Calls by state governments to distribute GST revenue according to population share is the best way to fix a system in desperate need of reform, Business Council of Australia Chief Executive Jennifer Westacott said.

Responding to a joint submission by state governments to the review of GST distribution, Ms Westacott said the current system was unsustainable and must be addressed.

“The push by the governments of New South Wales, Victoria, Queensland and Western Australia for the GST to be distributed on a per capita, or population share basis is in line with our submission to the review,” she said.

“We have done research showing that if federal and state finances are not put on a more sustainable footing, Australian governments could end up with a combined annual budget shortfall of five per cent of GDP by 2050, or $70 billion in today’s terms.

“State governments currently provide most of the services for which demand is growing, and yet they raise less than half the revenue needed through their own taxes.

“This means they rely on these inefficient, multiple state taxes which are a drag on the economy and sap productivity. Reforming the distribution of the GST is critical to the elimination of these taxes.

"The GST distribution review is an important opportunity to reform the system so that it encourages the efficient delivery of services, reduces barriers to national tax reform and facilitates investment to foster economic growth.”

Submissions by the BCA and state governments highlight the challenges of balancing the needs of different jurisdictions and for the review panel to map a transition path.

The BCA outlined several possible options to achieve this type of transition:

• quarantining a certain percentage of the GST pool for equal per capita distribution (50–60 per cent initially) with the remainder being equalised through a simplified process

• the equalisation of expenditures could be confined to focus on comparable levels of service for an identified safety net of services relating to health, education and other agreed services

• tackling Indigenous disadvantage through targeted financial transfers from the Commonwealth, including clear and transparent performance measures for closing the gap. This would leave the total funding allocated to Indigenous Australian’s unchanged, but improve transparency and accountability for Commonwealth and state expenditure

• territories and smaller states could be removed from the equalisation process, so that they receive only an equal per capita share of GST. Their remaining revenue requirements would be ‘made good’ through direct transfer payments from the Commonwealth to help meet additional costs per person of providing government services to smaller populations.

“Submissions by the BCA and state governments acknowledge that a move to population distribution would be costly for smaller states,” said Ms Westacott.

“The Commonwealth Government will need to play a part in assisting them cope with the necessary adjustments.

“But the fact that change is difficult is not an excuse to avoid necessary reform that will need to be taken sooner or later if governments are to deliver the investment needed to cope with rapid growth and to afford the services and social safety net future generations of Australians will require.”