With Western Australia emerging as an important battleground in the federal election, Treasurer Josh Frydenberg has defended now-entrenched GST reform which will this year see an extra $4.4 billion added to the state's already overflowing coffers.
The cash boost, owed to a deal struck with WA by then-treasurer Scott Morrison in 2018, is still drawing the ire of other states and territories, aggrieved that money will flow west despite one estimate putting the state's surplus at nearly $8 billion.
Without the deal, it is estimated WA would have received about $1.27 billion in the coming financial year – $4.4 billion less than what it is now expected to get.
The key piece of that deal, a floor that will ensure no state or territory receives less than 70 cents for each dollar it puts in, kicks in from the start of the upcoming financial year.
It is just one part of an overhaul WA spent years fighting for, but that remains controversial among economists.
And with the federal election looming, both the Liberal and Labor parties have been careful to pledge their support to the scheme while campaigning in the state.
'We righted the wrong': Frydenberg
Speaking in Perth yesterday, Mr Frydenberg was keen to remind all Australians that while WA would receive more money under the deal than it would have without the reform, the Commonwealth was "dipping into federal coffers" to make sure no state or territory was being left worse off.
The Commonwealth is doing so by providing top-up payments to make certain no state or territory fares worse under the new scheme.
"We did the right thing. We righted the wrong," Mr Frydenberg said.
"It wasn't fair for the people of Western Australia to get as low as 30 per cent."
WA's share dropped to 30 cents in the dollar between 2015 and 2017 because the Commonwealth Grants Commission judged WA "the state with the strongest fiscal capacity".
But that came in the aftermath of the mining boom, as the economy started tanking and the iron ore price took a greater hit than was expected.
The story now is a very different one to when the reforms were legislated four years ago, with WA currently the strongest economy in the nation.
Where other states have spent the last two years racking up debt to support their economies through the pandemic, WA has been buoyed by strong economic performance and rising iron ore prices.
Even so, Mr Frydenberg maintained the old system was unfair and had to change.
"The developments in Ukraine have seen coal prices increase, we've seen gas prices increase, we've seen wheat prices increase, all of which matters to the bottom line here in Western Australia," he said.
"But we recognise that commodity prices can be volatile, and that is why we didn't build into the budget long-term elevated commodity price assumptions."
WA is also preparing for a "significant inflexion" in global iron ore demand, something that is expected to arrive within the next decade — at least according to Peter Tinley, who recently chaired an inquiry into what the next 20 years of WA's economy looks like.
GST stance under fire
But the system continues to have its critics, both in and out of politics.
Tasmania and New South Wales have long criticised the arrangement, with new South Australian Premier Peter Malinauskas also joining in last week.
He said the Barnett and McGowan governments had both used "power politics to beat the drum" and ask for more money.
"South Australia being denied GST funds is going to have a significant impact on our budget position, and therefore the people of South Australia and the services they rely upon from the government," he said.
Independent economist Saul Eslake has long criticised the scheme, pointing to record federal budget deficits at a time when WA's budget was massively in the black.
"I think it's simply scandalous that at a time when the federal government is continuing to run record budget deficits … the federal government will be having to borrow almost $20 billion more over a five or six-year period in order to give the equivalent amount of money to the only government in Australia, one of the very few governments in the world, that's running budget surpluses," he said on RN Breakfast yesterday.
Mr Eslake also questioned whether the yet-to-be-called federal election factored into the parties' attitudes.
"Western Australia certainly has a number of important seats at stake," he said.
"That's probably why both major political parties have fallen all over themselves to appease the greed of the successive Western Australian state governments."
WA 'saved nation's finances': McGowan
Having fought to secure the new GST deal, WA Premier Mark McGowan reiterated it was only fair the state received the greater share.
"Whilst New South Wales was saying 'open the borders', had that occurred we would have had to shut the mining industry, and then we would've lost all those royalties," he said.
"We did a lot of things that were tough and difficult in order to save the state's finances over the course of the last five years, and by doing that Western Australia saved the nation's finances.
"All that money from the Commonwealth flowed into New South Wales and Victoria because we did that."
Mr McGowan also pointed out that every other state and territory continued to receive a greater share of the money they put into the GST pool than WA did.
And while he was grateful the current scheme appeared secure until at least 2026, he was keen for a commitment beyond that too.
"I just urge all sides of politics to say the existing system, by which no state can go below 70 cents, stepping up to 75 cents, will remain in place," he said.
What is actually changing?
The divvying up of GST revenue was designed to help even out differences between each state and territory's economy so that every government had an equivalent footing from which it could provide key services.
After years of campaigning by both the Barnett and McGowan governments, the Commonwealth legislated to overhaul the GST scheme in 2018, with the changes to be fully implemented by 2026-27.
The first part of that is the 70-cent floor. Since 2018, WA has been receiving top-up payments from the Commonwealth to bring it up to that mark.
Starting this financial year though, the floor will mean WA's share will come from the GST pool itself, rather than extra government money.
In two years' time, that floor will increase to 75 cents in the dollar.
But for WA's share to increase, the cuts of other state and territories will shrink. To try and offset that, the government is tipping extra money into the GST pool.
No state to be worse off
That pool is now expected to be $4 billion bigger this coming financial year, and only Victoria and the ACT will receive less money, despite everywhere but WA and the NT getting a smaller cut of the pie.
The method for calculating each state and territory's share of GST is also changing, transitioning to be based off the strongest of either the New South Wales or Victorian economies.
In total, the government has set aside $14.9 billion to ensure no state or territory is left worse off by the transition in the six years from 2021-22 to 2026-27.
In 2026, the scheme will be reviewed by the Productivity Commission to decide what happens next.
