Josh Frydenberg (Kooyong, Liberal Party, Treasurer) Share this | Link to this | Hansard source

I move:

That this bill be now read a second time.

The Treasury Laws Amendment (Making Sure Every State and Territory Gets Their Fair Share of GST) Bill 2018

reforms GST payments to the states and territories (states) by providing a fairer and more sustainable way of distributing GST.

It is a plan that leaves all States and Territories better off.

The Commonwealth makes significant payments to the states and territories. The GST comprises half or well over half of these payments for most states and territories.

The good news for states and territories, is that since 1998 when then Prime Minister John Howard and Treasurer Peter Costello introduced the GST the revenue pool has more than doubled. It is expected to grow anther 65 per cent over the next decade.

However, the system has not been working for everyone. The integrity of the GST was being threatened with Western Australia's share falling to 30c in the dollar. This compares to Victoria and New South Wales getting more than 90c in the dollar and the smaller states higher rates again.

The situation was so ridiculous that Tasmania and the Northern Territory both received more GST revenue than Western Australia, despite having populations that were one-fifth and one-tenth, respectively, of the size of Western Australia's population.

The current system of horizontal fiscal equalisation was effective when the Australian economy and states' and territories' economies were relatively stable.

It is a plan that leaves all states and territories better off, and it's a credit to the hard work and advocacy of my colleagues in this place.

The Commonwealth makes significant payments to the states and territories. The GST comprises half, or well over half, of these payments for most states and territories.

The good news for states and territories is that since 2000, when the Prime Minister John Howard and Treasurer Peter Costello introduced the GST, the revenue pool has more than doubled. It is expected to grow another 65 per cent over the next decade.

However, the system has not been working for everyone. The integrity of the GST was being threatened, with Western Australia's share falling to 30c in the dollar. This compares to Victoria and New South Wales getting more than 90c in the dollar, and the smaller states higher rates again.

The situation was so ridiculous that Tasmania and the Northern Territory both received more GST revenue than Western Australia, despite having populations that were one-fifth and one-tenth respectively of Western Australia's population.

The current system of horizontal fiscal equalisation was effective when the Australian economy and the state and territory economies were relatively stable. It meant that the GST was distributed so that all states and territories had their fiscal capacities equalised to be the same as the broad-based stable economies of either NSW or Victoria.

However, the current system of horizontal fiscal equalisation was not designed to deal with significant economic shocks. The mining boom was an unprecedented shock to the Australian economy. It exposed weaknesses in the system that could not have been foreseen when the GST was introduced. So, after the economic shocks of the past decade, it is time to make improvements to the system.

The way that GST is distributed in Australia has not been updated since it was introduced in 2000.

The coalition government—and I pay great credit to now Prime Minister Scott Morrison—asked the Productivity Commission to reassess how the GST is distributed. The Productivity Commission found that, although the current GST distribution system functions well and achieves high levels of fiscal equity, it can deliver perverse outcomes when there is a significant shock to the economy, such as a mining boom.

The government's interim response, released on 5 July 2018, proposed reforms to the way the GST is distributed that will leave all states better off and protect the integrity of the system.

GST will continue to be distributed using the 'fair go' principle of horizontal fiscal equalisation (HFE).

In essence, states should have sufficient resources (fiscal capacity) so that all Australians can have access to vital government services, no matter where they live across the country.

The government's plan will:

First, create a new equalisation benchmark, the stronger of New South Wales or Victoria (whichever is higher). All states will transition to this new equalisation standard over six years from 2021-22 to 2026-27.

Second, introduce a permanent in-system relativity floor of 0.7 from 2022-23, increasing to 0.75 from 2024-25.

Third, permanently boost the GST pool of funds available for distribution to the states and territories, providing direct Commonwealth cash injections each year from 2021-22 onwards. These are in addition to GST collections.

The bill will enable an initial boost of $600 million in 2021-22 and a further $250 million boost in 2024-25, indexed each year to grow in line with the GST.

Fourth, during the transition period from 2021-22 to 2026-27, states and territories will be guaranteed the better of the old system or the new system. This means that, at the end of the transition period, each state and territory will have received the better of the cumulative total over the entire period of either the old system or the updated system. Payments will be verified annually by the Commonwealth Grants Commission over the transition period and any adjustments made accordingly.

Fifth, to be completed by 26 December, the Productivity Commission will conduct an inquiry to assess whether the updated system is working efficiently, effectively and operating as intended.

Sixth, we will separately provide short-term top-ups to Western Australia and the Northern Territory to keep their relativities above 0.7 and 4.66 respectively from 2019-20 to 2021-22.

At the end of this period in 2026-27, Australia will have a horizontal fiscal equalisation system that protects against economic shocks and provides a more stable source of revenue for all states and territories.

The horizontal fiscal equalisation 'fair go' principle has been an important part of our federal financial relations system since Federation. The government's horizontal fiscal equalisation reforms—implemented in this bill—continue to uphold this principle so that all Australians can have access to vital government services no matter where they live across this diverse country. All states will be better off, with the Commonwealth injecting an additional $9 billion over 10 years to 2028-29.

The GST pool from 2026-27 will grow by more than a billion dollars each and every year, compared to what would have occurred without these reforms. Importantly, the additional funding from the Commonwealth will not come at the expense of existing payments to the states and will be provided in perpetuity.

The Commonwealth's projections use the Productivity Commission's estimates, which uses the numbers the states provided them. This additional funding is on top of another $6½ billion in GST receipts states will receive over the next four years as a result of decisions the government has taken since the 2015-16 budget. These include measures such as applying the GST to online purchases and other compliance measures. All that extra assistance is untied funding the states and territories can use to fund hospitals, schools and other essential services.

The government has consulted extensively with all states on its proposal since the release of its interim response. But, unlike changes to the rate and the base of the GST, changes to the distribution of GST revenue do not require the approval of the states and territories. It is the Commonwealth's job to govern for all Australians.

Former Prime Minister John Howard put this best when he said, 'I'm an Australian and, as far as I'm concerned, all Australians should be treated equally no matter where they live.' We have sought the bipartisan support from the opposition and we have made a sensible compromise.

To provide certainty, the Commonwealth is now seeking to legislate these reforms by amending the Commonwealth Grants Commission Act 1973 and the Federal Financial Relations Act 2009. In the end, the GST provides an important source of revenue to the states and territories; however, the viability of the system is only as good as the formula that underpins it and the economy in which it operates.

Australia is seeing strong economic growth, record jobs creation and a federal budget that is on track for a return to surplus. This is not good luck but good management and a product of the policies the coalition has put in place. This positive momentum cannot be put at risk by the opposition's high-taxing and high-spending approach which threatens the reforms that we have underway. This is why the Morrison government and our GST reforms should be supported, because they will deliver real benefits to all Australians. We have provided a national solution to a national challenge. That is what leadership is about.

Full details of the measure are contained in the explanatory memorandum, and I commend this bill to the House.

Debate adjourned.