Review of Australian GST Distribution

by Mary Swire, Tax-News.com, Hong Kong

31 March 2011

The Gillard Government has commissioned a review of the distribution of revenue from the Goods and Services Tax (GST) to the states and territories. It is proposed that the review will lead to a simpler, fairer, more predictable and more efficient distribution of the GST.

Instead of states facing penalties for economic growth and rewards for economic underperformance, it is hoped that the GST distribution process will encourage economic reform and better delivery of services, and provide states with certainty.

“This will build a stronger Australian economy and make for better, more efficient delivery of essential services like schools and hospitals”, says the Prime Minister, Julia Gillard.

There are a number of elements of the distribution arrangements that the Government believes could be improved. Under the current arrangements, there is:

Not enough incentive for reform – currently underperformance in service delivery and economic growth can be rewarded.

A need for more certainty and predictability – currently states can be hit with unexpected shocks to their finances.

The potential for greater simplicity – current arrangements are complex and accordingly not very transparent.

As well as structural problems that need to be addressed, the Prime Minister says that the Government recognizes the impact of shifts in economy over time.

“In particular, we recognize growth in the mining sector is increasing the discrepancy in the amounts of revenue raised by states and territories, as well as making it more difficult to anticipate GST distribution from one year to the next.

“A key principle of GST distribution is that States and Territories have the ability to provide broadly equivalent services in areas such as education, health and public transport. This is especially important given the differences in the cost of providing services between regions”, she said.

While the Government’s announcement has been welcomed by the resource-rich states such as South Australia, whose Premier believes that his state does not deserve to have its allocations cut back, small states including Tasmania, are concerned at the news. Tasmanian Premier, Lara Giddings, has said: “I can say from the outset that we will not accept any changes that result in less money flowing to Tasmanians.

“The Tasmanian Government supports the existing principle of horizontal fiscal equalization (HFE) on the basis that it is fair and equitable for all states.

“The Commonwealth Grants Commission is free from politicization and takes into account a range of factors, including relative advantage and disadvantage, state-own revenue and population size, when determining state and territory shares of the GST pool which ensures that the Government can deliver a full range of services to the Tasmanian community.

“Tasmania is at a relative disadvantage both in terms of population size and socioeconomic status and it would be fundamentally unfair to disregard those factors simply to reward states that are resource rich and have a larger population base.

“I can assure Tasmanians that I will be fighting hard to ensure that the Review delivers the best outcomes for Tasmania.”

The Review will be advised by a Heads of Treasuries Advisory Committee comprising representatives from all states and territories, and will seek submissions from the public. It will be supported by a secretariat within the Commonwealth Treasury, with representation from the states and territories as well as other agencies as appropriate.

The Review will provide an interim report to the Treasurer by February 2012 and a final report by September 2012. The Commonwealth Grants Commission will continue to serve as the independent umpire and make recommendations on the distribution of GST revenue.

The Federal Government will request the CGC to update its methodology to reflect any agreed recommendations from the Review. The Review will not affect the distribution of the GST revenue in 2011-12 or 2012-13.

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