'Money promised years ago hasn't turned up': Economists argue GST shortfall has left state and territory governments billions of dollars short

As state and territory governments face mounting pressure over debt and the delivery of essential services, some economists argue a flawed federal tax system – not spending decisions alone – has left them billions of dollars short.

The Australia Institute’s Research Director Rod Campbell told podcast Follow The Money that states were being ‘shortchanged’ because the Goods and Services Tax (GST) had failed to deliver the growing revenue stream it once promised.

“They’re not going broke, but they do have a problem,” said Mr Campbell.

“And that problem is that the money they were promised years ago hasn’t turned up.”

When the Howard Government introduced GST in 2000, state and territory governments were promised that their ‘bucket of money’ would mirror growth in the population and the economy.

“Here’s the trick,” said Mr Campbell, “it didn’t happen.”

According to calculations by the Australia Institute, if GST revenue had grown as expected, they would have received an additional $231 billion over the first 23 years of the tax, including about $26 billion more in the last financial year alone.

The Australia Institute’s senior economist Matt Grudnoff told the podcast the problem had developed gradually.

“At first, states barely noticed it at all,” he said.

“The GST was a great new big injection of cash into their budgets.”

However, he said, over time the GST base has shrunk because Australian households are spending an increasing share of their income on exempt items such as housing.

“Because of the housing crisis, people are spending more and more of their money on things like repayments and rent,” he said.

“Therefore, because people are spending more of their income on housing, they’re spending less on other things that are subject to the GST.

“And what’s happened is, over time, as the economy has grown and as the population’s gotten bigger, the amount of revenue collected in GST hasn’t kept up with everything else and it’s grown more slowly.”

The widening shortfall has progressively constrained state and territory budgets, forcing governments to make tough choices about essential services.

“They’ve had to cut back and back and back,” said Mr Campbell.

“We’ve seen larger class sizes, longer hospital waiting lists. We’ve seen public housing just disappear basically. We’ve seen public transport networks get worse.

“At the root of this is state governments not being able to fund what their communities expect and it’s because of this GST shortfall.”

Other major GST-exempt expenses include private health insurance and private school fees.

“Both of these are growing quite rapidly,” Mr Campbell said, arguing they, along with other GST exemptions such as an overseas holiday, disproportionately benefit wealthier Australians.

“One of the biggest problems with the GST is it makes inequality worse.

“It means that poorer people pay a larger proportion of their income in GST than richer people.”

“If we were to get rid of that exemption for private health insurance and private school fees, that would actually make the GST more progressive because it would be collecting more money from people on higher incomes, wealthier people.”

Mr Grudnoff said simply increasing the GST is “not going to help” and would make the system even more unequal.

Instead, he argued the federal government could broaden the pool of revenue it shared with the states and territories.

“For example, if we stuck a 25 per cent tax on gas exports, we could add that to the pool of money that goes in with the GST and then all of that $17 billion a year would be distributed out to the states,” he said.

Mr Campbell pointed to the deal struck by former prime minister Scott Morrison after Western Australia successfully argued it was receiving too little GST because booming iron ore royalties reduced its share under the distribution formula.

Instead of changing the GST rate, the Commonwealth ‘topped up’ the pool with money from elsewhere in the federal budget, ensuring WA received more funding without reducing allocations to other states and territories.

“So, the idea that we could tax gas exports and put that into GST funding to plug this hole that the housing crisis and the GST system have caused, it’s actually not without precedent within the GST funding system,” he said.

The Australia Institute argues Australia has many ways to make this happen, including introducing a wealth tax or cutting back on fossil fuel subsidies, which would also help tackle climate change.

“So, there’s all kinds of different ways we can do. We’re only limited by politicians’ imaginations, but certainly what we need to acknowledge is that the current system isn’t working for states,” said Mr Grudnoff.

“And often the state premiers get blamed and sometimes I feel sorry for them. Not very often I feel sorry for politicians, but every now and then you do because honestly, they’re constantly … copping it big time from the public saying you’re providing a worse service.”

Mr Campbell urged the states to form a united front across party lines to pressure Canberra for more revenue.

“They’re short-changing the states and they’re short-changing local governments and that’s driving so many of the problems and conflicts in Australian politics and policy at the moment,” he said.

He said the bottom line was: “Australia’s a rich country. We can afford to have whatever we want, and state governments should be able to afford to give you the services that you want.”

The Australia Institute’s Follow the Money podcast explains economics, politics and policy in plain English. Subscribe to Follow the Money on Apple Podcasts, Spotify, Pocket Casts or wherever you get your favourite podcasts.