Goods and Services Tax (GST) is levied by the Federal Government of Australia and the total GST revenue collected is distributed to the States and Territories to fund their services and associated infrastructure. The Commonwealth Grants Commission (CGC) is responsible to manage the distribution of GST revenue to achieve Horizontal Fiscal Equalisation (HFE) amongst the States and Territories.
The CGC defines HFE as “State governments should receive funding from the pool of GST 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 own sources and operated at the same level of efficiency.”
Australian States and Territories have varying levels of population density, economic activities and remoteness which impact on GST collection and cost of providing services. The HFE aims at distributing GST revenue to facilitate the provision of services to all Australians including remote locations at the same standard. This necessitates the sharing of GST revenue with States/Territories of less fiscal capacity to fund services.
In a final report by the Productivity Commission released on 5 July 2018, the Government proposed a plan to update the way the GST is distributed to reflect changes to the economy since the GST was introduced on 1 July 2000. This plan would improve the resilience of the HFE system against economic shocks and reduce volatility in GST relativities amongst the States and Territories.
To ensure a fair and sustainable transition to the new equalisation standard, the Federal Government would provide an additional and direct boost to the GST pool. They will allocate an extra $7.2 billion to ensure no state is worse off under the new fiscal equalisation benchmark.
The plan has 3 phases and runs from 2019-20 to 2026-27. In Phase 1, the Federal Government would provide funding over three years from 2019-20 to 2021-22 to ensure that no State receives less than 70 cents per person per dollar of GST for their State. This funding would be untied, allowing recipient State governments to spend it as they see fit to deliver services such as transportation, schools, hospitals and infrastructure in their States.
In Phase 2, a within-system GST floor would be introduced in 2022-23 to ensure no State can receive less than 70 cents per person per dollar of GST. Two years later, in 2024-25, this floor would be increased to 75 cents per person per dollar of GST. No State’s relativity is expected to fall below 0.75 after 2024-25 on current projections.
Phase 3 will realise the completion of the transition to the new equalisation benchmark. In 2026-27, the Federal Government would continue to boost the GST pool to ensure that all States and Territories would be better off, with additional funding every year from 2019-20 to deliver essential services. A 0.75 within-system relativity floor would be a permanent feature of the HFE system in Australia.