GST: why NSW does not get its fair share

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Rumour has it only two people in the world possess the magic formula for Coca-Cola.

I have a sneaking suspicion those two people work in an obscure Canberra bureaucracy, the Commonwealth Grants Commission (or CGC), because that is the body that also presides over the equally mysterious formula used to divide GST among the states.

The GST formula is hidden in plain sight on the CGC website, running to about 25 pages, all completely indecipherable to the average person.

You’d have a better chance guessing how to make Coke than predicting how the GST will be carved up in any given period.

Over the next year NSW taxpayers are expected to fork out more than $20 billion in GST payments – but only get about $17.5 billion back to spend on the services and infrastructure we need.

Exactly why and how the CGC decides about $3 billion in tax paid by NSW taxpayers should get reallocated to other states comes down to that magic formula – the outcome of a system that the Productivity Commission yesterday called “beyond comprehension”, “poorly understood”, and plagued by “confused accountability”.

This is a serious problem, because GST revenue is a vital source of funding for the states, accounting for about a quarter of their budgets.

When it was introduced, the GST represented a good-faith bargain between the states and the Commonwealth: the constitution doesn’t allow the states to levy their own GST, so the Commonwealth would raise the tax on the states’ behalf, in return for the states abolishing some of their own less efficient taxes.

That is: ultimately the GST belongs to the states.

You might think that means state governments have a genuine say in the way GST revenue is divided.

You’d be wrong.

The states themselves have no direct control over the work the CGC does, even though that work has a massive impact on the services state governments are required to provide.

State governments are accountable to their citizens.

The CGC is not – in fact, most people don’t even know it exists.

To solve the accountability problem, the NSW government has recommended a simple fix: give state Treasurers direct oversight of the CGC’s work.

Disappointingly, the PC has rejected that proposal as too “radical”.

Its alternative solution is to double down on the problem: increase Commonwealth government oversight, and give the CGC a PR budget.

That won’t fix the accountability deficit.

The most pressing reason we need more transparency over the GST carve-up is that the current system is making things worse, not better – according to the OECD, it is entrenching economic disadvantage among the weaker states, rather than making them stronger.

The PC report shows that the states receiving the biggest shares of GST – to compensate for their greater need – in fact grossly underspend in those areas.

For example, South Australia spent less than a third of the amount the CGC said it needed to on housing, and less than half the necessary amount on roads. Tasmania spent just over a third of its assessed need for community services, while the Northern Territory spent just two-thirds of the amount it apparently needs for welfare services.

In each case, the money assigned to these states on the basis of need doesn’t go to actually fixing the underlying problem, so it persists. In this way, the CGC rewards states that maintain economic disadvantage and pursue policies that drag on growth.

That’s not a formula for a stronger Australia.

Our nation will be at its best when each state is going full throttle down the path to individual economic strength, each increasing its capacity to stand on its own two feet.

Our tax system must empower states to be masters of their own destiny, not subject to the vagaries of an unelected, unaccountable bureaucracy and its alchemic formula.

The GST carve-up should play its part, driving each state to a secure, independent economic and financial footing, not papering over chronic but rectifiable weaknesses.

To make that happen, the states must play an active role in the process and hold one another to account, using GST to meet genuine need, while also pushing one another to positions of greater strength.

That’s why NSW will be calling on the PC to revisit our proposal of a Board of State & Territory Treasurers to oversee the GST carve-up.

All of this raises broader questions about the current state of the entire federal system when it comes to the taxes we pay, the services governments provide, and the way they are funded – something the PC has acknowledged in its report.

Resolving the broader federal question is something NSW strongly supports, and something our government will be keen to drive.

But in the meantime, it is time to shine the light on the CGC and return the GST to the states.

Dominic Perrottet is the NSW Treasurer.