Business Specialist CFP | Local Government Expert | Political Adviser
Ever wondered how the GST is allocated to the states? It is based on the formula below which Premier Barnett signed up to in a GST deal with Prime Minister Howard and Treasurer Costello.
History indicates that the then WA Government including Colin Barnett did not undertake appropriate due diligence on the formula for distributing the GST to the States and in their haste to do the deal made some fundamentally “poor” negotiating decisions (eg Royalties income included but gambling income isn’t – clearly something WA loses out on in the formula and NSW and Vic gain). Also for example there are no failsafe caveats to limit the negative distribution away from supposedly rich states like WA.
There are lots of other issues about the GST which clearly show the formula is unbalanced and WA is getting a dud deal, but the Premier signed up to it.
To blame Canberra is just sour grapes and misinformation.
“The method by which this GST is distributed amongst the states is determined on a HFE basis as recommended by the CGC, an independent statutory body of the commonwealth government. The principle of HFE suggests that:
‘… [s]tate governments should receive funding from the pool of goods and services tax revenue such that, after allowing for material factors affecting revenues and expenditures, each would have the fiscal capacity to provide services and the associated infrastructure at the same standard, if each made the same effort to raise revenue from its sources and operated at the same level of efficiency.’2
The HFE model for redistributing GST revenues can be stylised in the form of a simple arithmetical expression:3
gi = (G/N) + (E/N) (ϒi – 1) + (T/N) (1 – ρi)
where g = per capita grant to state i
G = pool of GST grant funds available
N = national population
E = total expenditure of all states
ϒi = cost disability for state i
T = own-source tax revenue of all states
ρi = revenue disability for state i.
On the basis of this formula, state i receives an equal per capita share of the grant pool, (G/N), which is then amenable to further adjustments.
The first of these is the ‘expenditure need’ of the state, (E/N) (ϒi – 1). When ϒi > 1 the expenditure need is positive and tends to raise the state’s grant above the per capita allocation, while if ϒi < 1 the state has a negative expenditure need which tends to reduce its grant below the equal per capita amount.
Similarly, (T/N) (1 – ρi) is the state’s grant element representing ‘revenue need.’ If ρi > 1 the state has a relatively high income and a negative revenue need, tending to reduce its grant below its per capita entitlement. If ρi < 1 the state has relatively low income and a positive revenue need which serves to increase its grant.
In effect, the HFE formula adopted by the CGC seeks to provide a relatively higher share of grants to states that have below-average capacity to raise their own revenues and/or have to spend more to provide the same standard of public services as other states.” (Ref, Institute of Public Affairs submission, GST Review Committee, 2011)