gst is 25 years old. does it work for tasmania?

Understanding Australia’s GST and State Funding

Introduced in July 2000, Australia’s Goods and Services Tax (GST) is a broad-based consumption tax. All GST revenue is centrally pooled and then redistributed to states and territories through the Commonwealth Grants Commission (CGC) to ensure Horizontal Fiscal Equalisation (HFE) – ensuring all states can provide comparable services.

Tasmania, due to its below-average revenue raising capacity and higher service delivery costs, receives a per-person GST share significantly above the national average.

Beyond GST, the Commonwealth further supports states through “no-worse-off” guarantees, Specific Purpose Payments (SPPs), and National Partnership Payments (NPPs), all funded from federal general revenue. Notably, GST comprises approximately 13% of the federal government’s total revenue, with individual and company income taxes forming the predominant share.

So what is GST?

The GST is a value-added tax of 10% levied on most goods and services sold or consumed in Australia, with designated exemptions for items such as fresh food, certain education and health services, and residential rent. It was legislated in June 1999 and commenced on 1 July 2000, replacing the federal wholesale sales tax and prompting the phasing out of various state and territory taxes, including banking taxes and stamp duties, to form a simpler, more efficient consumption tax system. The GST’s design includes input tax credits for businesses, ensuring the tax effectively cascades to the final consumer only.

History of the GST

Before the Goods and Services Tax (GST) began on 1 July 2000, Australian States and Territories secured their revenue through a complex three-pronged system:

1. Untied Commonwealth Grants (Financial Assistance Grants – FAGs): The Federal Government, holding the major revenue bases like personal and company income tax, shared a portion of this income with the States. These “untied” grants (FAGs) were distributed based on Commonwealth Grants Commission recommendations, aiming to equalize each state’s fiscal capacity. States had full discretion over how to spend these funds.
2. Specific Purpose Payments (SPPs): Beyond FAGs, the Commonwealth provided “tied” grants (SPPs) specifically for critical areas such as hospitals, schools, roads, and housing. These payments came with strict conditions and reporting requirements, ensuring the funds were used for their designated purpose.
3. States’ Own Taxes and Charges: Given the Commonwealth’s dominance over efficient tax bases, States relied on a patchwork of narrower, less efficient taxes. Examples included:
   • Payroll tax (transferred from the Commonwealth in 1971)
   • Stamp duties on property and insurance
   • Financial Institutions Duty and Debits Tax
   • Bed taxes, land tax, and motor vehicle registration charges
   • “Franchise fees” on alcohol, tobacco, and petroleum (which essentially acted as hidden excises).
   A pivotal moment: The High Court’s Ha v NSW (1997) decision struck down these franchise fees as unconstitutional excises. This ruling directly accelerated the push for a new, stable revenue source, significantly contributing to the adoption of the GST.

Was there a local (state) sales tax?

No. Australia did not have separate state or local sales taxes before the GST. Instead, there was a federal Wholesale Sales Tax (WST). This was a multi-rate tax, with rates as high as 45% on some items, levied at the manufacturer or wholesaler level.

The GST’s Transformative Impact:

The single, 10% GST replaced both the federal WST and the often-inefficient collection of numerous state taxes. All GST revenue is now entirely distributed to States and Territories, effectively replacing the old FAGs system and allowing for the abolition or phasing down of many of those narrow state taxes.

In essence, before the GST, States relied on a combination of Commonwealth grants (both untied and tied) and a disparate collection of their own specific taxes, but crucially, not a state-level sales tax. The GST consolidated and rationalised this funding, providing States with access to a broad and more consistent consumption tax base.

Tasmania’s GST Share and Relativity

Tasmania’s unique position within Australia’s federal financial system is clearly reflected in its share of the Goods and Services Tax (GST) pool. Unlike larger states, Tasmania consistently receives a significantly higher per-person share of GST revenue, a critical component of its budget.

The Quantum of Support: For the 2023–24 financial year, Tasmania was estimated to receive $3,409 million in GST, a slight increase of $5 million from the previous year. This substantial allocation underscores the ongoing commitment to Horizontal Fiscal Equalisation (HFE) in Australia, where states with lower capacity to generate their own revenue receive more federal support to ensure comparable service delivery across the nation.

The Impact of the 2018 GST Reforms (Relativity Floor and Top-Ups): The 2018 reforms to GST distribution aimed to address concerns, particularly from Western Australia, about states with strong revenue-raising capacities receiving a disproportionately low share of GST. Key elements of these reforms include:

• A “Relativity Floor”: This legislated minimum ensures that no state’s GST relativity (its share of GST per person relative to the national average) falls below a certain benchmark. This was primarily designed to benefit Western Australia, which, due to its booming mining royalties, was receiving a very low per capita share of GST.
• Commonwealth Top-Up Payments: To “smooth the transition” and ensure no state was worse off under these new arrangements, the Commonwealth government committed to injecting additional funds directly into the GST pool. These payments effectively boost the overall size of the pool before distribution.

While these measures largely benefit Western Australia by boosting its share, they have a subtle impact on other states. The overall pool is larger, but the relative share for states like Tasmania might see a minor theoretical reduction. However, Tasmania’s inherent fiscal challenges ensure its high per-person distribution is maintained.

Understanding Tasmania’s Elevated Fiscal Capacity Needs: Tasmania’s consistently high GST relativity – meaning it receives significantly more than its population share – is a direct result of two primary factors:

1. Lower Revenue-Raising Capacity: Tasmania simply has a smaller economic base compared to the larger states. This translates into a significantly lower ability to generate revenue from its own sources. For instance, on a per-capita basis in the specified period:
   • Payroll Tax: Tasmania can only raise approximately $675 per person, starkly contrasting with the national average of $1,057.
   • Mining Royalties: Its capacity here is even more pronounced, raising just $245 per person, compared to the national average of $1,000. These figures highlight the structural disadvantage in key revenue streams.
2. Higher Service Delivery Costs: Compounding its revenue challenges are the higher costs associated with delivering essential government services. Tasmania’s population is relatively dispersed, and it has Australia’s oldest demographic. These factors mean that providing services like healthcare, education, and infrastructure to a spread-out, older population is inherently more expensive on a per-person basis than in more densely populated or younger states.

These combined factors of lower own-source revenue capacity and higher service delivery costs are what drive Tasmania’s “relativity well above one,” leading to its consistent receipt of GST per person above the national average. This mechanism is fundamental to achieving horizontal fiscal equalisation, ensuring all Australians, regardless of where they live, have access to a comparable standard of public services.

Federal Funding Beyond the GST Pool:

Crucial Pillars of State Revenue

While the Goods and Services Tax (GST) is a cornerstone of state and territory funding in Australia, significant federal financial support flows to the states outside the direct GST pool. These additional funding mechanisms play a vital role in underpinning state budgets, addressing specific policy objectives, and ensuring fiscal stability.

1. No-Worse-Off Payments: A Guarantee of Stability

The 2018 reforms to the GST distribution methodology introduced a crucial safeguard: “no-worse-off payments.” These payments are a direct commitment from the Commonwealth Government to ensure that no state or territory receives less total GST revenue than they would have under the pre-2018 distribution arrangements.

• Purpose: The primary objective of these payments is to provide a “safety net” during the transition to the new GST arrangements. This allays concerns from states that might have seen their GST share reduced by the introduction of the “relativity floor” (which primarily benefited Western Australia). It ensures a predictable revenue stream during the adjustment period.
• Funding Source: Critically, these payments are funded directly from the Commonwealth’s general revenue, not from the pooled GST collected from consumers. This means they do not impact the calculation or distribution of the core GST revenue among states; they are an additional federal contribution.

2. Specific Purpose Payments (SPPs) and National Partnership Payments (NPPs): Targeting Key Outcomes

Beyond the untied nature of GST, the Commonwealth provides substantial “tied” funding to states and territories through two main categories:

• Specific Purpose Payments (SPPs): These are grants explicitly allocated for core service delivery areas. Historically, and continuing today, SPPs target fundamental public services such as:
  • Health: Contributing significantly to public hospital funding.
  • Education: Supporting school systems and vocational training.
  • Infrastructure: Funding major road, rail, and other critical infrastructure projects.
  • Housing and Social Services: Supporting vulnerable populations and housing initiatives. The key characteristic of SPPs is that they come with conditions and reporting requirements. States must spend these funds on their designated purpose and often meet certain performance benchmarks, ensuring federal policy objectives are met.
• National Partnership Payments (NPPs): These grants are designed to facilitate joint projects or reformsbetween the Commonwealth and states/territories. NPPs are typically more flexible than SPPs and are often used to:
  • Incentivize states to undertake specific reforms (e.g., in healthcare efficiency, educational outcomes, or environmental protection).
  • Fund specific, time-limited projects of national significance.
  • Share the cost and responsibility for addressing complex policy challenges.

Impact on Horizontal Fiscal Equalisation (HFE): The Commonwealth Grants Commission (CGC) assesses the impact of these tied grants on a state’s fiscal capacity:

• “Impact” Payments: If a tied grant is deemed to reduce a state’s need to spend its own funds in a particular area, the CGC will classify it as “impact” funding. This means it does factor into the HFE calculation, potentially reducing a state’s assessed need for untied GST funding. This avoids “double counting” where a state receives both direct federal funding for a service and a higher GST share for the same service.
• “No Impact” Payments: Conversely, if a tied grant is seen as not directly reducing a state’s underlying spending needs (e.g., funding a completely new initiative), it’s classified as “no impact” and does not affect the HFE calculation for GST distribution.

Unified Funding Source: Crucially, both SPPs and NPPs are, like the “no-worse-off” payments, drawn directly from the federal budget’s general revenue. They are not part of the GST pool. This distinction is vital for understanding the full scope of federal financial relations and how the Commonwealth leverages its broader revenue base (primarily income and company taxes) to influence and support state service delivery and strategic initiatives.

In summary, these non-GST funding mechanisms underscore the intricate financial ties between the Commonwealth and the states, reflecting shared responsibilities and the federal government’s role in guiding national policy outcomes and ensuring fiscal stability across the federation.

Commonwealth Government Revenue Sources

In the 2025–26 financial year, the Commonwealth’s total revenue is projected at $758.2 billion, sourced primarily from:

Revenue Source	Amount (A$ billion)	Percentage of Total Revenue
Individuals and withholding tax	357.8	47.1%
Company and resource rent taxes	145.5	19.9%
Goods and Services Tax (GST)	99.3	12.9%
Non-taxation revenue (dividends, fees)	56.0	7.4%
Excise and customs duties	43.8	6.6%
Other taxes	17.2	3.2%
Superannuation fund taxes	25.6	2.8%
Total	745.2	100%

Personal income and withholding taxes dominate, accounting for nearly half of all federal revenue, while GST contributes roughly one-eighth. Company taxes constitute a fifth, and indirect taxes—excise and customs—add about 6.6%, with the remainder from various other levies and non-tax sources.

The Interplay of Federal Transfers:

Navigating Australia’s Vertical Fiscal Imbalance

Australia’s federal financial system is a sophisticated network where the Goods and Services Tax (GST) and other federal transfers work in tandem to support state and territory governments. This intricate system is designed to achieve a balance between providing states with a stable financial foundation and allowing the Commonwealth to steer national policy.

GST: The Equalising Baseline

The GST-based equalisation system forms the stable fiscal baseline for all Australian jurisdictions, including Tasmania.Its core function is to implement Horizontal Fiscal Equalisation (HFE), ensuring that despite differences in their own revenue-raising capacities or costs of service delivery, all states can provide a comparable standard of public services to their citizens. For a state like Tasmania, with its specific demographic and economic challenges, the GST system is crucial as it consistently provides a higher per-person share, directly addressing its fiscal needs relative to wealthier states.

SPPs and NPPs: Targeted Influence and Flexibility

While GST provides broad untied revenue, Specific Purpose Payments (SPPs) and National Partnership Payments (NPPs) represent the Commonwealth’s more direct and flexible tools for policy influence.

• Targeted Fiscal Incentives: The Commonwealth uses SPPs to direct funding towards specific areas like health,education, or infrastructure, ensuring national standards or priorities are met. These “tied” grants incentivize states to invest in sectors deemed critical by the federal government.
• National Policy Priorities: NPPs, in particular, facilitate collaboration on joint projects or reforms that require a coordinated national approach. They allow the Commonwealth to fund initiatives that might fall outside routine service delivery but are vital for national progress, such as significant infrastructure developments, environmental programs, or social welfare reforms. This flexibility ensures that the federal government can respond to emerging national challenges or implement new policy directions without necessarily altering the fundamental GST distribution rules.

No-Worse-Off Payments: A Costly Commitment to Fairness

The “no-worse-off” guarantee payments, introduced with the 2018 GST reforms, were designed to ensure that no state would be financially disadvantaged by the transition to the new GST arrangements. While vital for achieving political consensus and ensuring transitional fairness, these payments carry an increasing cost for federal budgets.

• Dynamic Fiscal Landscape: As states’ own revenue bases evolve (e.g., through mining booms, population shifts,or changes in property markets), the theoretical GST distribution shifts. The “no-worse-off” payments then become a long-term commitment to compensate states for any perceived shortfall against a historical benchmark.
• Budgetary Implications: This commitment means the Commonwealth must find additional funds from its general revenue to cover these top-ups, potentially diverting resources from other federal priorities or adding pressure to the national budget. It highlights the challenge of implementing reforms that promise stability without creating new,potentially growing, financial liabilities.

Vertical Fiscal Imbalance: The Underlying Structure

Together, these complex mechanisms of GST equalization, targeted SPPs/NPPs, and “no-worse-off” guarantees fundamentally reflect Australia’s pronounced vertical fiscal imbalance (VFI).

• Commonwealth’s Dominance: Australia has one of the largest VFIs among federations globally. This means the Commonwealth Government raises significantly more revenue (primarily through high-yielding income and company taxes) than it needs to fund its own constitutional responsibilities.
• States’ Reliance: Conversely, states and territories have vast expenditure responsibilities (healthcare, education,policing, infrastructure) but a comparatively limited capacity to raise their own revenue.
• The Distribution Mandate: The surplus revenue raised by the Commonwealth is then distributed to the states and territories under various rules and conditions. This distribution is not merely a transfer of funds; it’s a critical tool for national economic management, social policy implementation, and ensuring equitable service delivery across a vast and diverse continent.

This interplay of untied grants, tied payments, and guarantees forms the backbone of Australian federalism, constantly balancing state autonomy with national objectives and the ongoing challenge of equitable resource distribution.

Is the Current GST/HFE System “Good” or “Bad” for Tasmania?

From a purely budgetary perspective, the current Goods and Services Tax (GST) distribution system is unequivocally beneficial for Tasmania.

This advantage stems directly from the principle of Horizontal Fiscal Equalisation (HFE), which aims to ensure all states can provide comparable services regardless of their inherent fiscal strengths or weaknesses.

Tasmania benefits significantly because it is assessed as having:

• Lower Own-Source Revenue Capacity: The state’s smaller economic base translates to a reduced ability to generate its own revenue. This is evident in its comparatively modest payroll and mining tax bases, alongside lower overall household incomes.
• Higher Relative Service Costs: Tasmania faces elevated expenses in delivering essential government services. This is due to its older, more dispersed population and the inherent diseconomies of scale in providing services across a less densely populated and often more remote geography.

These factors combine to assign Tasmania a “relativity above 1” within the HFE formula. This means Tasmania consistently receives more GST per resident than the national average. This substantial inflow acts as a crucial subsidy for core state services, enabling the Tasmanian government to avoid imposing markedly higher state taxes on its citizens or delivering public services at a demonstrably lower standard than other states.

The stark alternative: If GST revenue were distributed strictly on a per-capita basis, Tasmania would face an annual loss of hundreds of millions of dollars. Such a drastic reduction would inevitably force severe expenditure cuts or necessitate significant, politically challenging tax increases, fundamentally altering the state’s fiscal landscape and the quality of life for its residents.

Economic and Structural Effects: A Balanced Perspective

While the current GST/HFE system offers significant fiscal advantages to states like Tasmania, its broader economic and structural implications present both clear benefits and notable critiques.

Benefits:

• Service Stability: The predictable and substantial inflow of GST revenue provides Tasmanian and other financially weaker governments with a crucial, stable fiscal baseline. This reliability enables them to fund essential services—such as health, education, infrastructure, and social services—at levels broadly comparable to larger, wealthier states, preventing a decline in service quality based purely on local revenue capacity.
• Risk Mitigation (Implicit Pooling): The national GST pool effectively acts as an economic shock absorber. Even if Tasmania’s local economy faces downturns or its narrow tax bases experience volatility, it indirectly benefits from overall national GST collections. Strong economic performance or commodity price booms in other states enlarge the national GST pool, while HFE rules largely insulate Tasmania from the direct revenue impacts of its own economic fluctuations.
• Administrative Efficiency: Receiving GST as a broad, untied grant significantly reduces administrative burdenfor state governments. It streamlines financial management compared to the complexities and compliance demands of continually negotiating and managing a multitude of smaller, bilateral conditional grants from the Commonwealth.

Costs and Critiques:

• Potential Disincentives (“Fiscal Drag”): A key criticism is that generous equalisation might dull incentives for states to aggressively pursue economic diversification or expand their own revenue bases. If increasing local revenue capacity (e.g., through new industries or a booming property market) leads to a reduction in GST relativity, a significant portion of that “gain” is offset by a lower GST share. While evidence on the exact strength of this “fiscal drag” is debated, the perception of it can undeniably influence state policy choices, potentially hindering ambitious reform agendas.
• Dependence and Vulnerability: High reliance on external federal transfers can reduce the urgency for states to undertake difficult but necessary reforms in areas like tax administration, land-use planning, or productivity-enhancing policies. Furthermore, this dependence creates vulnerability: should the Commonwealth unilaterally change the GST distribution rules (e.g., by introducing new floors or caps that heavily favour specific states like Western Australia, as seen in recent reforms), states like Tasmania could be significantly exposed to sudden and impactful revenue reductions.
• Complexity and Opacity: The technical density of Horizontal Fiscal Equalisation (HFE) calculations, managed by the Commonwealth Grants Commission (CGC), often leads to a lack of public transparency and understanding. This complexity can hinder informed public debate about crucial budgetary trade-offs and long-term fiscal planning, making it difficult for the electorate to hold state governments fully accountable for their financial performance.

Alternatives and Their Implications

Any meaningful reform to Australia’s federal financial architecture must directly confront its entrenched vertical fiscal imbalance – the fundamental reality that the Commonwealth raises significantly more revenue than it spends on its own functions. Below, we explore realistic reform models and their likely consequences for Tasmania.

Realistic Reform Models & Their Tasmanian Implications

1. Per Capita Distribution of GST (Abolishing Equalisation)
   • Description: This radical shift would see GST revenue split purely by population, effectively eliminating Horizontal Fiscal Equalisation (HFE) or reducing it to a minimal, capped top-up fund.
   • Impact on Tasmania: Catastrophic. Tasmania would face an immediate and substantial budget shortfall amounting to hundreds of millions annually. This would necessitate severe expenditure cuts or politically unpalatable tax increases (e.g., higher land or payroll taxes). Service quality would almost certainly diverge significantly from mainland standards.
   • Political Feasibility: Extremely Low. Strong opposition from smaller jurisdictions, including Tasmania and the Northern Territory, makes this a non-starter.
2. Partial Equalisation (“Equalise to the Average” / “Equalisation Lite”)
   • Description: This model proposes equalising only a subset of revenue or expenditure categories (e.g., excluding volatile mining royalties) or capping the extent of redistribution.
   • Impact on Tasmania: Tasmania would still receive above per-capita funding, but less than its current share, increasing existing budget pressures. While potentially improving “incentive effects” by moderating extreme gains/losses, the immediate challenge for Tasmania would be managing the funding reduction.
   • Feasibility: Moderate. This approach has featured in past reviews and could be viable with substantial transitional assistance.
3. Fixed Relativity / Guaranteed Minimum
   • Description: Tasmania’s GST relativity (its share relative to the national average) would be locked in for a defined period (e.g., 1.7 for five years), rather than undergoing annual recalculation.
   • Impact on Tasmania: Provides short-term financial certainty and predictability. However, this could become disadvantageous if Tasmania’s fiscal circumstances genuinely worsen, or conversely, highly advantageous if they rapidly improve, as the system’s responsiveness to real-time needs would be reduced.
   • Feasibility: Moderate-High. Achievable through intergovernmental agreement, it also simplifies the complex technical workload of the Commonwealth Grants Commission.
4. Replace HFE with Larger Tied Grants
   • Description: GST would be distributed per capita, with the Commonwealth then using significantly larger, targeted Specific Purpose Payments (SPPs) to address state disadvantages.
   • Impact on Tasmania: Drastically shifts financial discretion to the Commonwealth. Tasmania would be compelled to meet strict federal conditions to access compensatory funds, risking under- or over-funding of specific needs and increasing the politicisation of budget allocations.
   • Feasibility: Low-Moderate. Administratively burdensome for both levels of government, and fundamentally undermines state autonomy, making it a difficult sell.
5. State GST Surcharge or Sharing a Broader Consumption Base
   • Description: States would gain the power to levy a surcharge on the national GST or vary their own consumption tax rates, akin to the Canadian model.
   • Impact on Tasmania: Tasmania’s narrow tax base and smaller population limit its revenue potential from such a mechanism. Raising a local GST rate could also deter consumption and complicate compliance (e.g., via cross-border online shopping). However, it would grant Tasmania direct fiscal autonomy over a key revenue stream.
   • Feasibility: Low. Requires significant constitutional and political agreement, alongside complex administrative reforms.
6. Tax Devolution (Assigning Part of Income Tax to States)
   • Description: The Commonwealth would reduce its income tax rates, allowing states to introduce a “piggy-backed” surcharge on individual income tax (potentially with some equalisation for capacity differences).
   • Impact on Tasmania: Provides access to a broad, growth-sensitive revenue base, potentially offering significant financial stability. Tasmania could set a modest surcharge, and existing ATO collection systems could manage administration.
   • Feasibility: Politically Highly Challenging. States have historically been very reluctant to bear the political cost of introducing a “new” state income tax, even if it’s a direct swap for federal revenue.
7. Economic Development Strategy (Grow the Base)
   • Description: Focus on strategic investments in population growth, productivity enhancements (e.g., digital infrastructure, skills development), and targeted sector development (e.g., advanced manufacturing, renewable energy, tourism).
   • Impact on Tasmania: The most sustainable long-term path. It expands Tasmania’s own-source revenue capacity. Over time, while this might cause its GST relativity to fall (reducing GST per capita), the total fiscal capacity of the state would rise if economic growth outpaces the reduction in transfers.
   • Feasibility: High, but requires long-term commitment. Requires coherent policy coordination and significant capital investment, with payoffs that typically lag over many years.
8. Resource / Royalty Sharing Reform
   • Description: Adjust the treatment of volatile revenue streams like mining royalties within the HFE assessment (e.g., by treating a portion outside the equalisation framework).
   • Impact on Tasmania: Could protect Tasmania from seeing its GST share reduced due to mining booms in other states, or if its own mining sector were to expand significantly, it could limit the “clawback” effect.
   • Feasibility: Low. Complex and highly contentious, as it would inevitably reopen the politically sensitive 2018 GST compromise which largely centered around Western Australia’s royalty share.
9. Expenditure-Side Reform
   • Description: States focus internally on efficiency improvements in public service delivery (e.g., through digital transformation, shared procurement models, or reducing administrative overheads).
   • Impact on Tasmania: Net positive fiscal impact if efficiency gains genuinely exceed any potential (and often marginal) reduction in GST due to lower assessed spending needs. This approach supports sustainability without necessitating fundamental changes to the federal funding structure.
   • Feasibility: High. Largely within the state’s direct control, but requires strong political will and disciplined implementation.

Strategic Assessment for Tasmania

Option	Fiscal Outcome	Autonomy	Risk Profile	Overall Suitability
Status Quo (Full HFE)	Highest transfers	Moderate	Policy change risk	Strong (baseline)
Per Capita GST	Large revenue loss	High	High (service cuts)	Poor
Partial Equalisation	Moderate loss	Moderate	Medium	Mixed
Fixed Relativity	Uncertain (depends on trend)	Moderate	Medium	Mixed
More Tied Grants	Depends on design	Low	Political risk	Weak
State GST Surcharge	Small gain potential	High	Compliance risk	Weak
Income Tax Devolution	Potentially positive	High	Political complexity	Medium
Economic Development	Long-run gain	High	Execution risk	Strong (long-term)
Royalty Sharing Tweaks	Marginal	Low	Negotiation risk	Limited

Conclusion: Tasmania’s Path Forward

Strategic Maintenance and Pro-Growth Reform

In the present fiscal climate, an objective assessment reveals that the current Goods and Services Tax (GST) and Horizontal Fiscal Equalisation (HFE) framework is unequivocally advantageous for Tasmania. This system acts as a critical fiscal backbone, underwriting essential service levels and ensuring a degree of financial stability that would be unattainable under alternative distribution models.

The Indispensability of the Current System for Tasmania:

The analysis of various reform alternatives highlights a crucial point: most structural changes proposed to the GST/HFE system would either directly reduce Tasmania’s funding allocation or introduce significant political and administrative risks that could destabilize its budget. Given Tasmania’s inherent fiscal challenges – its lower own-source revenue capacity and higher costs of service delivery – the current equalisation mechanism is not merely beneficial; it is foundational to its ability to function and provide comparable services to its citizens. To dismantle or significantly alter this system without robust, proven replacements would plunge Tasmania into immediate and profound fiscal difficulty.

Tasmania’s Optimal Dual Strategy:

Consequently, Tasmania’s most prudent and effective strategy in the immediate to medium term involves a dual approach:

1. Defensive Maintenance of HFE: This aspect of the strategy involves actively advocating for the preservation of the existing HFE principles. It means:
   • Vigilant Engagement: Closely monitoring and engaging in national discussions around federal financial relations, ensuring Tasmania’s unique circumstances and needs are consistently understood and represented.
   • Highlighting Benefits: Articulating clearly how HFE allows Tasmania to contribute to national equity and maintain its social fabric, preventing significant disparities in public services across the federation.
   • Resisting Undermining Reforms: Opposing proposals that might disproportionately disadvantage financially weaker states, such as extreme per-capita distribution models or further “floors” that could dilute the equalisation principle without adequate compensation. This “defensive” posture is not about stagnation, but about safeguarding the essential baseline funding that enables the state to operate and plan.
2. Pro-Growth Reforms to Broaden the Economic Base: Crucially, defensive maintenance of HFE must be paired with an aggressive and coherent agenda of pro-growth reforms. This forward-looking approach is about reducing long-term dependence, not just maintaining the status quo:
   • Strategic Investment: Focussing state resources and advocating for federal support in areas that directly enhance productivity and attract investment. This includes digital infrastructure, skills development to address workforce gaps, and targeted support for emerging and high-growth sectors (e.g., advanced manufacturing, renewable energy, specialized tourism, aquaculture).
   • Population Growth and Retention: Implementing policies to attract and retain working-age populations, particularly young people, through improved educational outcomes, diverse job opportunities, and enhanced liveability. This directly addresses the demographic squeeze and increases the tax base.
   • Fiscal Innovation: Exploring internal efficiencies in government service delivery and prudent reforms to the state’s own tax administration to maximize existing revenue potential without necessarily increasing tax burdens.

The Path to True Resilience:

Over time, the successful implementation of this pro-growth strategy will lead to a natural and organic reduction in Tasmania’s dependence on federal transfers. As its economic base expands, its own-source revenue capacity will increase, and while its GST relativity might naturally decrease, its overall fiscal capacity will grow. This enhanced self-sufficiency is key to improving Tasmania’s long-term resilience, making it less vulnerable to future national policy shifts or changes in federal financial priorities. It moves the state from a position of reliance to one of strength and autonomy, benefiting all Tasmanians.