Mathias Cormann (WA, Liberal Party, Vice-President of the Executive Council) Share this | Link to this | Hansard source

I move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows—

The Bill reforms GST payments to the States and Territories (States) by providing a fairer and more sustainable way of distributing GST.

It is a plan that leaves all States and Territories better off.

The Commonwealth makes significant payments to the States and Territories. The GST comprises half or well over half of these payments for most States and Territories.

The good news for States and Territories, is that since 2000 when then Prime Minister John Howard and Treasurer Peter Costello introduced the GST the revenue pool has more than doubled. It is expected to grow anther 65 per cent over the next decade.

However, the system has not been working for everyone. The integrity of the GST was being threatened with Western Australia's share falling to 30 cents in the dollar. This compares to Victoria and New South Wales getting more than 90 cents in the dollar and the smaller States higher rates again.

The situation was so ridiculous that Tasmania and the Northern Territory both received more GST revenue than Western Australia, despite having populations that were one fifth and one tenth, respectively, of the size of Western Australia's population.

The current system of horizontal fiscal equalisation was effective when the Australian economy and States' and Territories' economies were relatively stable. It meant that the GST was distributed so that all States and Territories had their fiscal capacities equalised to be the same as the broad-based, stable economies of either NSW or Victoria.

However, the current system of horizontal fiscal equalisation was not designed to deal with significant economic shocks. The mining boom was an unprecedented shock to the Australian economy. It exposed weaknesses in the system that could not have been foreseen when the GST was introduced. So, after the economic shocks of the past decade, it is time to make improvements to the system.

The way that GST is distributed in Australia has not been updated since it was introduced in 2000.

The Coalition Government asked the Productivity Commission to reassess how the GST is distributed. The Productivity Commission found that although the current GST distribution system functions well and achieves high levels of fiscal equity, it can deliver perverse outcomes when there is a significant shock to the economy, such as a mining boom.

The Government's Interim Response released on 5 July 2018 proposed reforms to the way the GST is distributed that will leave all States better off and protect the integrity of the system.

GST will continue to be distributed using the 'fair-go' principle of horizontal fiscal equalisation (HFE).

In essence, States should have sufficient resources (fiscal capacity) so that all Australians can have access to vital government services no matter where they live across the country.

The Government's plan will:

First, create a new equalisation benchmark the stronger of New South Wales or Victoria (whichever is higher). All States will transition to this new equalisation standard over six years from 2021-22 to 2026-27.

Second, introduce a permanent in-system relativity floor of 0.7 from 2022-23, increasing to 0.75 from 2024-25.

Third, permanently boost the GST pool of funds available for distribution to the States and Territories, by providing direct Commonwealth cash injections each year from 2021-22 onwards. These are in addition to GST collections.

The Bill will enable an initial boost of $600 million in 2021-22 and a further $250 million boost in 2024-25, indexed each year to grow in line with the GST.

Fourth, during the transition period from 2021-22 to 2026-27, States and Territories will be guaranteed the better of the old system or the new system. This means at the end of the transition period, each State and Territory will have received the better of the cumulative total over the entire period of either the old system or the updated system. Payments will be verified annually by the Commonwealth Grants Commission over the transition period and any adjustments made accordingly.

Fifth, to be completed by December 2026, the Productivity Commission will conduct an inquiry to assess whether the updated system is working efficiently, effectively and operating as intended.

Sixth, separately provide short-term top-ups to Western Australia and the Northern Territory to keep their relativities above 0.7 and 4.66 respectively from 2019-20 to 2021-22.

At the end of this period in 2026-27, Australia will have a horizontal fiscal equalisation system that protects against economic shocks and provides a more stable source of revenue for all States and Territories.

The horizontal fiscal equalisation 'fair-go' principle has been an important part of our federal financial relations system since federation. The Government's horizontal fiscal equalisation reforms – implemented in this Bill – continue to uphold this principle, so that all Australians can have access to vital government services no matter where they live across this diverse country.

Debate adjourned.

I move:

That resumption of the debate be made an order of the day for a later hour.

I table letters from the state treasurers in response to a request by Labor senators in the relevant additional comments in the Senate inquiry report on this bill.

Question agreed to.