Productivity Commission urges Anthony Albanese to scrap GST deal that favours Western Australia

Anthony Albanese is being urged by the Productivity Commission to unwind his Liberal predecessor’s expensive GST deal hated by east coast states that stopped Western Australia from being punished for its iron ore riches.

With the Federal Labor holding 11 of Perth’s 12 electorates, the Prime Minister has suggested his government would be careful about leaving Western Australia worse off than it is now.

Labor premiers in WA and NSW are at loggerheads over Commonwealth grants to the states and territories that provide a guaranteed minimum share for every dollar of GST collected, regardless of their revenue raising ability.

An interim Productivity Commission report released on Friday, ahead of a meeting of State treasurers, is calling on the Federal Government to scrap a deal former Liberal treasurer and prime minister Scott Morrison introduced in 2018, designed to stop WA from being punished for its iron ore riches.

But this deal to ensure no states are worse off is now costing $6 billion a year with the bill during the past eight years more than four times what was envisaged in 2018.

WA fears any change could potentially cost Western Australia $60 billion over a decade.

“Western Australia deserves a fair deal,” Mr Albanese told reporters in Canberra on Friday.

“They contribute to our national economy. They’re a driver of our national economy.

“This interim report . . . is just that an interim report. There’ll be a final report before the end of the year.”

Friday’s Productivity Commission report revealed Western Australia received enough GST revenue to meet 113 per cent of its fiscal needs, compared with 98 per cent for the other states.

The no worse off deal with the states expires in June 2030, following an extension under Federal Labor in 2024, and the Productivity Commission has presented three options, with two of them recommending a scrapping of a floor for every dollar of GST collected and a return to a pre-2018 system where the Commonwealth only boosted payments to states if a natural disaster or a fall in commodity prices hurt their revenue-raising capacities.

The Albanese Government would be taking a big political risk if it reversed the previous Coalition government’s 2018 changes that gave every State a floor for every dollar of the GST collected by the Commonwealth.

That level rose to 75 cents in the dollar in 2024-25, with WA a decade ago getting just 30 cents in the dollar by virtue of an earlier mining boom that boosted State Government royalties.

During this financial year, both WA and NSW would be receiving 82 cents for every dollar of GST collected, as part of those 2018 arrangements pegging Western Australia’s share with Australia’s most populated State.

NSW Premier Chris Minns said the deal was unfair and likened iron ore rich WA to a greedy oil-rich Gulf State.

“New South Wales needs a better and fairer share of the GST,” he told reporters in Sydney on Friday.

“We’re now in a situation where Western Australia is so wealthy and so rich that they’re competing and bidding on New South Wales rugby league games and putting tens of millions of dollars on the table.

“That’s how rich they are. I mean, you’re seeing similar behaviour from Gulf states like Saudi Arabia and the UAE and Dubai, almost for the same reason because they’re digging up natural resources and got billions of dollars to spend.”

Economist Angela Jackson, a commissioner with the Productivity Commission, said preserving most of the post-2018 arrangements could actually leave WA worse off because the existing arrangements wouldn’t adequately compensate the State in the event diving iron ore prices hit Government revenue.

“Western Australia’s GST is no longer related to its own fiscal strength or capacity, it’s really tied to NSW’s so in that situation if it experiences a fall in its own source revenue, whether that’s mining or anything else, it won’t necessarily see its GST share change,” she told The Nightly on Friday.

“So, it will experience that full impact on its Budget bottom line.”

Ms Jackson said the post-2018 system meant that WA would still receive a guaranteed minimum 75 cents for every dollar of GST collected, even if NSW experienced devastating bushfires or a plunge in stamp duty revenue from falling Sydney house prices, making the system inequitable.

“Under the current system as it is today, if New South Wales experienced a decline in stamp duty, Western Australia would also receive more GST,” she said.

Of the three options recommended, the Productivity Commission’s least preferred final option would retain the 75-cent floor in every dollar of GST collected and the existing no worse off test that guarantees WA doesn’t receive less than GST for every dollar collected.

This option could be more likely politically, given Labor won off the Liberal Party the Perth seats of Tangney, Swan, Hasluck and Pearce in 2022, followed by Moore last year.

Labor holds 11 of Perth’s 12 Federal seats, with only Canning held by high-profile Opposition frontbencher Andrew Hastie in Liberal hands, meaning the Government would be politically vulnerable if its changes to GST arrangements made WA worse off than it is now.

The Productivity Commission’s two preferred options envisaged a return to pre-2018 arrangements without a floor for every dollar of the GST collected.

Under this scenario, Treasurer Jim Chalmers would have the power to ask the Commonwealth Grants Commission to examine giving states and territories top-up payments should there be a plunge in revenue, which in WA’s case could include falling State Government royalties in the event of diving iron ore prices.

“In terms of the pre-2018 system itself, if there was a drop in iron ore revenue, part of the system as it stood was it can act as a a macro-economic stabiliser for states so if individual states have a shock, it’s responsive to that shock,” Ms Jackson said.

“If you suffered a fall in revenue due to iron ore prices falling or output falling, then your GST share would change as a result of that and your GST share would increase because you’d be assessed as having a lower fiscal capacity on your own to raise the revenue you needed to deliver the services to your residents.”

A second option, also without a floor for every dollar of the GST collected, would see the Federal Government make direct and transparent payments to states.

“If your iron ore revenues were falling, and your relative fiscal strength therefore fell, then your GST share would increase to offset that to some degree and that’s a stabilising impact of the system,” Ms Jackson said.

The Productivity Commission argues the no worse off test cost the Commonwealth $23 billion up to 2024-25, more than 4.5 times the $5b cost envisaged in 2018.

Western Australia calculates any change would see it lose $60b over a decade.