GST carve-up costs NSW $12 billion – and its premium credit rating

The federal government’s latest GST carve-up will cost the NSW budget $11.9 billion over four years, meaning the state will almost certainly lose its premium AAA credit rating.

The Commonwealth Grants Commission last month cut NSW’s GST allocation for 2024-25 while increasing funds to other states. Treasurer Daniel Mookhey will on Monday reveal that that decision is set to cost NSW more in lost revenue than the COVID-19 pandemic did.

NSW Treasurer Daniel Mookhey: “It almost certainly will lead to a downgrade.”Credit: Louise Kennerley

In a searing attack on the GST allocation system, Mookhey will use a speech to predict the state’s premium credit rating is all but lost due to next year’s controversial distribution. A budget surplus recently forecast for the state next financial year is now no longer expected.

“Put simply – losing $11.9 billion is the equivalent of losing 19,000 healthcare workers; $11.9 billion is enough to hire 19,000 teachers, or 16,000 police officers for the next four years; $11.9 billion is how much we spend on mental health, TAFE and the NSW Police Force combined every year,” Mookhey will say in a speech to the McKell Institute think tank.

Despite a string of budget deficits since the pandemic, NSW has maintained a AAA credit rating with international ratings agencies Moody’s and Fitch, along with a AA-plus credit rating with S&P Global. NSW is one of only 21 sub-national governments worldwide to still have a premium credit rating, which helps limit the cost of borrowing and maintain investor confidence in the state.

Mookhey predicts the “Commonwealth Grants Commission $11.9 billion GST rip-off” will change that.

“It almost certainly will lead to a downgrade,” he will say.

Mookhey will say maintaining a premium credit rating must be balanced against the government’s responsibilities to keep the economy growing, to maintain jobs and to deliver essential public services.

“I think protecting family budgets takes precedence over the AAA credit rating,” he will say.

That signals NSW will not make major spending cuts or tax increases to maintain the premium credit rating.

The Commonwealth Grants Commission distributes the GST using a complex formula that aims to give each state the capacity to deliver a comparable level of public services. Last month, it allocated NSW 27.1 per cent of the national GST pool next financial year, down from 29 per cent this year. NSW accounts for about 31 per cent of the national population.

The commission said the lower GST distribution to NSW was due to the state’s increased capacity to raise coal mining royalties and an increased capacity, relative to other states, to raise revenue from land taxes.

But the system used to allocate the GST has been criticised for being unpredictable, unnecessarily arcane and for undermining states’ incentive to undertake productivity-boosting reforms.

“If a decision by the Commonwealth Grants Commission costs NSW more revenue than a global pandemic, it raises questions about whether this system is fair,” Mookhey told the Herald and The Age before the speech.

He will argue for an overhaul to the GST carve-up.

“There is a better system for dividing the GST between the states and territories,” he will say. “It is to divide the GST according to population share, with the federal government topping up the smaller states to make sure they are no worse off.”

Mookhey’s attack on the GST system is set to reignite tensions within the federation, which flared last month when the Grants Commission announced the latest carve-up.

Victorian Treasurer Tim Pallas labelled NSW Premier Chris Minns “mathematically challenged” and a “tool” after Minns criticised the latest GST distribution, while West Australian Premier Roger Cook accused the Minns government of being “whingers” and advised NSW to “live within its means”.

Mookhey will continue to make the case for change.

“NSW has never had such a sudden fall in GST,” he will say. “Our share has fallen to 87 cents for every dollar paid in GST in this state. Some states want to portray NSW as being greedy; the big bad state that will not share. That’s not true.  For every dollar that Victoria will give to the smaller states next year, NSW will give upwards of four.”

Victoria will receive an extra $3.7 billion of GST revenue under the 2024-25 distribution and Western Australia will get an extra $838 million. NSW and Queensland were the only states or territories to have their GST allocation reduced in 2024-25.

Changes to the GST distribution method made by the Coalition government in 2018, which introduced a relative floor below which GST payments could not fall, have also come under fire from independent experts. The changes, which were supported by federal Labor, have benefited minerals-rich Western Australia but a “no worse off” provision has required the federal government to spend tens of billions compensating other states.

Mookhey says these changes have made the GST system more unfair.

“Every time NSW and Queensland get a coal boom, we share it with the other states but every time Western Australia gets an iron ore boom, they get to keep most of it for themselves,” Mookhey said before the speech.

The estimate that the Commonwealth Grant Commission’s decision will cost NSW $11.9 billion over the next four years is based on NSW Treasury modelling.

The NSW budget in June will include any spending cuts or tax changes made necessary by the hit to GST revenue.