Indian Tax Solution

GST: Productivity Commission proposes a softening of the edges rather than a revolution

The Productivity Commission has found that the way the GST is divided up is broken, and much of it "beyond comprehension". But it has also found something more important: that the brokenness doesn't much matter.

Treasurer Scott Morrison asked it to examine the influence of the current system on "productivity, efficiency and economic growth".

In short, the commission found there was none, or none it could find.

"In practice, it is hard to tell whether Australia's system has helped or hindered productivity and growth," its report says.

In part that's because, despite all the angst about the carve-up of the GST, the carve-up is small in relation to the size of state governments.

There's less than $8 billion moved around each year, out of a total GST cake of $60.7 billion. The states themselves, with local governments, raise the best part of $200 billion. The Commonwealth raises almost $300 billion. It's worth arguing about, but it isn't enough drive behaviour.

Morrison asked whether the GST carve-up rules were impeding the movement of capital and labour across state borders. The commission found that people move interstate "for a range of reasons". GST distributions were "unlikely to play a significant role".

So unimportant did the commission find the GST formula that it flirted with the idea of scrapping it entirely and simply doling out the GST on the basis of population. It was a recommendation of Tony Abbott's 2014 Commission of Audit. The disadvantaged states – South Australia, Tasmania, the ACT and the Northern Territory – could apply for extra top-up funding directly from the Commonwealth. The commission rejected the idea only because it thought the top-up funding was "unlikely to be forthcoming".

Instead it has settled for for modifying the extremes of the system we've got. Instead of falling as low as 30 cents out of every dollar collected from Western Australians, Western Australia's GST payment would only fall to 87 cents.

The change would give poor states only the average financial capacity of the other states, or the capacity of the second-best, rather than the best.

The commission's idea isn't new. Up until 1981 it's how the Grants Commission divided the pie, redistributing merely enough to allow states to function "at a standard not appreciably below that of other states".

Morrison is keen. Whereas previous treasurers have treated the distribution of the GST as political Kryptonite, saying it was up to the states to agree on a change (knowing they won't) Morrison is prepared to get his hands dirty. He needs to consult the states on the change but he doesn't need them to agree. Although it wouldn't take effect until 2020, he is likely to get the ball rolling next year.

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