5 July 2018
Transcript - #2018140, 2018

Press conference, Canberra

Subject: All States and Territories better off from a fairer way to share the GST

TREASURER:

Today the Government is announcing our interim response to the Productivity Commission report, which I had commissioned, to look into the issue of horizontal fiscal equalisation - in other words, the fair go principle that has been used, since Federation, to ensure that all States get a fair share. Stronger States support the less fiscally strong States to ensure that the essential services that all Australians rely on, the support is there in every state and territory to deliver those. It's an important principle, it's one this government supports, and must remain part of the system.

At the same time, we know that the system is broken. It does need to be fixed. There are very inequitable outcomes that have resulted particularly over the last decade. This issue has been kicked down the road in the past. That has to end. There's been plenty of reports in the past and no action taken. It's important we move to a new system, and that's what I want to outline to you today. So I think what's best is if I just take you through the presentation and then we can go to any questions. You've all had the opportunity, I think, to look at the interim response document now, and you've had the PC report for the last day or so.

What's important, I think, for me to stress, though, is I want to really thank the Productivity Commission for the work that they have done. We've ultimately accepted eight of the nine recommendations of the Productivity Commission report. But more importantly than that, without the work the PC has done to actually, for the first time ever, be able to project forward what the relativities are for each state and territory over the next eight years, it would not be possible to make assessments about what systems would be better or worse off in the future. That has been one of the most important pieces of the work that Karen Chester and the team at the Productivity Commission have done, and I want to sincerely thank them for the great work that has informed everything that we have decided to do.

So why don't we move through the presentation? Some obvious basics - around about a quarter of what the States - this is 17-18 numbers, the most recent year - of their total revenue comes from the GST, but as you can see that varies from state to state. It's around about half of the revenue up in the Northern Territory, but around about 10 per cent in WA. The money they get from the Commonwealth, which is around about 50 per cent of their budgets, half of that comes from the GST. That's distributed using the fair go principle, but you can see the other specific purpose payments, national partnership payments, which are done by negotiation, the specific purpose is done on an equal per capita share, it is needs based as you know for quality school funding, the national health reform funding, that's done on activity basis. The money that's provided by the Commonwealth to the States is done on a range of different basis, some of it activity, some of it per capita, but the majority of it, which comes from the GST, is done using this fair go principle.

About half of what the Commonwealth has provided to the States has been provided, as you can see, over a much longer period of time. So the GST makes up half of what has been provided to the States by the Commonwealth, and you can see that once the GST came in, you've had a much more consistent total amount of contributions made to the States. But you can take this all the way back to 1901.

Over that period of time, over the entire period of our Federation, there have been two States that have been subsidising all the other States, and it's always been New South Wales and Victoria, and as you can see, they've been pretty close over that period of time. They are the critical mass economy States, they are the ones with the economic base that effectively provides the ballast to the Australian economy. You can see there that while Western Australia had been for quite a long time a beneficiary of the fair go principle, what has happened more recently has dramatically changed that.

Now, we can't give the country too hard a time on this. For its failures more recently over the last decade, our system of fair go principle is actually world's best. There are plenty other federations, whether they be in Germany or Canada or Italy, that try and do the same thing, and their system doesn't work as well as ours. Yes, there are weaknesses in the system, and it should and must be improved, but when it comes to the fair go principle of ensuring that whatever state you live in, we are ensuring the fiscal capacity is there to get the services you rely on, Australia does it better than anyone else, and now we are going to do it even better.

What you can see here is what the relativities have been by all the States and Territories going back to the early 80s. There have been a lot of changes to how this has been done over time and the last big change to this was done when the GST was introduced almost 20 years ago. But what you can see is when everything started to go pear shaped in this formula was when the effect of the minerals boom, the mining boom, started to affect the relativities. For a long time, everything was going along swimmingly. People could largely predict what was happening. But when, under the formula, Western Australia shot to the top of the pack because the minerals component of what was going to their economy was just so much bigger compared to the overall size of their economy, the volatility of Western Australia then basically affected the entire rest of the system. Now that's what the Productivity Commission had highlighted in their previous report, and so the problem here is that the GST system was never built, the redistribution system, to cope with a big shock like a minerals boom. And the volatility that it caused in one state then washed across all the other States, creating a lot of erratic movements in the relativity measures. This is basically the heart of the problem. Technically, you could have the smallest of all, the Northern Territory, have a massive economic positive shock to its system, and it's not impossible theoretically that it could jump to the top of the list and start affecting all the other distributions. So having a solution that actually ties it to the ballast States is a much more practical way of ensuring the volatility is stripped out of the system.

Now this shows what I've just talked about. The blue line here is the task that is needed in dollars to redistribute money between the States and Territories. The green bars there are the percentage of the entire GST collected that has to be distributed amongst the States and Territories to equalise everything out. Before the minerals boom, the percentage of the GST that had to be basically redistributed was around 10 to 15 per cent. When the mineral boom hit, that went up, as you can see there to 70 per cent. So the churn in the system became quite frankly ridiculous, and you had $40- 45 billion worth of GST now swirling around in the system when previously it was only about less than $10 billion. So that's why you are getting these huge swings back and forth. That makes it very hard for States and Territories to forecast what is going to happen in their budgets, and when it's about a quarter of your budget on average for everyone, and up to 50 per cent in the Northern Territory, that creates a real problem. So my point is there a problem.

Let's play spot the difference. Everyone else's was going up, pick the one that was going down. Western Australia went from getting over $4 billion a year out of GST, which was about on parity, about $1, and they fell to less than 30 cents in the dollar. At the end of the day, in Western Australia, they were getting $2.3 billion from the GST, as distributed by the Commonwealth Grants Commission, which was actually less than Tasmania. It was actually also less than the Northern Territory, despite the fact that Western Australia has 10 times the population of the Northern Territory. Now anyone who can look at a set of numbers that says that and says the system is working can't add up. So that demands that we fix the system. You can't walk past that chart and say, we can't do anything and not do anything on a permanent basis to structurally fix this problem.

As you throw it out across the States and Territories, New South Wales, Victoria, Queensland, the larger States, but I note that Queensland still has a relativity share, last year at $1.19, which means

Queensland is subsidised by the other States and Territories. That has come down in the most recent figures for 18-19 but it is still above $1.10. But you've got Western Australia down here at 34 cents per dollar in the most recent redistribution achieved in 17-18, and as you can see the actual amount of dollars they've got, less than Tasmania, less than the Northern Territory and less than South Australia.

We've already been taking action as a government since we came to office to deal with part of this problem, and that is, you've got to make the pie bigger. If the pie is bigger, everyone is getting more, and regardless of what their share is, except Western Australia. And what we've done on digital transactions, low value threshold goods, all of these things, and I announced this in the budget, that over the next four years the GST pool is going to grow by $6.5 billion specifically because of the decisions we have taken as a government. If we hadn't done that, that's how much the States would have been worse off by over the next four years. Now that's all built into the pool now. Everything you will see today in terms of our forward projections of the pool all includes the things we've done. But it's important to note that that alone has had a far bigger impact, many times over any of the changes well talk about today, by making the pool bigger, making the pie bigger, then all the States and Territories benefit.

The biggest risk to the GST of any state in the future is actually, with an improved formula, it's not the formula, it's that the economy doesn't grow. A weaker economy will lead to lower GST revenues, and lower GST revenues for the States and Territories. So hospitals, schools, essential infrastructure, police - if you don't have a stronger economy, then there will be less money to the States for those things from the GST. This is why the Budget was about a plan for a stronger economy, and this is why we make the note about having lower taxes for the economy because that produces a stronger economy, which is good news for the States and Territories on GST.

So what have we got to do to fix this? First of all we are affirming our commitment to the fair go principle. If you are living in Tasmania today, if you're living in the Northern Territory, South Australia, the ACT, less so, because they are pretty close to average, equal - you should be assured that the Turnbull government supports the fair go principle of horizontal fiscal equalisation, and that's a bedrock thing that has to be achieved in our solution. Secondly, when changing the system, we have got to ensure minimal disruption. To try and do it in a way that is smooth and easy so you don't get the volatility and use the tailwinds of the system improving anyway to help fix the problem. Thirdly, you've got to deal with this volatility issue. You can't have a system that allows an outlier for whatever want of circumstances to come and crash the whole show. You've got to give it a more stable basis to be underpinned by. And fourthly we want to ensure that all States and Territories are better off because, when they are better off, that is the guarantee for the essential services on hospital, schools, police and essential infrastructure.

The PC have made nine recommendations. We've accepted eight of them. I'll take all eight of those recommendations to the next meeting of the state and territory treasurers, which I propose to be in September, and consult with them on all of those eight, and I would hope we could move forward on those. I think they are practical, helpful, housekeeping type improvements which I think will provide greater certainty and transparency for how this thing is run.

The ninth recommendation which deals with their recommendation to take us to the average of all States, is not one we are prepared to go forward with. But I note the Productivity Commission themselves say in the report, that option is "not unambiguously any better than any of the others". They think it's an improvement versus the others but this is not a stark recommendation in terms of the other options on the table.

Now I mentioned before at the outset, one of the most helpful things the PC have done is they've projected out where those lines will go out over the next eight years. No-one has ever done that before. What they did was is they basically they spoke to all the States and Territories, and they reconciled the information provided to them because, as I said, if all States and Territories said 'our share will be less', well that would mean that the Commonwealth must have held back money. Well they can't all be less because the numbers have to reconcile with each other. It's one system, it's one balloon, and so, if one says they are less, then another one is going to be more, and what the Productivity Commission has done is reconciled all of those views as best they can. One of the most important next steps is to re- interrogate that data with all the States and Territories. Everybody puts their projections into the middle of the room where everybody can see them and we can get a common dataset to make even more finite decisions.

All their relativities are going to change anyway, and you can't compare what's going to happen to a formula based on what it would have meant five years ago, because the circumstances of five years ago you can't assume are going to be the circumstances five years from now, which is what the Productivity Commission has taken into account. What you can see here is the change to relativities of what the PC option of equalising to the average is, and you can see there's a gap between every single line. Some better off, like New South Wales and Western Australia, but everyone else worse off, and worse off quite considerably in some cases. You don't have to move those lines by much, particularly in a larger state, for it to have a big impact.

You can see there the change, this is from the PC Report, the difference in the relativity shares, of each state and territory, and you can see every single state and territory worse off other than New South Wales and WA, and in some cases like in Queensland, quite dramatically, ending up going from $1.11 to just $1.01. The Northern Territory, equally massively affected $4.91 down to $4.84, Tasmania significantly affected, $1.75 down to $.1.66. South Australia similarly - I don't need to labour it. The scale of that change would have been enormously disruptive, and in order to try and compensate, massively expensive. I understand why they were recommending that, but making change is all about what you can actually do. It's not a theory. In politics you have to actually do things and bring the rest of the country with you. That is not an option in our view that we believe could be achieved, both fiscally, but secondly, we don't think fairly.

So this is what we propose to do. One, we are going to recommit to the fair go principle, as I've already said. Two, we're going to run a strong economy and continue to make the improvements to the GST that will just ordinarily make the pool of funds better in which everyone can share from. Thirdly, adopting those other PC recommendations will make the system simpler and more transparent, which is a good thing. Fourthly, we are going to change the formula to do two things. We are going to put in a floor so no state will get any less than 70 cents firstly, scaling up to 75 cents in the dollar per capita share into the future. It's fair enough that the larger States subsidise the smaller States, and we are going to put a limit on that down to 75 cents. Now that's historically below what States have historically had to do, particularly in the case of New South Wales and Victoria. But, for WA, as I illustrated before, the show got a lot more ugly than that for them.

The other thing we are going to do is, rather than equalise to what's called the stronger state, we are going to remove the risk of there being an outlier that can just zap from the bottom of the pack to the top with some sort of exogenous shock in their economy, and make sure we are equalising to the standard of the better of New South Wales or Victoria. Now I don't think anyone can claim that New South Wales or Victoria are substandard. In fact most of the country would say services in those States are arguably better than other places. I won't get into that debate. But it would be untrue to say that New South Wales and Victoria would be an inferior standard from what we're currently doing now, particularly given the history of what has been done largely. What that does it that brings that greater ballast to the system and avoids the volatility of the bigger changes that come from more volatile States.

So that's the plan. We are going to do it over eight years. If you do it in a calm, methodical way, then there's no sharp, sudden shock, the fiscal impact can be managed over a longer period of time. We are not increasing any taxes to do this. This can be absorbed into the Budget over that period of time. Finally, we do it in a way that all States are better off, both now and into the future, by using a method of increasing the overall pool of money that is distributed by the States to include not just the GST but extra money put in by the Commonwealth every year going forward.

The timetables - from 2019-20 to 2020-21, including 2018-19, for the distributions that have already been set, there will be no changes. Everyone will get the same thing the formula was going to produce over those years, and in Western Australia and in the Northern Territory, there will be a top up provided to those States. In Western Australia, it's to ensure that they achieve the equivalent of a 70 per cent share. In the Northern Territory, there are separate circumstances there which I know Nicole Madison and I are very familiar with in the territory, and we need to provide a further prop up to Northern Territory in 2019-20. From 2021-22 to 2026-27, we change the system gradually year by year to get us to the new system, starting 100 per cent in 2027-28, and then from there on it operates under the new arrangements.

The change in the relativity shares, you can see there, compared to what was happening in the PC, the dotted lines pretty much match the solid lines, with the exception of Western Australia and the Northern Territory. That is borne out in the tables you have in your packs. There is only the most marginal of differences in a couple of places, in Victoria and Queensland, you can see how WA and the Northern Territory are better off, and even in Tasmania at the back end, the projections are that they would be slightly better off on their relativities going out of those years. But I caution there is a false precision when it comes to these numbers. We are talking about two decimal places here. If you take them to three, four, five, six, small differences can produce bigger impacts on the nominal distributions for larger States. So we recognise that but we are talking about no great shock to the respective relativities of the States and Territories by smoothly transitioning to the new plan.

The way we work the expanding pool to compensate all the other States and Territories is like this. First three years, no change. Then, in 2021-22, that's how much money $77.2 billion that we anticipate the GST will collect in that year, we tip in another $600 million which brings the total pool up to this. That figure of the top up is then indexed to the growth in the GST revenue collected. As you can see, it increases each year, and it means, by the end of 2023-24, you've got $86.1 billion now in the pool, compared to $85.5 billion. The next year, we throw in another $250 million as an adjustment, which boosts the pool again, and then that total boost amount is then forever indexed to whatever the GST collections are that year. So if you have a bigger pie, then even if your share of that pie has been marginally affected, the slice, that is, is coming out of a bigger pie. It's pretty straightforward. That's the only way you can legitimately compensate the impacts of any change to the formula into the future. You have to have a bigger pie. Otherwise it's the same size, and what your share is, is what your share is, and that's why we've chosen to do it in that way. You can see how that works there. And you can see the relative size of our top-up compared to the overall pool. And we've even started the chart at $65 billion. If I took it all the way down to zero, you'd barely even see the green or the red on the chart. So, that's how it works. We are making the pool bigger over time and permanently.

This is what happens to payments. For all the States and Territories, you can see everybody is getting more. Everybody is getting more. In WA, these green little bars here, that's the top-ups we've already done for Western Australia. We ensured that we stopped the drop when we came into government, that their relativity share didn't fall below 37 cents. It actually got down below 30 and we topped them up in this most recent year, in 2018-19, we have topped them up to 50. We'll then make sure they get topped up to a 70 per cent share, and then the new formula kicks in. As you can see, Victoria, New South Wales, Queensland, everybody's lines are heading in the right direction. And as you can see there, WA's lines are no longer heading in the wrong direction. For the other States - Tasmania, South Australia and the Territories, a similar story. And you can see the top-ups we're doing there for the Northern Territory to ensure that this trough here did not keep going down, but we started kicking it up again.

This is the key chart, I think. Everyone's better off. Everyone's better off, because the Commonwealth is stepping up to make our contribution to solve the problem. If the Commonwealth doesn't do that, you can't fix it. And it's important that we do fix it. And it's important for the whole country that we fix it. This is not just about what's happening in Western Australia, although that is the evidence of why the system has been failing us. We're one country. We do believe in the fair go. But the fair go has to work for everybody. It has to work in Tasmania, it has to work in Western Australia. It has to work in New South Wales, it has to work in Queensland. And the system wasn't producing a fair go for everyone. And so the Commonwealth is investing in the fair-go principle so it will work better for everyone in the future. Yes, that comes at an additional cost. That is the cost of doing business in the Federation.

We could just look the other way, keep kicking the can down the road, you know, the idea, "oh, why don't you just keep doing top-up payments to WA?" Well, WA deserves their fair share. They don't deserve a handout. They deserve to have what they should rightly have. Top-up payments forever, it's a mug's game. It doesn't solve the problem. It avoids the problem. It tries to paper over the problem. What I'm putting forward to you today, what the Turnbull Government is putting forward today, is about addressing the problem and fixing it with a long-term plan. That is fair for everyone and backs in investing in the fair-go principle, which delivers the schools, the hospitals, the nurses, the police, and the essential infrastructure.

What are the next steps? The figures I have given you today are illustrative, they are indicative. The final figures will depend upon that exercise I now embark on with the States and Territories, and I'd ask everyone to be patient with us as we do that. We need to get to a common data set. And once we have that common data set, which should not be markedly different from what has been independently done by the Productivity Commission, I suspect you may hear some States say, "we're worse off, we're worse off, or we're worse off more than the Productivity Commission says," well, if someone's worse off, someone also has to be better off. So, we have to reconcile those views of the future and make sure their evened out and we can have a clear view.

So, we'll get their feedback. HOTS is the Heads of Treasury, the acronym, for those who aren't familiar with it. We'll task our secretaries of Treasury to go and do that job separate from the politicians, so they can bring back to us at a meeting in September, what they believe is within reason a consolidated data set. We'll also deal at that September meeting with the PC recommendations that we've adopted, and we're suggesting everyone should adopt. Then we will get on and issue a direction to the Commonwealth Grants Commission. And I note that I'm reappointing Greg Smith today to that role of the chair of that commission. And they will then work on those recommendations. We'll come back later in the year and hopefully, agree through an inter-governmental agreement, this new plan.

Now, do I have to have an inter-governmental agreement to achieve this? No, I don't, but I think it's the right thing to do, it's certainly the right thing to try. I think it provides further certainty if this is summarised in an intergovernmental agreement, rather than done unilaterally by the Commonwealth. The States deserve certainty. They deserve this plan for a fairer GST for everyone.

QUESTION:

Mr Morrison, in the new intergovernmental agreement, one assurance the States might be looking for, is that the Federal Government contribution to the pool, the ongoing top-ups at no stage ever come at the expense of some other federal government grants or specific purpose payment or something like that, would that be something you'd be prepared to ... [INAUDIBLE]

TREASURER:

Yeah, that's a completely reasonable expectation. They are completely different conversations. As you know, there are agreements between the States and Territories that are permanent, like hospitals and schools and things like that. There are others that are fixed periods and those discussions will be held independent of this.

QUESTION:

On a related subject Mr Morrison you say that, correct me if I am wrong, but it looks like that billion-dollar payment top-up effectively goes into perpetuity.

TREASURER:

Correct.

QUESTION:

Is a better way to handle that to look at the GST base and perhaps look at some of those services that perhaps should be, according to some at least, have GST applied, which is, of course, what your intentions seemed to be a couple of years ago.

TREASURER:

I'm not following you, Andrew.

QUESTION:

Apply the GST to other services that are currently GST-free.

TREASURER:

Broaden the base? We're not planning to do that.

QUESTION:

Just adding on from that...

TREASURER:

The short answer is no.

QUESTION:

So, does this remove the need for future governments to increase the rate of GST and broaden the base?

TREASURER:

Well, that is a completely separate consideration. It's not one the Government is considering. That is a whole separate tax discussion. That isn't about fixing the distribution. This is about the distribution of the pool of revenue, not what the GST rate or base is. This is about how you share it out. What's the formula for doing that? So, they're completely separate issues. The Government is not increasing the GST. The Government is not broadening the base of the GST. In fact, we're not increasing any taxes to do this. I note our opponents are increasing taxes, both on personal income taxes and on business taxes, for every single business in the country, Bill Shorten confirmed last week, from the smallest baker to the biggest miner.

QUESTION:

What you're effectively doing, though, Treasurer, is sort of slicing off part of other forms of revenue to the fiscal equalisation task in this...

TREASURER:

Correct.

QUESTION:

So, I suppose one of the issues that's come politically out of this is that West Australians feel entitled to every GST dollar that is raised. How do you just better describe the role of the GST? How much should each state think that they're going to get? I mean, John Howard said it was the States' tax. You know, we're conceding here that, you know, it is, but you can't get every dollar back. But...

TREASURER:

Well, that was the former Prime Minister's view as well because the relativity formula applied then. What we're saying here is that stronger States will always have a role to subsidise the smaller States, but no more than 75 cents. It shouldn't fall below 75 cents. And under the new formula it is very difficult to foresee a set of circumstances under this formula as opposed to the old one where that share would fall below 75. Because, as I said, it's got the control of equalising to a critical mass economy state, as opposed to any state which, for want of circumstances, could catapult them for unknown reasons to the top of the pile. So, by removing that issue, it is very hard to see how a state may fall below 75. You can't absolutely rule it out, but it would be quite unlikely, and that is also a guarantee for Tasmania and all the rest of them that the impact of the floor is highly unlikely to be called on. If you like, it's belt and braces, but when it comes to the Federation, it's always good to turn up with belt and braces.

QUESTION:

The Productivity Commission's preferred option of going to an average for equalisation, they say would have opened up an opportunity for, you know, more economic reform, particularly around things like land tax. Have you squibbed an opportunity there to put pressure on the States to do those reforms?

TREASURER:

The reason any state or territory is not going to junk their stamp duty and put a land tax on every single private residence in the country has less, I'd say virtually nothing, to do with the GST and has everything to do with politics. So I think we have to be realistic about this. I respect the PC's recommendation, and coming at it from a solely economic perspective. But as the Government, we've got to work in the realm of what gets done. This is not a theory class, this is real-world implementation of real policy. I would make this point, though, if you just bear with me - and that is the current formula, or any formula, is unable to assess what the value is of what's in the ground. So, the only time that resources, and their impact on state revenues, really get brought into the GST formula, is when the shovel hits the dirt. Once you start pulling it out of the ground, that's when it starts impacting your relativity. Now, what this does is for the States in particular that do have resources, whether they be South Australia, Northern Territory, indeed, Queensland, Western Australia, you know, gas in Tasmania, in New South Wales, in Victoria, this removes, I think, a potential impediment, and evens it up, that the state that actually realises its resources will not face the penalty, as WA have, for actually realising their resource opportunity. And let's not forget, in WA that minerals boom, yes, WA benefitted from it. But so did the rest of the country. Phil Lowe once famously said some years ago, when he was deputy governor of the RBA, that what was happening in the Pilbara was helping coffee shops in Sydney and Melbourne. So, the minerals boom just didn't help Western Australia, the company taxes and other personal income taxes that were paid out of Western Australia from their booming economy was actually assisting welfare payments in Tasmania, or infrastructure funding in Queensland, or in New South Wales. So, it's not fair to say to WA, "well, you had all that royalties revenue", well frankly the rest of the country had a lot of other revenue that was generated out of WA which went to the Commonwealth and was spent all over the country.

QUESTION:

It would seem that the GST carve up is dependent on the economy growing further, doing substantially well. What happens if the world economy shudders, Australia's economy shudders or catch as cold? Would some of the States who require the fairer carve-up be potentially left out in the cold?

TREASURER:

No. A, this is why you have policies for a stronger economy. And the real kick-in of the additional top-ups into the pool happen at the back end of the next 10 years. That is a time when the budget is projected to be with a surplus of more than 1 per cent of the entire economy. So, we're building to go back into balance within the next couple of years, 2019-20, one year early as I've said. But you highlight the right point. You can't afford to have policies that give you a weaker economy. And that's why we're doing what we are, as opposed to what the Labor party wants to do with crippling higher taxes which suffocate the economy. It would not only be bad for the economy, it would mean less money for the States in less GST.

QUESTION:

Mr Morrison, you said that the Commonwealth can go it alone, but isn't that view disputed? The other view is that it needs the consent of all the States and Territories. But, secondly, if the States don't accept this carrot, are you willing to legislate unilaterally for this change?

TREASURER:

Well, it's not disputed that the Commonwealth can act alone on this. That's not disputed at all. The base and rate of the GST requires unanimous agreement of all States and Territories. That's what the arrangement is now. The distribution method is at the discretion of the Commonwealth, the Treasurer specifically, actually, in the directions provided to the Commonwealth Grants Commission. But I don't think acting unilaterally on this is the way to go. I think the better way to go is to work consultatively with the States and Territories to land on a new, fairer GST deal, which everyone can sign up to. They can get on with managing their budgets in a less volatile GST environment, and provide the services their citizens are depending on. They need to spend it well. At the end of the day their own citizens will hold them to account on that. That's not for me to hold them to account on untied funding. The States are always asking for more untied funding. This is what I'm delivering through this package, and that should go into the high priorities in those States, of police, of nurses, of hospitals and schools, and ensuring that their books are in order.

QUESTION:

Treasurer, this was just meant to be a redistribution of GST, of state taxes, in the end was the only solution for the Commonwealth that wanted the system to work was to buy it?

TREASURER:

Well, let me make a couple of points. The first one is when the GST was introduced, there were two assumptions that were made. One was that the GST would be a growth tax, solely for the benefit of the States. And that is true. But it hasn't proved to be the same growth tax that was anticipated at that time. The carve-outs and other things that necessarily had to be done means that the growth in GST revenue has been lower than other forms of revenue, the average of all state taxes, all Commonwealth taxes revenue, for example, or income tax or so on. And that's been a constant issue which has been raised by the States and Territories. So, I think that's one point. The other point is that there was an assumption that the States would own the GST, that they would own decisions about its base, that they would own decisions about its rate, that they would own the need to improve its integrity. And, as I said, $6.5 billion of additional GST revenue coming as a result of the Commonwealth's initiative, still waiting for the States to say thanks - I'm not expecting it to come - but the States haven't really taken an ownership of growing that revenue pool themselves by making recommendations really as to how that could be improved. Now, that's just the reality of the Federation. I'm not complaining about it. So, as the Commonwealth Treasurer, it's my responsibility to ensure there's a better arrangement. At the end of the day, that means ensuring no state is worse off, and, indeed, making sure they're better off. That's what I believe needed to be done to fix the problem. The alternative is to leave things as they were, and we were not prepared to do that.

QUESTION:

They all complained about it and they refused to fix it.

TREASURER:

Well, you have to take that up with them. But as the Commonwealth Treasurer, at the end of the day, their problem always ends up being my problem. And that's fair enough. That's the gig. Not complaining. That's why I just get on and fix it.

QUESTION:

What do you say to Western Australians who have been arguing that there should have been a floor to GST? They have been arguing this for maybe six - well, actually, more than 10 years. In fact, there was a vote on the floor of the House of Representatives, where the floor was presented as an idea. Tony Crook put it forward. Only one other person supported it - Bob Katter. Labor party, Greens, Liberal Party voted against it. Now you're introducing it, when the benefit of that floor is likely not to go to WA in the end, it's likely to go to New South Wales?

TREASURER:

Well, A, that's not true. The primary beneficiary of that will be Western Australia because over the next 10 years, it is estimated that WA will still be the strongest fiscal state. Over the next 10 years. So, they are the primary beneficiary of that floor. In terms of why not earlier, and the reason is this - the Productivity Commission report. Previously, there was not the information available to compare a new system against the existing system. The whole debate was hostage to the politics of better off, worse off, competing sets of numbers, dealing estimates at 10 paces, which just lent itself to political gridlock and nothing happened. That's why nothing happened. And so as a Government, we were genuinely serious about fixing this problem. Not as some parochial attention to one particular state. Western Australians, I think, have been enormously patient with the Government as we've sought to work through this. I've spoken into Western Australia, been in Western Australia many times, and I've said, "please give me the time to work up a real solution." That's what we've done. This report has helped us to do that, because it's given us the data we needed to make the decisions that we have.

QUESTION:

And is it also just bought you some fairly important time, Treasurer, I'm just looking at your nice graph here, page 23. I mean, if you had looked to implement this solution in, say, 2015-16 the cost of it would have just been absolutely prohibitive.

TREASURER:

I think that's a fair assumption. But you deal with what's in front of you. And that's why we still have to delay a couple of years. Because what we're doing here is we'll say, "we'll top up WA for another two years beyond the 2018-19 year." What that does is give the system to sort of catch up, and start from a basis that when you put the floors in and you start transitioning the system, you're not getting the short, sharp shock of change. What we do by saying this to Western Australians, but the whole country frankly, is we're trying to cater for all the things that concern you. Now, that does come at a cost. There's no doubt about that. But the cost of not doing this would be to perpetuate a system that was broken, that was unfairly treating States, and, importantly, undermine the fair-go principle, which as I showed you from those international comparisons, is something Australians should feel very proud of. I didn't want to see that broken, and the trust in that system erode. If we just did Band-Aid top-ups and things like that, well, I think people would rightly say, "that's just politics, you're just trying to paper over this before an election." This is a plan.

QUESTION:

Treasurer, one of the features of this is that these top-ups continue in perpetuity, in essence. What guarantee do you give to future state treasurers when they come into a room in 10 years' time and have to negotiate these numbers, when other things like grants are also on the table, what guarantee do they have that they won't be dudded someday down the track?

TREASURER:

This is why reaching an agreement and getting everyone on board is so important, and having an intergovernmental agreement, because the intergovernmental agreement will be permanent. It won't be for eight years, it will be a permanent agreement. We have a number of agreements like that in the system, one on housing, for example, that's a permanent agreement in terms of how the funding works on that. So, it's important that we actually do use the mechanism of coming to an intergovernmental agreement. It's not necessary, as Michelle raised the issue, to do that, but I think for certainty for all States and Territories, for the exact reason you're saying, Jacob, we should do that. We do genuinely want to work this through with the States and Territories. I suspect there will be a few disagreements about numbers, and, you know, everyone will have their abacus out and doing all that. That will be an exercise we'll have to work through. But at the end of the day, I'm optimistic, as I always am, as a true Sharks supporter, that at the end of the day everyone is trying to get the right outcome here with the States and Territories. I haven't been to a treasurers' meeting where there hasn't been a blue about the GST. Most times I just sit there and watch them all fight with each other about it. It doesn't matter whether they're from the Liberal Party or the Labor party, this is one of those true issues where, you know, it becomes a States' house, and they actually are arguing on their States' benefit, regardless of what side of politics they're on. So, this helps us, I think, strike a new deal and we can focus on national security issues at COAG, we can focus on police and we can focus on hospitals and we can put this issue to bed.

QUESTION:

Treasurer, would you legislate the intergovernmental agreement so it can't be tampered with?

TREASURER:

There's no need to do that, we don't believe there's a need to do that.

QUESTION:

The Commonwealth top-up, which will currently be used to make sure everybody is above 75 cents, if everybody is above 75 cents, will that just be distributed on the same principles established by the Productivity Commission?

TREASURER:

No. The new formula will be to equalise to the highest of New South Wales or Victoria, as opposed to the strongest state, or what the PC said, the average of all States. So, that new formula is what will distribute. Now, I don't expect the 75 per cent floor to actually be necessary over that period of time. I could be proved wrong by that. These numbers do move about a bit. But how it's distributed amongst the States and Territories is based on that new formula. And so if the floor isn't activated then it will just be distributed based on that formula equalising to either the better of New South Wales or Victoria which has largely been the federation experience.

QUESTION:

Treasurer, how are you going to fund the $6.5 billion and are you banking on higher tax receipts, or for a future government to fund it, or will it be part of a contingency budget measure?

TREASURER:

Well, no, and no, to the last two parts of your question. We're not putting taxes up doing that. The only people who want to put up taxes are Bill Shorten and Chris Bowen. So I know that's their plan. They think the Government gets more revenue by putting taxes up. We believe that the Government does better by growing a stronger economy. Our plan for a stronger economy is set out in the Budget. Our fiscal estimates going out over the next 10 years are set out in that Budget and that can accommodate what we're talking about here. Any impacts of this on the near term will be addressed in MYEFO later this year.

QUESTION:

One of the complaints with the existing system was the lag. Because when the Premiers were ripping into each other a couple of years ago, it was pointed out that WA got a stack of money early, they were getting a lot of money from the GST at the same time their royalties were going gang busters. The criticism was Colin Barnett didn't save for a rainy day. Could not the existing system have been fixed to make it more real-time?

TREASURER:

I understand what you're saying. Historians will judge performances of governments, including the Turnbull Government. The PC looked specifically at this issue of the time lag. The GST formula is incredibly complex. I'm not going to make the nation suffer by explaining it in any detail. I'm sure you won't do the same to your readers. It relies on a lot of data and what the PC found was it's important to actually strike the relativities when that data is most accurate. If you try and do it exactly in real time, the data is not accurate. It means that, in subsequent years, you've got to provide reconciliation payments. So while it's not perfect, they say it's better to wait until the data is right than to call it early and have to compensate later. People talk about the PC report, and they've rightly focused on the big recommendation but there are eight other recommendations there that deal with a lot of those things, Phil, which I think makes the whole system simpler and fairer.

But I'll finish on this note, at the end of the day this is what it's about - there's a real problem, it does need to be fixed, we're not going to kick it down the road, we are going to fix it, we've got a plan to do that, we think it's a fair plan, we can afford to do this plan, it means the services that Australians rely on in the States and Territories will be completely unaffected. In fact, States will have an enhanced capacity to deal with those services. We won't put taxes up to deal with it. We'll continue with our strong plan for our economy, which means that these are the things you can do when you have a stronger economy. It's time we fixed it. I think we've got the right plan. I look forward to working with the States and Territories to nail it and get it done by the end of the year. Thank you.


Attachment

 Horizontal Fiscal Equalisation - slide pack