Review of GST Distribution

The Gillard Government has commissioned a review of the distribution of revenue from the Goods and Services Tax to the States and Territories.

We have appointed Nick Greiner, John Brumby and Bruce Carter to conduct the review.

The review will lead to a simpler, fairer, more predictable and more efficient distribution of the GST to States and Territories.

Instead of States facing penalties for economic growth and rewards for economic underperformance, the GST distribution process should encourage economic reform and better delivery of services, and provide States with certainty.

This will build a stronger Australian economy and make for better, more efficient delivery of essential services like schools and hospitals.

Under any changes that might be considered by the Government, we will ensure that smaller States continue to receive a fair share of GST revenue, and that States with larger economies are not unfairly penalised for success.

At present, there are a number of elements of the distribution arrangements that could be improved. Under the current arrangements, there is:

• Not enough incentive for reform – currently underperformance in service delivery and economic growth can be rewarded. As far as possible, States should not be put in the position where they can be penalised for investing in economic growth and improved service delivery.
• A need for more certainty and predictability – currently States can be hit with unexpected shocks to their finances.
• The potential for greater simplicity – current arrangements are complex and accordingly not very transparent.

The incentive for states to pursue reforms which get the best performance from their economies can be excessively dulled by the current arrangements for distributing revenue gains away to other states.

On the other hand, major errors in economic management that lead to sustained slow growth in a way that hurts a state's ongoing ability to raise revenue can be compensated.

States should have an incentive to invest in economic reform; they shouldn't be unfairly punished for success.

As well as structural problems that need to be addressed, the Gillard Government recognises the impact of shifts in our economy over time.

In particular, we recognise growth in the mining sector is increasing the discrepancy in the amounts of revenue raised by States and Territories, as well as making it more difficult to anticipate GST distribution from one year to the next.

A key principle of GST distribution is that States and Territories have the ability to provide broadly equivalent services in areas such as education, health and public transport.

This is especially important given the differences in the cost of providing services between regions.

The Review will be advised by a Heads of Treasuries Advisory Committee comprising representatives from all States and Territories, and will seek submissions from the public.  It will be supported by a secretariat within the Commonwealth Treasury, with representation from the States and Territories as well as other agencies as appropriate.

The Review will provide an interim report to the Treasurer by February 2012 and a final report by September 2012.

The Commonwealth Grants Commission will continue to serve as the independent umpire and make recommendations on the distribution of GST revenue.

The Federal Government will request the CGC to update its methodology to reflect any agreed recommendations from the Review.

The Review will not affect the distribution of the GST revenue in 2011-12 or 2012-13.

Terms of Reference
Review of the GST distribution

Objectives and scope

1. Australia is facing a number of long-term trends that are driving pronounced and challenging structural change in the economy, including:
   1. the rise of China and India, and continuing globalisation;
   2. the challenge of mitigating and adapting to climate change;
   3. population growth and demographic change; and
   4. the continuing effects of innovation and technological change.
2. In addition, Australia has ongoing challenges in tackling the entrenched disadvantage of many Australians, especially Indigenous Australians.
3. These trends and challenges are likely to have differing impacts on the ability of States and Territories (the States) to deliver broadly equivalent levels of services and infrastructure to their residents, in ways that maximise sustainable growth and improvements in quality of life for all Australians.
4. In this context, the Review will consider whether the distribution of the GST and the current form of horizontal fiscal equalisation will ensure that Australia is best placed to respond to these challenges and public confidence in the financial relationships within the Australian Federation is maintained.
5. In considering any possible changes to the form of equalisation, the Review will have regard to the following:
   1. efficiency, including the effect of alternate approaches on the allocation of resources in the national economy and on the States' reform, service delivery and investment decisions to best meet the requirements for growth;
   2. equity, including the extent to which alternate approaches would affect States' fiscal capacities to provide for Australians' access to government services, regardless of where they reside;
   3. simplicity, including the extent to which alternate approaches would provide for reduced complexity and increased transparency; and
   4. predictability and stability in the determination of States' GST shares so as to better support long term decision making and reform by Governments.
6. The Review will be guided by the following:
   1. that the long-standing practice of equalisation between the States has served Australia well;
   2. that the GST will continue to be distributed to the States on the basis of equalising payments to the States, consistent with the principle that jurisdictions should have equal capacity to provide infrastructure and services to their citizens;
   3. as per the current arrangements, all the GST revenue will be distributed to the States as "untied" payments;
   4. that the Commonwealth Grants Commission will continue to make recommendations on the distribution of the GST; and
   5. it is not intended that the Review will consider detailed methodological and data issues, however the Review will seek the assistance and advice of the Commonwealth Grants Commission on technical matters as required.

Composition and consultation

7. The Review would be undertaken by two or three eminent people.
8. The Treasurer will bring the final report to the Council of Australian Governments (COAG) for consideration before a final decision is made on new arrangements by the end of 2013.
9. The Review will be supported by a Secretariat in the Commonwealth Treasury. It is expected that the Review will second a number of staff with particular expertise, including officials from State Treasuries and the CGC. A Heads of Treasuries Advisory Committee, consisting of all States, will provide advice to the Review.
10. The Review will consult the public and State Governments and seek written submissions.

Timing

11. The Review is to provide an interim report to the Treasurer by February 2012 and a final report by August/September 2012.
12. The GST shares will be distributed in 2011-12 and 2012-13 based on the current arrangements.