Australia's system for distributing Goods and Services Tax revenue has long generated controversy among the states. The Commonwealth Grants Commission's latest update sharpens the tensions. For 2026-27, Victoria will receive about $1.7 billion more in GST than New South Wales, despite NSW having a larger population.
The divergence illustrates how far the federal tax-sharing arrangements have drifted from a simple per-capita formula. The total GST collected, referred to as the 'GST pool', is divided between the states by the Commonwealth, based on advice provided by the Commonwealth Grants Commission (CGC), an independent advisory agency. That advice rests on a complex assessment of each state's spending needs and its capacity to raise revenue from other sources.
Victoria's case exemplifies the mechanics at work. Victoria emerges as the greatest beneficiary of the GST distribution, gaining almost $3.9 billion on last year, due to its booming population and struggling economy. The state's rapid population growth creates infrastructure demands. Simultaneously, its property tax revenues have grown faster than the national average, reducing its assessed need for GST support under the principle of horizontal fiscal equalisation. Yet the overall effect has been a dramatic shift. It's also the first time Victoria has become a net beneficiary of GST rather than a net contributor.
Queensland tells a different story. Despite the national pool increasing by almost 20 per cent over the past three years, Queensland will be the only state or territory allocated less GST in 2026–27 than 2023-24. The culprit: rising coal royalties. When Queensland's own revenue-raising capacity increases, the federal system assumes the state needs less GST support.
This invites a critical question about incentives and federalism. Does a system that penalises states for strong commodity revenues encourage fiscal responsibility or discourage economic activity? For most of the past 100 years the formula has delivered more to the smaller states (including Western Australia) than would be expected on the basis of population, and less to the larger states of New South Wales and Victoria. That principle of equalisation remains sound: wealthier jurisdictions should help fund services in poorer ones. But the distribution mechanism is increasingly opaque to ordinary citizens and politically contentious.
The broader context matters. On 6 December 2023 the Commonwealth and states agreed to extend the guarantee for 3 years to the end of 2029–30. This "no worse off" safety net, which ensures no state receives less than under the old arrangements, will expire at the end of that decade. Beyond that point, winners will gain at the direct expense of losers, with no federal cushion.
The stakes are real. In 2020–21, GST comprised 25 per cent of total general government sector revenue for Victoria. For states heavily dependent on this untied revenue, changes reverberate through budgets and service delivery. A planned Productivity Commission review in 2026 will offer an opportunity to examine whether the current framework still serves Australia's long-term interests or whether a more transparent, simpler allocation method might be preferable.