Economists Warn GST System Punishes Success, Rewards ‘Populist’ Mediocrity

The annual debate over the redistribution of GST continues after Victoria received an extra $3.6 billion.

Australian dollar coins and banknotes in Melbourne, Australia on April 4, 2024. AAP Image/Joel Carrett

Days after the Commonwealth Grants Commission (CGC) released its latest GST redistribution decision, economists are renewing their critique of the system, and how it encourages states not to make tough decisions to improve productivity.

The report grants Victoria an additional $3.6 billion while slashing Queensland’s share by $1.2 billion.

The CGC justified Victoria’s increased allocation citing its economic struggles, population growth, and inability to raise revenue via mining.

Queensland lost funding because of an increase in coal royalties driven by global prices and a higher royalty rate.

John Humphreys, chief economist of the Australian Taxpayers’ Alliance said this demonstrated how productive states were being penalised by the system.

“The problem with the GST system is that the money is raised by the federal government and then distributed to the states in a way that actively punishes the productive states,” he told The Epoch Times.

“States that make tough economic reforms to improve productivity are punished with less GST, while those relying on inefficient populist policies see their productivity decline, and are then rewarded with higher GST distributions from the federal government. The entire system is broken.”

Victoria Receives Grants Despite Economic Management Issues

Much of Victoria’s parlous economic situation can be attributed to massive funding commitments, its ban on offshore gas drilling, net zero projects, as well as the government’s decision to implement the toughest COVID-19 lockdowns in the country for two years.

The state’s landlords and businesses are still paying for the state’s “COVID Debt Repayment Plan,” which has created an economic chilling effect and resulted in hundreds of landlords trying to sell their properties, and thousands of businesses closing—all as the state continues to receive a major international migration intake.

Independent economist Saul Eslake says Victoria has progressively become a “relatively poor state” like Tasmania or South Australia with the third-lowest capita gross state product in the country, and the second-lowest per capita household disposable income.

A man crosses the normally busy intersection of Flinders street and Swanston streets in Melbourne, Australia on May 28, 2021. Darrian Traynor/Getty Images

Queensland Bears the Brunt

Despite Queensland experiencing the highest net domestic migration, its GST allocation for 2025–26 will fall to $16.6 billion.

“While Queensland is understandably angry at receiving a reduction in its GST revenue compared with 2024-25,” Eslake told The Epoch Times.

“It should have seen this coming, as it is largely attributable to the CGC basing its assessment of Queensland’s revenue-raising capacity (especially from coal royalties).”

‘What WA Wants, WA Gets’

Western Australia continues to benefit from the 2018 GST reforms, which introduced a floor of 0.75, ensuring it never receives less than 75 percent of its per capita GST share.

As a result, WA is set to receive nearly $6 billion more in 2025–26 than it would have under the previous formula—despite having a much smaller population than Queensland, New South Wales, and Victoria.

Eslake called the 2018 decision “the worst public policy decision of the 21st century,” criticising successive governments for maintaining it.

Perth CBD can be seen across the Swan River while people sail catamarans in South Perth, Western Australia, on March 16, 2024. Susan Mortimer/The Epoch Times

He said the state’s leverage over GST negotiations is due to pure politics.

“Since 2016, when Malcolm Turnbull’s Coalition government narrowly retained power by winning 12 out of 15 WA seats, the state has effectively held both major parties hostage,” Eslake explained.

“From 2016 to 2022, the Coalition needed to retain those seats to stay in power. Now, Labor must hold onto them to maintain its majority,” he added.

“Ultimately, it will ensure that the residents of Australia’s richest state, WA, will enjoy better public services while paying lower state taxes than people living in the ‘eastern states.’”

With a federal election looming, Eslake said both parties remain reluctant to alienate WA voters. “It’s simple: what WA wants, WA gets.”

Ideas for Reform

Humphreys suggested allocate GST based on which state it is paid.

Another approach, supported by states like NSW, involves distributing GST based on population size. A more radical idea is reversing the roles of GST and income tax—allowing the federal government to keep GST revenue while converting income tax into a state-based tax.

“This would fix the vertical fiscal imbalance, encourage political decentralisation, and align with the original intent of the Australian Constitution,” Humphreys said.

“But I’m not holding my breath.”

Decentralising money-making would give states more responsibility over their finances and make them more accountable to voters. Currently, GST distribution issue can become a political football.

Chalmers Dismisses Queensland’s Concerns

Despite Queensland’s calls for a review, Treasurer Jim Chalmers has ruled out any immediate changes. The CGC’s recommendations, handed down last week, will stand.

Queensland state Treasurer David Janetzki branded the outcome “shonky,” urging the federal government to scrap the latest redistribution. However, Chalmers defended the process, emphasising the CGC’s independence.

“It is not unusual for state treasurers to demand more money from the Commonwealth,” Chalmers said. “I understand their frustrations, but this debate is as old as Federation.”