Everyone’s living standards will fall under GST deal – bar one state

The living standards of every person in the country bar the residents of Western Australia will go backwards unless a “broken” GST deal is repaired, a review into how the tax is carved up has been warned, amid claims it is already undermining the national economy.

As calls emerged for John Howard’s original GST system to be completely overhauled, NSW Treasurer Daniel Mookhey on Monday said the 2018 deal was so one-sided that the development of $2 trillion worth of critical minerals in his own state was at risk.

The Productivity Commission is this week holding public hearings in response to its interim report that labelled as a mistake the 2018 deal to reform the annual allocation of the GST between the states and territories to protect WA from a collapse in its share of the tax.

The deal, initially expected to cost less than $5 billion, is now forecast to deliver a $60 billion blow to the budget by the end of the decade. While put in place by the Morrison government, the Albanese government has promised its retention despite the Productivity Commission’s findings.

Mookhey told the commission the 2018 deal was now delivering the WA government a $6-billion-a-year subsidy while every other part of the country was forced to cut services or make difficult political choices that could ultimately harm their long-term economic futures.

He said the deal was moving so much money to WA that it did not have to worry about the state of its budget while it could try and steal events from other states, such as making a pitch to take the NRL grand final from NSW.

WA was on track to be one of the richest governments in the world, but it was coming at a cost to the rest of the nation.

“If you give one state $6 billion additional each year, every year for nothing, then their quality of services and therefore quality of life will compound over time, and you can already see that in the diverging fiscal parts of the states,” he said.

“If we don’t get change, then in 10 years’ time, 20 years’ time, 30 years’ time, you will see the benefit of a massive subsidy that compounds over time in the difference in living standards between one group of Australians and another.”

Supporters of the current deal have argued it rewards states and territories that are prepared to develop their economies.

But Mookhey said the system made it more difficult.

He said while WA claimed it was a mining powerhouse, NSW itself was a major mining state and could be even larger if it was able to develop its vast array of critical mineral deposits. But the way the GST was being carved-up worked against NSW’s interests.

“I’m told by [NSW] Treasury that if we theoretically were able to extract all critical minerals, they would be worth a current market value of about $2 trillion,” he said.

“They are in hard-to-realise places of NSW that require substantial investments in our road networks and rail networks, amongst others.

“In order for us to properly understand whether or not we can meet the national objective of becoming a world-trusted supplier of critical minerals, we also have to factor in all the like costs that are similar to bringing on a resource industry online at scale.”

NSW believes allocating the GST on a per capita basis, with poorer states such as South Australia and Tasmania given extra funding by the federal government, should be considered as a replacement to the 2018 system.

The West Australian government has vowed to fight any changes to the deal with Premier Roger Cook labelling the Productivity Commission as “east coast clowns”.

But Michael Brennan, a senior Treasury official close to the 2018 deal who is now head of the independent e61 think tank, said the current arrangement had to change.

He said the Productivity Commission had found the 2018 deal had created new anomalies. A natural disaster in NSW actually delivers an increase in GST to WA.

According to Brennan, the original requirement set by John Howard when the GST was introduced in 2000 that all of its revenue go to the states and territories had become a “barrier to sensible discussion”.

He said the GST should be rolled in with other substantial grants made by the federal government to the states and territories in what would create a $200 billion pot of money that would be indexed with the growth in the economy.

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