New South Wales (NSW) Treasurer Daniel Mookhey says the GST redistribution by the federal government will result in the state losing its AAA credit rating and cost them nearly $12 billion over the next four years—more than COVID-19 policies.
The treasurer told the McKell Institute in Sydney that the changes will see the equivalent of 9,000 healthcare workers, 19,000 teachers, or 16,000 police officers go unfunded and will result in a significant fiscal setback.
“This can’t continue,” Mr. Mookhey added before saying the move is “an absurd GST decision,” arguing it should be distributed based on a state’s population share.
Mr. Mookhey said NSW will lose $11.9 billion (US$7.7 billion) over the next four years.
“The commission’s decision will cost NSW more in lost revenue than COVID-19 did ... NSW has never had such a sudden fall in GST ... Our share has fallen to 87 cents for every dollar paid in GST in this state,” he said.
“It will almost certainly lead to a downgrade.”
NSW is currently rated AAA by global credit rating agencies Moody’s and Fitch, despite a 2020 downgrade from Standard and Poors to AA.
Any entity rated A or above is considered to be capable of meeting financial obligations, although downgrades mean a state borrower has to pay more to raise debt.
GST revenue is collected by the federal government and then distributed to the states and territories based on the principle of horizontal fiscal equalisation (HFE). This means that states with weaker revenue-raising capacities receive more GST revenue, while states with stronger capacities receive less.
HFE aims to ensure that each state can provide services and infrastructure at the same standard, with the same level of effort, if each has the same tax system and applied the average tax rate. But it can also lead to significant differences in the amount of funding each state and territory receives from the federal government.
The distribution is determined by the Commonwealth Grants Commission (CGC), an independent body that assesses each state’s fiscal capacity. The CGC considers factors such as the state’s revenue-raising capacity, expenditure needs, and circumstances beyond its control, including population growth which is particularly pertinent to NSW.
Currently, the GST relativity floor, which is the GST each state receives per person, is the strongest in the Northern Territory, while Western Australia’s GST share in 2023–24 was increased to a guaranteed amount in 2018.
Australia’s two most populous states, NSW and Victoria, receive less due to an ability to raise extra funds via mining resources.
NSW, which currently receives the least per person has been pushing for GST distribution to be shared on a per-capita basis. The federal government is then required to top-up from the greater pool any states not meeting their relativity ceiling.
Protecting Families Now Becomes the Focus
After cutting $13 billion in gross debt in the last financial year and despite a predicted surplus for 2024/25, losses from the GST shortfall will set the state “back to square one,” Mr. Mookhey said.Despite the impending downgrade, the treasurer said the focus of the upcoming budget will be easing the burden of the cost of living crisis.
“I think protecting family budgets takes precedence over the AAA credit rating and I think having the flexibility to respond to the risk of recession is more important than the AAA in the current economic climate,” he said.
“I know too many families are still doing it tough. I can say to them that we are making progress and we will continue on that path despite this setback.”
Writing in the Sydney Morning Herald, Mr. Mookhey said “Fiscal discipline is key,” before adding that a shift to end the privatisation of essential services will bring relief.
“Ending privatisation, rescuing the Sydenham-to-Bankstown Metro and Metro West, and investing in a reliable and clean energy future, will all pay dividends for NSW,” he said.
“We can pay our essential workers more because we are paying our creditors less. By slashing the state’s gross debt by $14.8 billion we avoided $2 billion in interest payments.”
Federal Assistant Treasurer Stephen Jones told ABC Radio the federal government is still in discussions with the NSW government around the distribution of funds in critical areas like health and providing solutions for the housing crisis.
“In the area of health, we’re negotiating with NSW and other states around the new health and hospitals agreement,” he said.
“We’re in discussions around the NDIS, we’ve provided a record new injection into housing funding—$2 billion last year alone.”
