In May this year, I commissioned the productivity commission to undertake a thorough review of our GST distribution system and in particular what’s known as Horizontal Fiscal Equalisation, before people drift off to sleep with the use of that term, what it basically means is the fair go principle that is applied to how we distribute GST revenue between the states and territories. This principle has a very long history in Australia. It goes back to the 30s, and over time has been reinterpreted and changed and it was particularly used when the GST was introduced as the way that GST should be determined as to how it should be shared between the states and the territories.
In more recent times, there has been much greater volatility in how that GST was being shared between the states and we have seen the quite extreme outlier situations that have occurred particularly in Western Australia that have fallen with their relativity, back to less than 30 cents. It is true that the Commonwealth, under this government, took action to ensure we stopped the drop for GST in Western Australia at what was effectively 37 cents but that still remains a very low level in comparison to other states and territories. We thought the right answer to address this problem was to get the work done, to do the homework, to not act in any knee-jerk way. We had provided some short-term compensation for Western Australia but that was never going to be a long-term fix to this issue, so we had to determine - what was the problem we were solving for.
It is true that Western Australia had been receiving an unfair and far too low share of the GST. But we also had to determine - was this a national problem or just a Western Australian problem? That's why it was important to undertake the work from the Productivity Commission. Today I welcome that draft report that has been released overnight but I stress that it is a draft report. There is still a long way to go on this issue. Recommendations still need to be firmed up before they are presented to government. A lot more consultation needs to be undertaken and, importantly, the task of how any potential transition arrangements or any detailed impact assessments can be done, all of this is work that still has to be done. But I think the report has answered some important questions early in this process.
Firstly, the draft findings highlight, re-enforce, the importance of having done this work. It was the right call to get this work done and approach this in the methodical and patient way the government has done it.
Secondly, it has re-enforced the fair-go principle. The principle of how we distribute GST to other states and territories, where we do try to make sure that, whether you live in Western Australia, New South Wales, South Australia, the Territory, Tasmania, that you do get access to a similar standard of services right across our Commonwealth. It's an important principle. It's one the Turnbull Government remains committed to and will always be the way in which we seek to distribute these revenues. It is an important principle. We recognise that.
The chat we now have to have, though, is really about how we do it better. How do we realise this fair-go principle in a better way than has been occurring up until now, particularly over the last few years and how do we get to that new point? That is where the Productivity Commission will now undertake further work and consultation and I and the government will do that with our colleagues in the states and territories and other stakeholders.
The report found that the fair-go principle was right and we do it better than anywhere else in the world, and we do it with a level of independence and with a degree of certainty that is not achieved anywhere else in the world - Canada, Germany, other prominent federations have been unable to achieve the fair-go principle in a way that Australia has, so this is something we should be proud of but we can't rest on our laurels because the Commission identifies some serious problems.
First of all, the perfect has become the enemy of the good, when it comes to how we distribute GST. A false sense of precision. Having, in such an enthusiastic way tried to equalise things, we have created a situation the PC refers to as “unfair equality”. We have got the point where there has been insufficient flex in how the system deals with quite significant shocks like we have seen in the post mining boom period. The variability, the volatility in those distributions means that the system has not been responding well. Up until about 2012, the relativity stayed within a relatively tight band. After that period, the rubber band has stretched right out and is close to snapping. When that occurs, you obviously have a major crisis of confidence in how the system works in states particularly that are adversely impacted. So that needs to be fixed.
Secondly, it is finding that the current way we do this is holding our economy back, that it does mean that states and territories have a disincentive to undertake positive changes to their tax systems, to make the most of the resources and minerals that they have that sit within their states and territories. As a result, it is not just a Western Australian issue, it's a national issue. That's important for me as a federal Treasurer. It's my job to fix these national problems in the national interest. It's in the national interest to fix the way that the GST has been shared between the states and territories. It's holding our national economy back. That should be of concern to all Australians, not just those in Western Australia who have been most adversely impacted by the way this has played out.
Thirdly, it needs to be simpler and it needs to be more understandable. It is a very complex system. It's complex because of its high level of precision. It needs to be more readily understood by Australians and policymakers.
So the system needs a proper fix. The Commission finds that it doesn't need more Band-Aids and it doesn't need more bolt-ons. What we need is to properly deal with the causes of the problem, not the symptoms. So it rejects ideas as long-term solutions of top-ups from the Federal Government, floor prices, carve-outs from the base or, in fact, going back to an equal per capita distribution as some have suggested. It rejects those as propositions because they won't achieve the goals of our fair-go principle in a fair way that the government also seeks to achieve. We don't need Band-Aids. We saw this recently when the Leader of the Opposition went to Western Australia and offered a Band-Aid. It was rejected by the people of Western Australia and rightly so. It wasn't an attempt to fix the problem, it was just an attempt to engage the politics from the Leader of the Opposition. Bill Shorten can go down that path if he wants. The Government will remain on the right path, which is to make the right choice to ensure our fair-go principle for GST distribution is done in a way that is fair, that is durable, that will be able to flex with the economic circumstances and that we'll get it right, ensuring a more efficient system. The next step is now to engage more. There is a meeting of State Treasurers on 27 October this year, the Productivity Commission will be present at that meeting and there will be the opportunity for all states and territories to provide their first initial feedback to the Commission and, and of course, to the Commonwealth. That process will continue for many months. The timing of the final report, I will take advice from the Productivity Commission about how much additional time is required because the real issue is not just what is the answer but how do you get to that answer in a way that does not cause undue disruption to some of the smaller, dependent states who have higher distributions of GST and we need to ensure that we manage and smooth out those impacts as well. It remains a very difficult challenge but the Government is taking the issue seriously, not just for the people of Western Australia but for all Australians because we need to both continue to honour the fair-go principle that all Australians standby but we also need to honour the principle of growth which all Australians' jobs depend on. That is what the Turnbull Government will continue to focus on. Happy to take questions.
Treasurer, this is obviously a big issue in Western Australia particularly, will WA be a winner from any review?
At this stage, I think what it highlights is that the Western Australian public have not been dreaming this up. It's real. It's a real problem. They've had the raw end of the stick on this. There is no doubt about this. That has been my view now for some time. That's why I believed it was very important that, while I have great sympathies for what Western Australia has been having to deal with, that it needed to be addressed in a national-interest context. It can't just be about one state wanting more or one state wanting other states to have less. That's not the sort of discussion we should be having. We should all be doing what's in the national interest for our economy and the Commission has found, at this draft stage, that it is in the national interest to fix the GST, not paper over the cracks.
How challenging will it be to find a solution that's fair to every state and territory?
I think it will be very challenging. That's why I would call on all states and territories and the Leader of the Opposition, the Labor Party and others to engage in this process productively, constructively. I think the Commission has done some excellent work which helps us talk through some of the issues and to come up with an agreed position, preferably, on what the new standards should be and then a transition path to get there in a reasonable time frame which continues to provide, I think, support for Western Australia while at the same time avoiding any shocks to the smaller states.
Has the Government taken too long to address this problem?
No, I don't believe so. The Government, this Government, is the only government that's been acting on this problem. When we saw the GST relativities for Western Australia drop like a stone under the Rudd-Gillard-Rudd years, they did nothing. Absolutely nothing. They just sat there and watched the stone drop. They made promises, they made statements but did absolutely nothing. That's why I think the Western Australian public have had a gutful of Labor's false promises on the GST. By contrast, as a Government, since we were first elected in 2013, not only have we provided those $1.2 billion in top-up payments, stopping the drop for GST in WA at effectively 37 cents but we have now gone about the serious task of trying to solve the problem in a methodical way, not offering political offer-ups or top-ups on a permanent basis but to give a real solution, not Band-Aids, real solutions to the very serious issue which is not just impacting WA, it will impact all states and territories. Take a state like Queensland, for example, they're a resource state as well. Queensland currently has an unusually higher level of GST distribution because of natural disasters that have occurred there. Over time, their GST distribution will change. You've got to look at this not just as a cut point in time, you've got to look at it over a number of years because these relativities do move around based on other influences.
The Productivity Commission has obviously said the system of GST carve-up is under significant strain. How urgent is the need for an overhaul?
We have to get on with this but you've got to get it right. What I don't want to do here, as I said before, offer Band-Aids and bolt-ons. That just kicks the problem down the road. What I want, what the Prime Minister wants, what the Turnbull Government wants, is a durable, fair and efficient system. That's what I said when I went to WA earlier this year and spoke to the Western Australia Chamber of Commerce and Industry, that's the goal I'm working towards and I'm inviting all others in this debate to join me in getting to that goal. The best outcome here is that we can agree some consensus on this, that's the best outcome. But the government won't be deterred from getting to a position which is durable, fair and efficient.
The report says introducing a GST floor is targeting a symptom. What do you make of that?
I think they are right. That's why we have asked them to do more than just look at symptoms and come back with a series of broader potential responses which they've done in this report. And they need to do more work on that now. What we have said on this issue, up until now, has been to offer some short to medium-term support, particularly for WA, always knowing that a longer-term solution would be necessary. And this is how you go about this. Our approach to this is no different to our approach on energy. We don't rush out there, trigger-happy, as the Labor party does, grasping at every straw, seeking to make some political point. We do the work. We have been doing the work on energy. We're doing the work on GST relativities. We are working to get the right answer which will endure. We have had too many of these short-term fixes under the previous Labor government. This Government is looking to deliver permanent, durable, fair and efficient solutions whether it's in energy or whether it's in the GST or other economic challenges.
Treasurer, what then do you see as the biggest barriers to achieving a more fair and equitable carve-up of the GST?
I'm going to have a good-natured outlook on this. I'm looking forward to that first discussion with Treasurers in a few weeks' time. This issue is regularly discussed around every Treasurers' meeting that I have attended and I suspect every one prior to that going back to Federation. It is important that we work together to try and determine not only what a better standard is to ensure we live up to the fair-go principle but we work out a transition path which is also fair. There is a lot of give and take I think from everybody in that. So I look forward to a very constructive and positive response to work through the problem.