over recent weeks.

All states aside from the ACT and Queensland — which will produce its budget on Tuesday — have now handed down much delayed 2020-21 budgets. Exclusive analysis of the documents by ANZ reveals that the virus and measures taken to control its spread means states and territories will slash a combined $23.3bn from GST revenues over the three years to 2022-23 versus what had been expected before the pandemic hit.

The health crisis has “basically blown a big hole in state finances”, ANZ economist and budget specialist Cherelle Murphy said.

NSW is the only state to release figures which compare pre- and post-COVID estimates for GST revenue out to 2023-24. If included, that would add a further $2.3bn to the GST deficit, lifting the total to $25.6bn, the ANZ analysis showed, suggesting the hit to state revenues would extend further into the decade.

The analysis showed state and territory treasury officials were more pessimistic than their federal counterparts, even before including the yet to be released Queensland budget. The October 6 commonwealth budget estimated the GST pool would shrink by $19.5bn over the four years to 2023-24.

Plunging GST payments will complicate the task of fiscal repair over coming years following big spending budgets which have been paid for with record levels of borrowing.

In an effort to alleviate pressure on the states’ finances and economies, the federal government has committed hundreds of millions in additional fiscal support, mostly in relation to new funding for infrastructure projects. “It looks like the commonwealth tried to fill that (GST) gap with grants for infrastructure and other specific purposes,” Ms Murphy said.

For example, versus the pre-pandemic, mid-year 2019-20 budget forecasts, Victorian budget papers show an additional $393m a year from 2020-21 to 2022-23 in specific purpose grants. The large upgrades “primarily reflect additional infrastructure grants for major transport projects,” the budget read.

Josh Frydenberg on Sunday said the Morrison government “has done the bulk of the heavy lifting and when it comes to COVID recovery,” even as the Treasurer welcomed “the initiatives from various state governments in their budgets, including the social housing commitment here in Victoria”.

And Ms Murphy flagged that the states’ predictions may prove too pessimistic.

“Although there are significant haircuts to the GST forecasts, there is also reasonable risk that the economy comes back stronger than expected, and so the GST forecasts are revised higher when the next set of budget estimates are published,” she said.