Is the Current GST Revenue Distribution in Australia Optimal?
Understanding GST Distribution
The Goods and Services Tax (GST) is a crucial revenue source for Australia’s state and territory governments. The distribution of this revenue between these jurisdictions has been a topic of debate, as different approaches have varied implications for each state’s ability to provide essential services.
The Current Method
The current method of GST distribution uses a formula administered by the Commonwealth Grants Commission. This formula aims to ensure that each state and territory can provide comparable services by distributing funds based on factors such as population, economic activity, and revenue-raising capacity.
The 2018 Western Australia Deal
In 2018, a special deal was made between the then Western Australian premier and federal treasurer. This deal granted Western Australia a greater share of the GST than it would have received under the formula, recognizing its significant mining revenue.
Expert Opinions
A recent poll conducted by the Economic Society of Australia surveyed 38 top economists on the current GST distribution method and the 2018 Western Australia deal.
Support for the Current Method
25 of the economists surveyed supported the general framework of the current method, emphasizing its fairness in distributing funds based on need and ability to pay.
Opposition to the Western Australia Deal
However, a majority (28) of the economists advocated for the scrapping of the Western Australia deal. They argued that it unfairly advantaged one state at the expense of others, undermining the principle of equal distribution.
Alternative Proposals
Several economists proposed alternative methods of GST distribution, such as allocating revenue based on the size of each state’s economy or population. Others suggested exploring a Commonwealth resource tax to account for the uneven distribution of natural resources.
Balancing Needs and Simplicity
While the principles of equalization and fairness are important, the economists also acknowledged that the current distribution formula is complex. They emphasized the need for a simpler system that balances fairness with administrative ease.
Impact on Inter-State Mobility
One argument in favor of the current method is that it ensures the liveability of all parts of the nation, as people are more likely to choose to live in states with adequate services. Conversely, a system that favors states with larger economies could lead to depopulation and economic imbalances.
Upcoming Review
The Productivity Commission is set to review the Western Australia deal in 2026. This review will provide an opportunity to assess its effectiveness and consider potential alternatives.
Conclusion
The current GST distribution method has been subject to ongoing debate. While most economists support its underlying principles, many oppose the special deal granted to Western Australia. Alternative proposals, as well as the need for simplicity, will likely be key considerations in any future changes to the GST distribution system. The upcoming Productivity Commission review will be crucial in shaping the future of this important revenue stream.