The Productivity Commission's verdict on the WA GST deal: a $60 billion mistake

The Productivity Commission's interim report on GST distribution, released on 14 August 2026 right after a meeting of state and federal treasurers, has found the Morrison-era GST deal with Western Australia achieved almost none of its goals and made the system less fair. The Commission has called the deal a costly mistake that should be reversed.

The numbers are stark. The WA GST deal has cost taxpayers nearly $23 billion by 2024-25, against an original forecast of about $5 billion. Based on current budget forecasts, the total cost will reach $60 billion by 2029-30.

The deal was requested by Western Australia and implemented under the former Morrison government with Labor's support. It placed a floor under any individual state's share of the roughly $100 billion annual GST pool — meaning no state can receive a lower per-person share than New South Wales or Victoria. States and territories get their share on a per-person basis depending on their fiscal capacity (broadly, how much revenue they can raise on their own), as assessed each year by the Commonwealth Grants Commission.

Think of GST distribution as a pool of money meant to top up the states that need it most. The system, known as Horizontal Fiscal Equalisation, is designed so all states can provide comparable services — schools, hospitals, roads — at comparable tax rates, regardless of whether they have booming mining royalties or a smaller revenue base. The 2018 deal put a floor under that pool, guaranteeing WA a minimum share, but in doing so it shifted the whole logic of who gets what and why.

GST funding accounts for around 25 per cent of state revenues on average, but the range is wide: roughly 10 per cent for Western Australia, almost 50 per cent for other states. The Commission concluded that only Western Australia has benefited from the deal change.

Deputy chair Alex Robson said the deal had reshaped a system that needed targeted reform, leaving taxpayers with a large and growing bill. Commissioner Angela Jackson identified perverse outcomes whereby a state improving its fiscal position can receive less GST. Economist Saul Eslake has separately labelled the 2018 reforms "the worst public policy decision of the 21st century" (The Guardian).

All state and territory jurisdictions bar Western Australia favoured a major overhaul of the GST system, according to the interim report. The No Worse Off guarantee — a commitment that no state would lose revenue because of the deal — was extended to 2029-30 in November 2024 through a funding agreement with all states except WA, which tells you something about how isolated Western Australia's position has become within the federation.

Not everyone agrees the deal failed. Former Finance Minister Mathias Cormann submitted to the inquiry arguing that WA's GST share has been stabilised and lifted while all other states received more GST revenue than they would have under the previous system. Another submission described the arrangement as a special carve-out for Western Australia. The WA government's own page on the reforms confirms an interim report was expected on 14 August 2026, with a final report to follow.

The political backstory matters for how these findings land. This was a Coalition initiative, requested by a Liberal state government, implemented with Labor's opposition support. Neither major party has clean hands on the policy, which narrows the scope for partisan point-scoring even as the fiscal damage becomes clearer. The original grievance was real enough: back in 2017, a Productivity Commission hearing transcript recorded 45 WA businesses concerned about growing state deficits and the GST not being returned to the state. Western Australia had a genuine complaint about the equalisation system's treatment of mining royalties. The 2018 deal was the remedy. It just turned out to be the wrong one.

The broader context here is that the Commission's core concern is structural, not just about the price tag. By inserting a floor tied to the relativities of the two largest states, the 2018 reforms did not merely top up WA. They fundamentally altered the equalisation principle that has governed GST distribution since the tax was introduced. Horizontal Fiscal Equalisation is meant to ensure all states can provide comparable services at comparable tax rates. A floor that benefits one state at the direct expense of the Commonwealth's bottom line, and indirectly at the expense of the integrity of the equalisation pool, does not fit that framework. When the cost balloons to four-and-a-half times the original estimate, the fiscal logic gets harder to defend.

What happens next is the real question. The Commission wants the deal reversed. Every state except the beneficiary agrees the system needs an overhaul. But unwinding a GST arrangement that Western Australia treats as an entitlement, and that was legislated with bipartisan support, is a different order of difficulty from recommending it. The final report will carry more detail. Whether any government, state or federal, is prepared to wear the political cost of acting on it is another matter entirely.