An important feature of Australia’s federation is that the Commonwealth provides untied financial support to the states and territories (states). Since 2000, the Commonwealth has used revenue from the Goods and Services Tax (GST) to fund these transfers.
GST allocation reflects states’ different needs. This is known as horizontal fiscal equalisation.
States vary in their costs of providing services, as well as the amount of revenue they are able to access to pay for these services. The Commission uses evidence to estimate these differences.
The Commission determines the amount each state needs to spend, and the revenue each can access. A state with a small gap between the amount it needs to spend and the revenue it can access needs a smaller share of GST. A state with a large gap needs a larger share.
As the GST pool in a given year is fixed, needs are calculated on a relative basis. A change in the relative expenditure needs or revenue raising capacity of any one state will affect the GST allocation of all states.