Under a new formula, to be outlined by Treasurer Scott Morrison on Thursday, the Federal Government will ensure that by 2022, no state receives less than 70 cents per person per dollar of GST.
The funding will be untied, meaning governments will be able to spend it as they see fit to deliver services in their state, for things such as schools, hospitals, roads and rail.
Western Australia is expected to be the only state with a relativity (amount received) below 0.70 during the phase-in time from the next financial year.
The states and territories are slated to receive $67.3 billion in GST payments in 2018/19, rising to $112.25 billion, including the top-ups, in 2028/29.
The system under which GST is shared, known as horizontal fiscal equalisation (HFE), has not been changed significantly since the consumption tax was introduced in 2000.
The benchmark for HFE will shift over eight years to a new standard that will ensure the fiscal capacity of all states and territories is at least equal to that of NSW or Victoria (whichever is higher).
“Benchmarking all states and territories to the economies of the two largest states will remove the effects of extreme circumstances, like the mining boom, from Australia’s GST distribution system,” Mr Morrison said. As well as moving to a new standard, the Government will put in place the new “floor” of 70 cents per person per dollar of GST, below which no state’s relativity can fall, from 2022/23.
This will rise to 75 cents from 2024/25.
The government has rejected the recommendation of a Productivity Commission review to use an “average” figure to equalise the payments, which Mr Morrison said would have left smaller states behind.
WA’s GST share dropped to 30 cents in the dollar per person as a result of the mining boom, which triggered the review.
During the transition to the new system, the Federal Government will provide short-term funding to ensure no state receives less than 70 cents per person per dollar of GST.
The first injection into the new GST distribution will be worth $600 million in 2021/22, with a second injection of $250 million in 2024/25.
The combined additional commonwealth funding would then be indexed to grow in line with GST collections on a permanent basis.
Treasurers will meet in September with a final agreement expected by the end of 2018.