NSW needs to lead the charge on reforming GST share-out

The carve-up of GST revenue among the states is never likely to be a barbecue stopper (except perhaps in Perth), but it occasionally hits the headlines — as it did last week thanks to the Commonwealth Grants Commission’s (CGC) latest recommendations.

There are winners and losers from these updates every year, and this time New South Wales and Queensland are the losers. The NSW Premier is livid, and demanding a shift to states’ population shares (equal per capita, or EPC, in the jargon) as the basis for distribution.

There is more than a little political posturing in the Premier’s stance, as his government struggles with persistent deficits and a heavy debt burden.

The absolute decline in the NSW GST allocation for 2024-25 is no more than a rounding error in its budget, and the CGC has in fact set the NSW share lower in five of the past 20 years. But the GST shortfall relative to expectations is material.

This has always been one of the problems with the distribution methodology; predicting what will come out of it is like trying to crack the Enigma code.

Hell hath no fury like a Premier and a Treasurer hearing three months before their budget that plans for a return to operating surpluses after five years of massive deficits have been disrupted by Canberra bureaucrats tweaking the dials of horizontal fiscal equalisation (HFE).

There is nothing new in NSW politicians demanding a shift to EPC distribution. They’ve been at it for decades. Every time they are mugged by the equalisation system, the NSW Treasury dusts off a well-thumbed file of suitable talking points.

This is not to make light of the case for reform. There is much to be said for an equal-per-capita distribution. It would be simple, understandable, predictable, efficient and impervious to gaming. With an adjustment for the uneven interstate distribution of mineral resources and royalties, it could also pass the fairness test.

But as Premier Minns and Treasurer Mookhey must know, it is not about to happen — not because the idea lacks merit, but because the current system is entrenched with strong political and institutional support.

The HFE system has been reviewed over the years more times than the tax system, and there has never been an outcome more than tinkering at the edges.

The only review to recommend a pathway to EPC was the one conducted by eminent public policy economists Ross Garnaut and Vince FitzGerald in 2002 for NSW, Victoria and Western Australia. Other states and territories dismissed it.

If we were starting with a blank sheet, EPC or some variant of it may well look like the best way to go — but the starting point consists of smaller states and territories strongly wedded to the status quo.

The NT with five times its population share of GST revenue, Tasmania with almost double and South Australia with 1.4 times, will always fight tooth and nail to keep what they have, and no federal government will over-ride their objections to change.

As Peter Costello often said, if the states and territories could agree on a different method of distribution, the Commonwealth would implement it — knowing full well there would never be such agreement. The status quo has always won.

The smallest two states and the NT would lose more than $7 billion a year from a shift to EPC. Minns breezily assigns the burden of compensation to the Commonwealth. That won’t happen.

It would permanently lumber the federal budget with a burden even greater than the sweet deal WA extracted from the Turnbull government in 2018; to put a floor under its GST share regardless of the state’s iron ore royalty windfall.

Minns and Mookhey should carry on the NSW tradition of advocating fundamental HFE reform and construct as broad a coalition of the willing as they can. They are now at loggerheads with Victoria over this year’s allocations, but reform is in Victoria’s longer-term interests.

WA has supported reform in the past but is now happy with its top-up deal with the Commonwealth, as long as it lasts. Queensland has always been a strong defender of the status quo, but that could change down the track.

Reform is a long game.

The immediate focus must be on the forthcoming budget. If Minns wants to portray the CGC report as a crisis for NSW, then he should take it as an opportunity to frame a tighter budget than otherwise.

As the saying goes, never let a good crisis go to waste.

Robert Carling is a Senior Fellow at the Centre for Independent Studies, and a former World Bank, IMF and federal and state Treasury economist.

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