‘Worst public policy of the century’ faces probe

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A deal to placate angry West Australians that is on track to cost taxpayers more than $60 billion will be examined by the Productivity Commission, with the institution able to assess whether the arrangement is good value for the nation.

Treasurer Jim Chalmers announced on Wednesday that the commission would start the year-long investigation into the GST deal put in place by the Morrison government, which has become one of the biggest drains on the federal budget.

Anthony Albanese in the West Australian electoral division of Tangney during this year’s federal election.

While the terms of reference require the commission to consider the government’s ongoing commitment to the original Morrison deal, it also enables it to come up with alternatives that may ease the pain to the nation’s finances.

Chalmers said the commission inquiry would ensure the GST was allocated to deliver the best value for state, territories and taxpayers.

“This work will ensure we have the best possible system to pay for the schools, hospitals and essential services Australians need and deserve,” he said.

“The inquiry will look at ways in which the federal financial relations system can best promote fiscal sustainability across the states and territories and the Commonwealth.”

As treasurer, Scott Morrison ignored a Productivity Commission report into the annual carve-up of the GST that had left Western Australia, which was enduring a state recession, with mounting budget deficits and debt.

He came up with his own plan, supported by Labor, to ensure WA received billions of dollars in extra assistance.

Under Morrison’s policy, originally forecast to cost $2.3 billion over four years, no state’s GST share could fall below 75¢ for every dollar of the tax with the federal government topping up the national GST pool. At the time, WA’s share had fallen below 30 cents of every dollar estimated to be raised within the state.

It was estimated to cost federal taxpayers about $2.3 billion over four years. Instead, it is on track to cost more than $60 billion by 2029.

Under the terms of reference, the commission needs to determine if the arrangement is “fiscally sustainable” for the federal and state governments, whether the system is acting as an incentive for the states to pursue reforms in areas such as tax and service delivery and if it is providing certainty to states for their budget planning.

They also require the commission to assess the feasibility and risks of any changes while accounting for the federal government’s promises during the last election to honour the original Morrison deal.

The GST deal has grown faster than any other federal program including the NDIS. But it is also a huge political issue for the government and Coalition.

The deal was put in place largely due to explicit political pressure across WA where, in 2018, the Coalition was defending 11 of the state’s 16 seats. At the 2025 election, Labor won 11 seats with the Liberal Party holding just four.

Economist Saul Eslake has described the GST deal as the worst public policy decision of the 21st century so far.

Apart from the pressure on the budget, other states are agitating for change to both the deal and the way the GST is allocated.

Independent economist and long-term critic of the Morrison deal, Saul Eslake, said the inquiry would be a test for the Albanese government and whether it would continue to “gift” the nation’s richest state with $7 billion a year more than it needed to provide services to its residents.

He said the commission would have to find the deal was not working as intended, given the huge blowout in costs.

“Any rational person would also draw from that fact alone that the current arrangements are not fiscally sustainable for the Commonwealth,” he told this masthead.

“Hopefully, the treasurer has today opened the door to reversing the worst public policy decision of the 21st century thus far.”

The key reason for the blowout in the GST deal has been the ongoing strength in iron ore prices which had been assumed to fall to their long-term average. Instead, they have consistently outperformed expectations.

In the March budget, the spot price of iron ore was assumed to fall gradually to $US60 a tonne by March next year. So far this year, it has averaged more than $US100 a tonne.

If that continues, it means the cost of the GST deal will again blow out.

Initial submissions to the commission will close on February 27 with an interim report due by August 28. A final report has to be delivered to Chalmers by the end of next year.

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