Fight for fair GST share far from over

14 June, 2017

CCI and our Chief Economist Rick Newnham have been instrumental in the campaign for a fairer GST share for WA and last week Newnham got the opportunity to state the case to the Prime Minister beside some of the state’s biggest business heavy weights.

Newnham joined businessmen Michael Chaney, John Poynton and Nigel Satterley in the meeting to discuss changes to the GST formula ensuring each state is getting their fair share while still incentivising development of state resources.

“The meeting with Prime Minister Malcolm Turnbull was a very constructive discussion on the GST issue and its impact on national economic growth,” Newnham said.

“The Prime Minister listened intently and was very keen to discuss all the options for GST reform, and said he would continue to participate in an open dialogue on GST going forward.”

Newnham has been highlighting the need for changes to how the GST is distributed for some time.

Read his column on the need for reform from this month’s Business Pulse below.

Last month’s Federal Budget gave us 226 million reasons to reform the GST.

For the third consecutive year, the Federal Government has ‘topped up’ Western Australia’s GST share, this year by $226 million. The last two top-ups were to the tune of $500 million each.

The WA business community has warmly welcomed this year’s payment, designed to plug WA’s GST gap and keep our share at 2014-15 levels.

However, the fact that the Government has seen a need to top up WA – repeatedly – highlights that the GST model is structurally broken.

If the system was working properly, WA should not need a top up at all.

There’s a lot of confusion around the GST. Why is WA’s share now so low? Is it our iron ore royalties? Why is WA being punished for having a successful economy? Why don’t other states develop their own resources?

Perfectly good questions, and all questions the Productivity Commission will ask during its upcoming GST review. Treasurer Scott Morrison has directed the Commission to review the GST distribution, to determine if the current model is hindering national economic growth by removing incentives for states to develop their own economies.

CCI and WA business believe that this is indeed the case. We will make this argument in our submission to the Commission inquiry and to Prime Minister Malcolm Turnbull later this year. 
Here’s how. The current GST system looks at all the states and territories and identifies which one can deliver the highest quality of public services to its residents. The Commonwealth Grants Commission then distributes money from the GST pool to make sure all other states and territories have enough cash to deliver the same peak level of public services as the leading state.

This process is called Horizontal Fiscal Equalisation. Crucially, this model ignores policy decisions by individual states to make sure they can’t enact policies that game the system to bump up their GST share (like lowering taxes).

Sounds good, right? Not so fast – this disregard of policy decisions effectively rewards states and territories who choose to adopt a policy that prevents the development of new or under-utilised industries, particularly natural resources.

Look at New South Wales and Victoria – they’ve both banned the development of onshore gas, but because these bans are policy decisions, the GST system decides these states don’t have enough cash to deliver services at the leading state’s level. As a result NSW received $17.2 billion and VIC received $13.6 billion in GST this year – a bountiful share compared to WA’s abysmal $1.9 billion. If WA received an equal population share of the GST, we would have received $5.7 billion, but instead we are sending more than $3.8 billion in iron ore royalties over east.

Put simply, if a state proactively develops its industries and grows its economy, it will receive less GST because the system calculates that it has an increased capacity to deliver services itself.

States that don’t develop their industries will receive more GST – so why bother developing your economy?

Australia does need a system that ensures no citizen lives in a state providing less than an acceptable level of services – but that level of services does not need to be at the wealthiest state’s level.

Instead, it should be at an acceptable level – like a pre-determined national average – so states are incentivised to grow their industries AND no state gets left behind.

So, what needs to be done?

It’s a challenging road ahead, but the first test is showing the Productivity Commission the current GST system does indeed remove incentives for national economic growth.

This case must be prosecuted by a united ‘Team WA,’ comprising of all WA politicians – state and federal, Labor and Liberal, minor parties – as well as business leaders, SMEs, the social sector and the wider community. The Chamber of Commerce and Industry WA will continue to lead the charge on bringing Team WA together.

GST reform can help us grow our state economies, incentivise growth and create thousands of jobs across Australia. CCI will continue to call for GST reform, not because WA believes it’s an unfair deal, but because it’s clear the broken system is holding our nation back.

► CCI is hosting breakfast with the Federal Treasurer the Hon. Scott Morrison on 30 June - don’t miss this chance to ask your burning questions, book your tickets here.