Australia’s federation is at war over a single tax carve-up. Back in 2018, Scott Morrison’s government pushed through a radical change to how Goods and Services Tax revenue is distributed across the states and territories. It was billed as a fair fix for a resource-rich state that felt shortchanged. Now, the Productivity Commission has blown the lid off that arrangement, labeling it a multi-billion dollar policy failure that needs a complete reversal.
If you live outside of Western Australia, you are funding a system that hands billions of taxpayer dollars directly to the country's wealthiest state, leaving other state budgets gasping for air. The interim report from the Productivity Commission makes it painfully clear: the Morrison-era compromise missed every single objective it promised to hit.
How the Broken GST Formula Actually Works
For decades, Australia relied on a principle called horizontal fiscal equalisation. The core idea was simple. Every state and territory collected its share of the national GST pool based on relative need. If a state lacked strong revenue-raising streams, it got a bigger safety net so citizens in Tasmania or Queensland could access the same standard of hospitals and schools as those in New South Wales.
Then the iron ore boom hit, and Western Australia started swimming in royalty cash. Under the old rules, those massive mining windfalls meant WA's share of the GST dropped significantly because the system assumed they could fund themselves. Perth politicians screamed foul. They argued they were being punished for working hard and digging up the nation's wealth.
The resulting 2018 legislative fix changed the game entirely. It instituted a funding floor, guaranteeing that WA would never receive less than 75 cents on the dollar for its per-capita share, while the federal budget stepped in with billions in top-up payments to ensure no other state supposedly lost out. Except, the federal budget doesn't have a magical money tree. Taxpayers footing the bill are watching the federal government pump billions of dollars into a state sitting on a multi-billion dollar budget surplus.
Why the Productivity Commission Wants to Scrap It
Alex Robson, the deputy chair of the Productivity Commission, didn't mince words when releasing the latest findings. The commission found that the reform failed to achieve its goals, distorted fiscal balance, and loaded a massive, growing financial obligation onto federal coffers.
Instead of encouraging national productivity, the deal created a bizarre distortion where the rest of the country subsidizes a booming regional economy. Eastern states like New South Wales are bearing the brunt of the imbalance, watching their relative funding shrink while WA pockets billions in guaranteed handouts.
Economists have long lined up to condemn the policy. Prominent voices have called it one of the worst public policy decisions of the century. Yet, political survival kept both major federal parties locked into a bipartisan vow to protect WA's special deal, terrified of losing seats in the west.
The Political Showdown Ahead
State treasurers are meeting to hash out the fallout of this report, and the lines are drawn. Western Australian Treasurer Rita Saffioti stands completely isolated against her interstate counterparts, defending the arrangement as essential protection against eastern states treating Perth like an endless cash cow. Industry groups in the west are already mobilizing, arguing that any rollback will punish the engine room of the national economy.
Meanwhile, other jurisdictions are demanding action. They argue that a system requiring multi-billion-dollar federal bailouts just to keep basic state services afloat is fundamentally broken.
The federal government faces an ugly choice. Backing down means alienating an entire state ahead of electoral cycles. Ignoring the Productivity Commission means letting a multi-billion-dollar drain on federal taxpayers bleed out indefinitely.
Fixing Australia's tax distribution requires stripping away the political self-interest that birthed the 2018 compromise. Until Canberra finds the spine to stare down Perth and rewrite the formula, taxpayers will keep paying for a mistake that everyone knows was a bad idea from day one.
