Economics

The GST Redistribution Deal

The GST redistribution debate in Australia highlights tensions between wealthier states like Western Australia and smaller states such as Tasmania. While a 2018 reform guaranteed WA a GST minimum, it has led to funding pressures on poorer states. Critics warn of a long-term imbalance as federal top-ups expire by 2027, raising concerns over equitable public service access.

Published

11 months ago

May 30, 2025

Today we’re diving into a debate that’s slowly creeping back into public discourse in small circles—Australia’s GST redistribution deal. Originally designed to stabilise the budget of Western Australia, experts such as Saul Esklake and former Liberal Treasurer Michael Ferguson believe it’s become a political tool, and arguably a battleground between Australia’s richer and poorer states, with claims the current system is punishing smaller states like Tasmania, South Australia and the Northern Territory, while benefiting Australia’s Largest state…western australia. But why was the deal introduced in the first place? Why is it being contested now? And is it fair?

The GST—or Goods and Services Tax—is a 10% tax on most goods and services in Australia. It’s collected by the federal government and is redistributed to the states and territories to fund essential services like hospitals, schools, and infrastructure along with other grants the federal government provides to the states.

But here’s the key point: the GST is not divided up equally. Instead, it’s distributed based on a concept called Horizontal Fiscal Equalisation, or HFE.

HFE tries to ensure that all Australians, no matter where they live, can access similar levels of public services. That means wealthier states—like WA during the mining boom—would get less GST, and less wealthy jurisdictions—like Tasmania or the NT—would get more. But that principle hit a brick wall around 2015.

At the time, Western Australia’s share of the GST had plummeted to just 30 cents per dollar of GST raised in the state—largely because it had become incredibly wealthy off the back of the iron ore boom. Under the equalisation system, that wealth meant it was expected to rely less on GST, so it received a smaller slice with the rest redistributed to the other states.

WA was not happy about this arrangement. Both sides of politics in the state argued it was being punished for its success, sharing the sentiment similar to resource rich states around the world like Alberta in Canada, who believe they were being exploited by the rest of the nation. Pressure grew on Canberra to “fix” the system. Politically, WA was too important to ignore, and the GST system became a serious point of contention in federal elections. In 2018, under then-Treasurer Scott Morrison, the federal government introduced a significant overhaul. The solution? A “floor” in the GST distribution.

This meant no state would receive less than 70 cents per GST dollar—eventually rising to 75 cents. In effect, WA was guaranteed a baseline return, no matter how wealthy it became.

To make it work without immediately hurting other states, the federal government topped up the GST pool with transitional payments—billions of dollars in federal funds were used to compensate the states losing out.

It was framed as a “no loser” deal, and it was guaranteed both through liberal and labor reforms that no state will be worse off. But those transitional payments are temporary. The real test? 2027, when the federal top-ups begin to expire. Fast forward to today—and things are starting to show in state budgets in Queensland, South Australia and especially Tasmania.

A new analysis from independent budget watchdogs including well received economist Saul Eslake and state treasuries shows the smaller states are already feeling the pain. The formula, with the GST floor in place, in their view is distorting the balance of redistribution. And WA? It’s collecting record royalties from mining, billions in surpluses, and still receiving more than it otherwise would under the old system.

Meanwhile, states like Tasmania, South Australia, and the Northern Territory are now warning that the 2018 reform is creating a structural imbalance. In short, their budgets are under pressure, and they argue they’re being short-changed.

Here’s the problem: the GST floor protects WA when it’s booming—but no such floor protects the smaller, less wealthy states when times are tough.

Economist Saul Esklake warns that the floor creates a disconnect between wealth and redistribution. WA could theoretically become the richest state in the nation—and still receive billions in GST support—while poorer states fall behind.

With extended federal payments made by the 1st Albanese government lasting until 2030, the cost of keeping WA’s GST at the floor will fall directly on the other states every year after that period.

A recent report by the Parliamentary Budget Office estimates that over the next decade, WA will benefit by more than $30 billion under the current model—money that would otherwise go to less wealthy jurisdictions. States like Tasmania that have 75% of their revenue dependent on federal government support, with around 39-40% of that budget dependent on GST alone could see the state at least $100m worse off each financial year from 2030 onwards.

State treasurers from across the east and north have written to the federal government demanding a review of the GST floor before 2030. But WA’s Premier Roger Cook and Treasurer Rita Saffioti have said the deal must be respected, warning that any changes would be “a betrayal.”

Federal Labor, caught in the middle, is under pressure to respond. Prime Minister Anthony Albanese has so far refused to re-open the deal—but as tensions escalate, the political cost of doing nothing or taking action to reform the deal is rising.

With the next federal election likely to be in sight of the “no worse off guarantee” expiry, the GST could once again become an election issue—particularly in states like South Australia and Tasmania. Although due to this being an often underreported, complex and politically unpopular issue it’s unlikely that we will see significant changes going forwards, as WA is often quoted as being the State that often determines who wins the federal election.

So, where do things stand?

WA is winning big under the current GST system.
Smaller states are warning of a funding crunch as the deal matures.
Federal top-ups are masking the problem—for now.
And in 2027, everything changes.

The question is no longer just whether the 2018 fix was fair—it’s whether it’s sustainable in the long run.

The challenge for policymakers is to balance WA’s historical grievance with the original purpose of HFE—to ensure that no matter where you live in Australia, your access to public services isn’t determined by your postcode.

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