The GST reforms were not a zero-sum game

This article was published in the Australian Financial Review on August 17, 2026.

The renewed attack on Western Australia’s GST arrangements rests on a fundamental error. It treats the 2018 reforms as a zero-sum transaction in which WA gained and everyone else necessarily lost.

That is not what happened.

WA will have received about $30 billion by the end of the transition in 2026–27. The other states and territories will have received what they otherwise would have, as a result of the transitional no-worse-off guarantee and the GST pool top-up that was legislated. And the Commonwealth, which paid the difference, collected by far the largest share of the windfall produced by iron ore prices remaining well above the assumptions on which the reform costs were based.

All three parts of that equation matter. Ignore the Commonwealth’s windfall and you misjudge both the cost and the fairness of the reforms.

Nor was it an arbitrary concession to WA. The reforms responded to a defect identified by the Productivity Commission’s 2018 inquiry into horizontal fiscal equalisation: that equalisation was being pursued above all else, and that the objective should be revised from giving every state the fiscal capacity of the strongest to a reasonable standard of services.

While the Commission judged the broader efficiency effects of equalisation to be small and hard to quantify, resource development was the significant exception. When a state facilitated major development and generated additional royalty revenue, much of the benefit was removed through a lower GST allocation, even as the Commonwealth and other states benefited.

WA was the clearest demonstration. It invested in the approvals, infrastructure, ports and policy settings needed to build one of the world’s most productive resources sectors, generating export earnings, employment and very large tax receipts for the Commonwealth. Yet without reform, WA’s counterfactual GST relativity in 2023–24 would have fallen to 0.09786, less than a tenth of its equal per capita share. No federation should regard that as sustainable or fair.

The reforms moved the benchmark from the fiscally strongest state to the stronger of New South Wales and Victoria, and set a minimum relativity, initially 0.70 and now 0.75. This did not abolish equalisation; it replaced absolute equalisation with reasonable equalisation. Nor is it the single-state carve-out it is described as. In 2026–27 the floor was not triggered at all, and the benchmark also lifted Queensland in two of the three assessment years used to calculate that year’s relativities.

The Commission’s modelling that underpinned the reform relied on relativity forecasts supplied by the state treasuries, in which WA’s relativity rose steadily to 2026–27, implying mining revenues were expected to fall materially. Commonwealth budgets carried the same expectation, through the prudent assumption I adopted as Treasurer that iron ore would settle at US$55 a tonne. Instead the price averaged roughly double that across the period, and at times exceeded US$200.

The scale can be estimated rather than just asserted. Successive Commonwealth budget sensitivity analyses put the effect of a sustained US$10 a tonne movement in the iron ore price at between $1 billion and $3 billion a year in tax receipts, building over several years as mining profits are realised and taxed. Roughly, this can equate to between $55 billion and $75 billion in additional revenue delivered to the Commonwealth over the reform period.  On higher sensitivities published by Treasury, potentially even more.

Set against that, the reform cost far less. Combining transitional top-ups, the no-worse-off payments and the perpetual boost to the GST pool together, the cost will be roughly $35 billion to the end of the six-year transition.

And here is the point the critics never confront. The cost of the reform and the Commonwealth’s windfall are not two separate facts that happen to net off. They have the same cause. High iron ore prices depressed WA’s assessed relativity, which widened the gap to the floor, which is what drove the no-worse-off payments. Had iron ore returned to US$55 as assumed, the reform would have cost a fraction of what it did, but the Commonwealth would have collected tens of billions less in tax. You cannot cite the cost while ignoring the cause of the cost.

This is why the zero-sum analysis fails. There was a much larger fiscal pie than forecast. The Commonwealth gained most, through company and personal income taxes. The other states were held harmless. And WA, whose resources sector generated the bulk of the windfall and which carried the development risk, retained a fairer share, rather than having it ripped away by the previous formula.

A distinction should also be drawn between the cost of the initial reform and what came afterwards. The transition agreed in 2018, with bipartisan support, was legislated to conclude in 2026–27. The guarantee was then extended three years to 2029–30 by the Albanese Government in 2024, again with bipartisan support, and formalised in a funding agreement rather than being legislated. On the same basis, combining no-worse-off payments and pool top-up together,  those three years will cost in the order of $20 billion, around two-thirds the cost of the entire six-year transition, in half the time.

The disincentive problem now matters more than it did in 2018. Developing Australia’s critical minerals and rare earths, much of it in WA, is no longer simply state economic development. It is a key feature of our national security policy and our strategic alliance with the United States.

The same applies to gas. Australia’s LNG industry is fundamental to our strategic and economic relationships with Japan and South Korea. It is worth recalling that when the reforms were considered, the Andrews Government had a moratorium on even onshore conventional gas exploration and development.

It would be self-defeating to run a fiscal system that tells a state: develop the industries essential to the national interest and we will confiscate most of the resulting improvement in your fiscal position. It would be equally foolish to underwrite states that choose economic self-harm by shutting their resource sectors down, or to strip out the legislative safeguard against both and leave it to the arbitrary choice of the government of the day. What investor or ally would take confidence from that?

None of this is an argument against redistribution. The Northern Territory’s 2026–27 relativity of 5.24 reflects genuine need due to remoteness, dispersion and the cost of serving Indigenous communities. In government I extended a further top-up to the Territory for that reason, and Tasmania’s and South Australia’s positions are not artefacts of a rigged formula either. But equalisation cannot extinguish the incentive to develop.

The debate about how to move forward should not be reduced to the simplistic observation that WA gained around $30 billion. As demonstrated this was not a zero sum game. There were important economic policy issues at stake that were addressed as part of the 2018 reforms and they remain just as valid today, and should not now be overlooked.

Hon. Scott Morrison AC was Prime Minister from 2018–2022 and Treasurer from 2015–2018, when the GST reforms were designed and legislated.