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Commonwealth Grants Commission finding highlights CCI’s case for GST reform

The Chamber of Commerce and Industry WA (CCI) has welcomed yesterday’s release of the Commonwealth Grants Commission’s (CGC) horizontal fiscal equalisation position paper which acknowledges that Australia’s GST calculation is broken.

CCI Chief Economist Rick Newnham said acknowledgement from the CGC that the GST calculation is broken is an important first step towards GST reform, however their proposed solution is nothing more than an invitation to state governments to hike up royalty rates.

“The CGC has acknowledged that there is a problem with the GST formula but has made the wrong recommendation to fix it,” Mr Newnham said.

“If implemented by the Commonwealth Government, this would create a strong incentive for state governments to raise royalty rates to capture additional revenue.

“It would also further discourage the mining resources sector to invest in production and exploration at a time when they need to be incentivised.”

CCI’s submission to the Productivity Commission, which is due to release its draft report next month, has called for the GST system to be reformed to a partial equalisation model, which would restore incentives for states to develop underutilised industries and boost national economic growth. CCI also called for the introduction of a GST floor to restore stability in GST revenue.

Mr Newnham said CCI’s submission outlined three methods to reform the GST formula, including by carving out 25 per cent of mining royalties to ensure states keep more of the revenue they generate when they fully develop their own economy, as WA has done.

“It has become increasingly clear that the current GST distribution system has created perverse incentives for state governments across the country to block industry development, which hinders national economic growth,” Mr Newnham said.

“For example, if New South Wales and Victoria developed their onshore gas sectors they could create billion dollar industries and inject millions into their own state government revenue, but because they’ve banned unconventional gas, they receive GST that would have otherwise been distributed to Western Australia and the rest of the country.

“This effectively rewards economic laziness while punishing states like WA which drive development, grow their industries, and create jobs.

“If the Commonwealth Government wants to truly reform the GST calculation, without hindering economic growth, they should disregard the Commonwealth Grants Commission’s proposal and instead implement a solution that will incentivise states to grow their economies, as CCI has recommended.”