Today I can confirm that I have decided to task the Productivity Commission to undertake an inquiry into the impact on our national economy of Australia’s system of horizontal fiscal equalization (HFE) which underpins the distribution of GST revenue to the States and Territories.
Fiscal equalisation has been a feature of Commonwealth-State financial relations since the early years of Federation. Under Australia’s current approach, the Commonwealth Grants Commission recommends a GST distribution to the States that provides each State with the capacity to provide its citizens with a comparable level of government services. The current system was agreed by all States prior to the introduction of the GST in 2000.
In recent years, views have been put to the Government that the current approach to HFE creates disincentives for reform, including reforms to enhance revenue raising capacities or drive efficiencies in spending, arguing that any gains from reform are effectively redistributed to other States. In commissioning this inquiry, the Government seeks an examination of the issues underlying these claims.
I recognise the strong advocacy from Western Australian Coalition MPs and Senators in calling for this review. They have been effective voices for their state in government.
It is important for Australia’s future prosperity that our system underpinning Commonwealth-State financial relations supports productivity, efficiency and economic growth across the country. Ultimately, all Australians benefit when the States actively pursue reforms seeking to improve productivity, efficiency and economic growth within their own jurisdictions.
Public consultation will be undertaken as part of the inquiry, and the Government encourages the States and any other interested parties to participate.
The PC is due to report to Government by 31 January 2018. The Terms of Reference will be available on the Commission’s website.