The WA State Government and CCI have been lobbying for years and yesterday it was finally announced that problems with the system used to share GST revenue will be fixed by the Turnbull Government.
The current system, called Horizontal Fiscal Equalisation (HFE) equalises the fiscal capacity of all states and territories to that of the highest state.
WA has been penalised by this model through its “boom” years, where the state received less than 30% of its GST collections back due to fiscal equalisation.
The government is now looking to reform the system over the next eight years to make it fairer for WA, while also making sure that no state is worse off.
This is going to be achieved in a number of ways.
Initially, top up payments will be made to lift WA’s share of its GST to 70% from 2019/20 onwards. This is expected to deliver a $2.1 billion windfall to WA over the next 3 years.
The governments preferred model going forward is to ensure the fiscal capacity of each state and territory is at least equal to that of NSW or Victoria (whichever is higher).
By using NSW or Victoria as the benchmark, it ensures that all states are equalised at a high standard and provides a stable benchmark.
The government also proposes to put a GST “floor” in place of 70% initially from 2022/23 which will rise to 75% from 2024/25.
To ensure all states are better off during and after the transition, the government will inject $600 million per year into the GST distribution (from other revenue sources) from 2021/22. Contributions in the following years will be equivalent to indexing this injection at the growth rate of GST collections in those years. There would be a second injection of $250 milion in 2024/25 (to $850 million) when the 75% floor is introduced. The combined additional commonwealth funding would then be indexed to grow in line with GST collections on a permanent basis.
These reforms will ensure that no state or territory will be worse off, but more importantly no state or territory will be penalised for pushing their economy ahead.
This is great news for the WA Economy.