MATHIAS CORMANN: Unwinding the 2018 GST reforms would take Australia backwards

To say I was surprised and disappointed by the Productivity Commission’s interim report into the 2018 GST distribution reforms would be an understatement.

I was stunned that a report which concedes the reforms protected Western Australia exactly as designed, and concedes the unfairness of the old system was real, would recommend going back to that old system anyway – based on arguments which do not withstand scrutiny.

Earlier this year, the Productivity Commission invited me, as the Finance Minister when these reforms were designed and introduced, to make a submission to its inquiry.

My submission made a simple case. The 2018 reforms restored fairness for Western Australia, whose GST share had collapsed below 30 cents in the dollar with no floor beneath it.

They preserved the principle of horizontal fiscal equalisation – stronger States supporting others so every Australian can access comparable services – by moderating its extremes, not abandoning it. And they guaranteed no State would be worse off, funded by additional Commonwealth money.

In its report the Commission gets one big conclusion right: the problem was real. Western Australia’s GST share fell to 30 cents in the dollar – the lowest of any State in our Federation’s history – straining public support for equalisation itself.

The Commission points to the cost exceeding forecasts. That is a legitimate concern, but let’s be very clear why it happened: iron ore prices stayed strong longer than anyone anticipated.

What that means is that without our reforms, Western Australia would have remained trapped at extreme, unprecedented and unfairly low levels of GST distribution for another decade at least. Most probably longer.

The higher cost is not evidence the reforms failed. To the contrary, it is the measure of the continued unfairness the old system would have kept inflicting on Western Australia.

The Commission’s complaint that “only Western Australia is better off” applies the wrong test. Of course, self-evidently, the principal beneficiary of the reform was the one State being substantially and unfairly disadvantaged by the pre-2018 arrangements – that was the point.

The test for us at the time was never whether every other State would be better off from correcting an unfairness they did not suffer, but whether it could be corrected leaving no State worse off.

That has demonstrably been achieved: every other State and Territory has received at least every dollar the old system would have delivered.

On efficiency, the Commission finds minimal gains. That finding is frankly highly premature. No credible economist would expect a reform that only completes its transition to full implementation this financial year to have already transformed State behaviour and national productivity.

Incentive effects of this kind reshape State resource development, investment and tax reform decisions gradually over decades. It is genuinely surprising that the Productivity Commission of all institutions would judge them a failure before the new system has operated in full for a single year.

The complexity argument is simply illogical – the Commission cannot credibly criticise a transparent, legislated formula as too complex, while recommending as its alternative a more obscure system, with the Treasurer of the day issuing case-by-case political directions to the Commonwealth Grants Commission.

Reintroducing ministerial discretion would bring back the unpredictability and risk of unfairness the reforms brought to an end.

Where the Commission’s concerns are legitimate, there are better answers than just going back to the unfair and broken old system.

The uncertainty created by the looming expiry of the no-worse-off guarantee – the “fiscal cliff” other States rightly fear – should be resolved by making that guarantee permanent, funded by the Commonwealth.

The theoretical “perverse outcomes” the Commission identifies – which it concedes have never actually occurred and would likely be small – can be closed through targeted technical refinements within the existing framework. And its governance recommendations on consultation and transparency deserve support.

Australia continues to run one of the world’s strongest fiscal equalisation systems. A State at the 75-cent floor still forgoes a quarter of its per capita GST share to support other States. That is substantial, ongoing support to other States. No other State in our history has ever seen its GST or equivalent share under pre-GST arrangements fall below about 80 cents in the dollar.

Even at the 75-cent floor, Western Australia is still contributing more to equalisation than has ever been asked of any other State.

The floor, the benchmark and the no-State-worse-off guarantee work together as an integrated system. Refine it where warranted, but preserve its architecture.

This is an interim report and I welcome the Commission’s open process. It has the opportunity to revisit these conclusions and recommendations in its final report.

A fair, stable and predictable GST distribution is not a Western Australian issue but a national interest issue. The 2018 reforms delivered it. Strengthen them. Do not unwind them.

Mathias Cormann served as Australia’s Minister for Finance from 2013 to 2020 and as a Senator for Western Australia from 2007 to 2020. He was one of the architects of the 2018 GST reforms and writes in his personal capacity.