Views on the bill
General views on the bill
There was enthusiastic support for the proposed changes to the
horizontal fiscal equalisation (HFE) system from the Western Australian
The Western Australian Government strongly supports the
passage of the Bill. The current GST distribution system is broken and needs to
While the Bill is expected to give Western Australia lower
funding than the changes recommended by the Productivity Commission, Western
Australia accepts the reforms as a reasonable and pragmatic response.
The Hon. Mark McGowan, Premier of Western Australia, provided a personal
endorsement of the proposed changes:
...I do think that the outcome that has been reached, which is
by necessity a compromise, is a good compromise and a reasonable compromise and
ensures that no state is worse off. It does largely resolve the issues
confronting Western Australia.
Various bodies representing the business community also supported the
proposed changes to the HFE system. For example, the Chamber of Commerce and Industry Western Australia (CCIWA)
outlined some of the benefits from the proposed HFE system update:
Reforming the distribution formula of the GST is in the
national interest and can stimulate national economic growth by strengthening
development incentives for all states.
The proposed legislative change to equalise to the higher of
New South Wales or Victoria will minimise the adverse effects of outlier
outcomes, such as a mining boom, from the equalisation task. It will also
restore Western Australia's incentive to develop its own economy.
Mr Rick Newnham from CCIWA provided an interesting perspective:
There are really good reasons why we don't equalise
everyone's personal income in Australia to the same point, because again, it
removes the incentives for people to get out and have a go. For the same
reasons, states shouldn't necessarily be equalised to exactly the same point...
Similarly, the Minerals Council of Australia welcomed:
...the Federal Government's initiative to reform the GST
distribution which has for some time not delivered an equitable share of
funding to states that promoted economic growth through the development of
their natural resources.
Rio Tinto submitted that:
The legislation provides a more stable and predictable source
of revenue for all States and Territories and helps ensure states that develop
their natural resources are able to retain a greater share of the benefits.
But less enthusiasm was forthcoming from other states for a change in
GST distribution arrangements.
The Tasmanian Government remains of the view that the current
system of HFE is not 'broken' and that the PC did not make a convincing case
that it needs changing.
The Northern Territory Government is a strong supporter of
the current definition of Horizontal Fiscal Equalisation (HFE) and strongly
rejects the view that the current system is broken.
Victoria considers the Commonwealth's proposal to be inequitable,
as it moves away from the principle of giving each State the potential to fund
government services to the same standard.
The Palaszczuk Government is a strong supporter of the
current system of horizontal fiscal equalisation.
The claim that the current equalisation system is broken has
been made by a variety of commentators and political leaders. This view is not
shared by the ACT Government.
New South Wales Government
New South Wales has always played a key role in supporting
the smaller states, however it is not responsible for funding states that
receive revenue windfalls from its resources and then fail to plan for the
The South Australian Government has been a long standing
supporter of the current objective of horizontal fiscal equalisation (HFE),
which is to provide states and territories with the capacity to provide
services and the associated infrastructure at the same standard...
In line with these views the South Australian Government's
preferred position is that the current GST distribution arrangements are
Ms Kate Phipps from the Treasury drew attention to the fact that an
extensive and independent review had been undertaken by the Productivity
Commission (PC), which did find that while there was support for the principle of
HFE there were advantages to moving to a new standard of equalisation, consistent
with that contained in this bill:
As you would be aware, the Productivity Commission undertook
a review of horizontal fiscal equalisation. The PC found that there was
unanimous support for the principle of HFE across all jurisdictions and all
states and territories, but the PC also recommended that there were advantages
in moving to a standard of reasonable equalisation rather than full
equalisation, and the changes that are implemented through this bill represent
One submission argued for a complete overhaul of the GST distribution
system. The Institute of Public Affairs believed that equalisation should be
abandoned as a policy objective:
In its place, the principles of decentralization and
competitive federalism should be adopted. To unlock the benefits of competitive
federalism, the states would require the power to set the rate of GST that
applies in their respective jurisdictions, with an associated entitlement to
claim the proportion of the GST that is attributable to that particular state.
Specific comments on the bill
Concerns about forecasts and
Many state and territory governments raised how GST relativities are
forecast. Mr David Martine from the Victorian Department of Treasury and
Finance noted that:
It is important to understand that neither the Commonwealth
nor the states forecast relativities past two years. Beyond that, forecasters
formulate projections which generally assume a return to long-term trends...
The Tasmanian Government provided its interpretation of the methodology
adopted by the PC:
...the PC failed to take into account that relativities are
generally very volatile. For this reason States generally do not forecast
relativities beyond the Budget and Forward Estimates period and if they do,
they are heavily caveated...
The PC has also assumed the States' relativities trend to
their long term average at the end of the Forward Estimates period.
...while projecting an increase in Western Australia's
relativity, the PC has not projected a corresponding decline in other States'
relativities. This outcome is not possible under the GST distribution
methodology and the assumption would appear to distort the 'zero sum' outcome
of the GST methodology where any financial distribution to one State must be
offset by a redistribution away from other States.
However, Mr Simon Atkinson from the Treasury confirmed the forecasts are
based on ten year Budget projections, using relativities from the PC:
...our modelling of the government's proposal is outlined on
page 21 of the government's interim response, and that's based on the PC's
modelling, which is based on our central projection that underpins the
Commonwealth budget and the 10-year forecasts as well.
A number of state governments noted that there are various feasible
alternative scenarios, based on different assumptions, which would appear to
indicate that the proposed changes to the GST distribution may be detrimental,
rather than beneficial, to the fiscal position of some states.
Modelling undertaken by the Victorian Government illustrated that:
...most States could get less GST in future years compared to
the current distribution method based on several scenarios. Therefore, the use
of forecasts to determine the compensation required for States may still result
in a negative financial outcome for an individual State.
Similarly, the South Australian Government noted that:
Modelling undertaken by the states and territories shows that
under different assumptions jurisdictions could be worse off as a result of the
new arrangements with an overall reduction in GST revenue compared to what
would have been delivered under the current arrangements.
While acknowledging that the relativities presented in the Australian
Government's policy response to the PC report were not fixed, Mr Simon Atkinson
from Treasury noted that:
...if you fundamentally change the relativities you actually
need to understand what economic circumstances would have driven those and
calculate through the other side of the equation.
Hence, in relation to the alternative scenarios modelled by the states:
The challenge with those scenarios is that they just deal
with relativities. They don't model the full range of economic parameters that
would need to shift to create those relativities and the flow-through that that
would mean to the GST pool, which is fairly fundamental in the calculation to
how much funding each state gets.
No worse off guarantee
With such a significant proposed change to the GST distribution system,
Mr David Martine outlined the position of those states and territories that
would not be unambiguously better off under the updated HFE system:
...the challenge for most states and territories has been to
ensure that we receive at least as much GST going forward under the proposed
new methodology as we would under the current system.
While welcoming the insertion of the 'no worse off' guarantee into the
bill, the Victorian, Tasmanian, Australian Capital Territory and Northern
Territory Governments advocated for the extension of the guarantee in
The Victorian Department of Treasury and Finance undertook analysis of
the proposed update to the HFE system and concluded that:
...without a guarantee that is enforced in perpetuity, as a
result of enacting the Bill most States may be financially worse off beyond the
transition period, possible substantially so.
Noting the Australian Government's reluctance to provide a guarantee
beyond 2026–27, Mr Martine argued that:
...part of the policy rationale by the Commonwealth in making
this change...is that they make the statement that the original architects of the
GST distribution system could not have envisaged GST relativities changing so
much over a period of time...In that world, it is a bit hard to accept a
proposition that the architects of the new system can be so certain that the
GST relativities can be projected for the next eight years, 10 years, and even
20 years. That's why the ongoing guarantee is important.
If the Commonwealth wants to make this change and say it is
not going to affect anyone, then the guarantee should be in perpetuity.
Concerns were also raised about the cumulative nature of the guarantee.
The Northern Territory and Queensland advocated for the guarantee to be applied
to single years, rather than over the entire transition period as outlined in
The New South Wales Government submitted that transparency of the
operation of the guarantee would be welcome:
This could include publication by the CGC [Commonwealth
Grants Commission] of the old and new relativities directly after they have
produced them rather than waiting for the Commonwealth Treasurer's permission
for those to be released.
Mr Martine echoed these sentiments on behalf of the Victorian
Our view would be that transparency and visibility are really
important. There's nothing in the legislation that actually says that the CGC's
calculations of the old system would be made available to the states, or even
made public. So, transparency is very important, along with a stronger role for
the CGC to be determining what additional amounts would be to honour the
guarantee commitment in the legislation.
In response to the concerns about transparency, Mr Chris Leggett from
Treasury noted that:
Section 25 of the Commonwealth Grants Commission Act, requires
Commonwealth Grants Commission reports to be tabled in both houses of
Parliament and, at that point, they all become publicly available.
However, not all stakeholders considered that a 'no worse off' guarantee
was required. For example, CCIWA did not believe that the guarantee was
necessary and could be a costly drain on the federal budget:
The proposed legislative guarantee could prove to be an
expensive liability for the Commonwealth Government. In effect, it transfers
the risk of a diminished GST share away from the leading state other than New
South Wales and Victoria (currently Western Australia) to the Commonwealth
Government in the instance of an outlier event, such as another mining royalty
boom for Western Australia.
Discretion afforded to the
A number of states, including New South Wales, raised concerns about the
scope of ministerial discretion in decision making.
The Victorian Government noted that the proposed legislation:
...gives the Treasurer significant discretion in determining
whether a State is to receive a payment under the no worse off guarantee. In
- an assessment of the GST that a
State would have otherwise been entitled to if the Bill had not been enacted,
is based on 'the Minister's opinion'; and
- in forming this opinion, the
Minister must only 'have regard to any report of the Commonwealth Grants
Commission that the Minister considers relevant'.
Similarly, the Queensland Government was concerned that the discretion
afforded to the Minister's opinion was too subjective in its application and
should be replaced by a more objective test where the Minister is 'reasonably
However, the Australian Capital Territory Government viewed the approach
taken by the bill 'as a sound and practical way of implementing the
Commonwealth's 'no worse off' commitment'.
Mr Chris Leggett from the Treasury gave a comprehensive response to
allay the concerns raised by the states:
I think we would say it's perhaps incorrect to characterise
the description 'in the minister's opinion' as giving the minister a
discretion. It's consistent with the drafting of the bill and its current
framework in the Federal Financial Relations Act, which gives the Treasurer the
sole responsibility for making decisions and determining entitlements under the
act. The wording that we've chosen, which is 'in the minister's opinion', is a
very common drafting technique at the Commonwealth level—for example, one of
the income tax assessment acts uses the term over 150 times to describe actions
by the Commissioner of Taxation.
We use that in situations where the decision-maker is making
a decision under an act that has to weigh a number of competing factors; where
they have to make assumptions about facts they aren't aware of or can't get
information on; or to determine an outcome in a hypothetical scenario. The last
particular case is the one here, which is, with the no-worse-off guarantee, the
Treasurer, as the decision-maker, has to determine what he would have done in
the hypothetical world of not passing this act. Only the Treasurer is in the
position to know what he may have done in the hypothetical world of not passing
this act. Only really the Treasurer is in a position to know what he may have
done in that particular hypothetical world.
That said, the technique doesn't provide discretion in the
sense that the states have used it. The Treasurer can't just decide not to
provide or to calculate any random number. His actions have to be consistent
with parliament's clear intention as set out in the bill and explanatory
materials, and he has to do so, having regard to the advice from the
Commonwealth Grants Commission, from us and from the states and territories as
part of his consultation arrangements. His actions have to be considered
reasonable from the court's position.
Review of the updated HFE system
Stakeholders generally welcomed the proposed review of the updated
system by 2026. The ACT Government supported an independent review of the new
system once it is fully operational.
Similarly, Rio Tinto believed the review to be:
...the appropriate place to consider any further reforms that
may be required to support states in the development of their natural resources
and embed incentives in the GST system to encourage economic development.
However, several state and territory governments expressed reservations
about the proposed review of the HFE system by the PC.
The Victorian Government considered the aims of the proposed PC review
to be unclear given that 'intent' is not defined, nor how 'efficiently' and
'effectively' will be measured. Further, it questioned the value of the PC
review as no indication was given of how the recommendations of the PC's report
would be applied by the Treasurer. Similar concerns were expressed by the New South Wales Government.
The Northern Territory Government considered that:
The Commonwealth Government should waive its right to hold
the PC inquiry final report for 25 sitting days, instead releasing the report
immediately to the states to ensure any future negotiations around the HFE
system are conducted in a prompt manner.
Likewise, the Queensland Government called for the final inquiry report
from the 2026 PC inquiry to be presented to the Council of Federal Financial
Relations immediately on its completion.
The Tasmanian Government provided the most pointed comments on this
issue to argue that the PC should not undertake the review at all:
Notwithstanding that the PC was unable to demonstrate that
the current system was detrimental to national productivity, efficiency or
growth, it recommended a broad ranging suite of reforms that would benefit one
State at the expense of all other States.
Given its demonstrated knowledge and evidence-based approach,
the Tasmanian Government considers that the CGC is better placed to undertake
the review proposed to be undertaken by the PC...
The Minerals Council of Australia recommended that the PC review be
brought forward to align with the Commonwealth Grants Commission's major update
of distribution methods that is scheduled for 2025.
Australia's system of horizontal fiscal equalisation provides an
important source of revenue to the states and territories. While the HFE system
works relatively well, it can deliver perverse outcomes that discourage states
and territories from reforming their tax bases and pursuing some policies that
could boost economic growth.
Given the GST distribution system has not been updated since it was
introduced in 2000, the committee welcomes the transition to a new GST
distribution system as outlined in the bill. The system will continue to
provide Australians with access to vital government services no matter where
they live, but also provide states and territories with incentives to undertake
reform and foster economic growth. The committee notes that the Australian
Government will inject an additional $9 billion in untied funding to the
GST pool over the next ten years, and that this will not come at the expense of
existing payments to the states.
The committee acknowledges the concerns raised by the states and
territories regarding the implementation of the updated HFE system but
considers that the 'no worse off' guarantee provides a safety net during the
transition period. Further, the legislated inclusion of a completed
Productivity Commission inquiry by December 2026 gives all stakeholders an
opportunity to reflect on the updated HFE system and argue for ongoing
improvements following the transition period.
The committee recommends that the bill be passed.
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