‘Worst policy change’: State cashes in on GST carve out

Australia’s budget is set to be hit with a $60bn blowout, as one state had the country by the “shorts and squeezed as hard as they could”.

The “worst policy change in the 21st” century is set to blow out the national budget by $60bn and keep one state in the black for years to come.

The goods and services tax (GST) carve up was back in focus this week as state treasurers came out with their budgets.

Queensland, NSW, Western Australia, and the ACT all delivered budgets, with one state standing above them all.

Mining-rich WA is in the black, with costs tipped to come in at $2.5bn less than predicted spending.

The rest, budget deficits.

Western Australia has cashed in on changing GST rules. Picture: NewsWire / Nicholas Eagar

WA Treasurer Rita Saffioti used her speech to focus on the relative strength of the economy compared with other states while warning of an uncertain global outlook.

“This budget is about fortifying WA amid global shocks,” she said.

Independent economist Saul Eslake argues that WA has achieved a surplus for the last seven years on the back of soaring GST revenue.

“Between 2016 and 2025, Western Australia essentially had the country by the shorts and they squeezed as hard as they could,” Mr Eslake told NewsWire.

“I call it the worst public policy decision of the 21st century.”

So what changed for the WA government to achieve seven years of surplus.

WHY IS WA THE LUCKY STATE?

Much of WA’s success comes back to two changes.

The first was a change to the GST in 2018, with Mr Eslake arguing that the then Liberal federal government wanted to appease WA where it held an overwhelming majority of federal seats.

Then treasurer Scott Morrison announced a review of Australia’s horizontal fiscal equalisation (HFE) system, which determines the distribution of goods and services tax (GST) revenue among states and territories.

Then treasurer Scott Morrison enacted the GST reforms. Picture: NewsWire / Martin Ollman

After a Productivity Commission inquiry, the system changed so that all states and territories received 70c for every dollar of GST raised in 2022-23. That figure increased to 75c a dollar in 2024-25.
Before the new agreement, WA’s GST share was 30 cents in the dollar.

High iron ore prices at the time could have meant WA got just 15.6 cents of every dollar of GST raised.

“So what Morrison did was commission the Productivity Commission to do an inquiry into horizontal fiscal equalisation,” Mr Eslake said.

“The terms of reference for that were written in Mathias Cormann’s office. It was a classic example of (fictional TV character) Sir Humphrey Appleby’s advice that you never call an inquiry unless you know what it’s going to say.”

HFE’s aim is to ensure that every state and territory should have an equal opportunity to provide public services.

The key word is should, as states and territories are free to raise additional revenues how they please as well as fund their own state-based services.

“That principle is they are equalising the fiscal capacity of the states and territories,” Mr Eslake continued.

“And the point of that, it matters far less where you live when it comes to the quality of schooling your kids get, the quality of healthcare that you and your family get, the quality of policy or environment you get.”

The price of iron ore stayed high. Picture: Rebecca Le May

Mr Eslake used the example of the US, which does not have HFE, meaning different states have varying life outcomes.

“If we didn’t have it, then Victorians and NSW people would have much better public services and pay lower taxes, all else being equal, than Tasmanians or South Australians,” Mr Eslake said.

“And I would argue, and traditionally most Australians have accepted, that’s something that makes Australia a better and fairer place than America in particular.”

The second major change for WA was the rise of China, or as Paul Keating famously said, the state got “kissed on the a*se by a big Chinese rainbow”.

This kissing, Mr Eslake argues, turned WA from being propped up into a donor state.

“(In the early 2000s) WA got a bigger share of whatever federal grants were going around than they would have got if it was distributed equal per capita,” he said.

“Because the (Commonwealth) Grants Commission recognised that when gold was fixed at $35 an ounce, and iron ore was only trading at $20 a tonne and they weren’t selling much of it, they couldn’t raise much money for mineral oil fees, but they had a relatively high cost of providing services.”

NSW used its budget to call out WA’s share of GST. Picture: NewsWire/ Gaye Gerard

BUDGET BOTTOM LINE

To get other states to support these changes, a no one is worse off provision was added, with the federal government topping up any shortfalls in GST revenues.

This policy was also extended until 2029-2030 under the Albanese government.

This NOWO provision turns a $9bn budget blow into a $60bn black hole.

“This is the biggest blowout in the cost of any single policy decision ever with the possible exception of the NDIS, which as (economist) Chris Richardson says is at least set up for a noble purpose,” Mr Eslake said.

“It’s what is allowing Western Australia to run a budget surplus while everyone else, including the feds, are running a deficit.

“In the longer run, what it will mean is residents of Australia’s richest state, WA, will have better public services and lower taxes than people who live in the eastern states, which I say is un-Australian.”

Originally published as ‘Worst policy change’: State cashes in on GST carve out