The GST distribution in Australia reflects the extreme of Australian fiscal equalisation as currently practiced in the world and should be recognised as already past its used-by date. Unfortunately, the current arrangement for federal financial relations makes it impossible to reform the GST distribution system.
The federal government is generally uninterested in how the GST is distributed among the states because there is little relations for its own revenue or expenditures, so its attitude has been if all the states agree then it would agree. Because any meaningful reforms to the GST distribution system would undoubtedly result in some so called winner and loser states, how could it possible for them all to agree?
Maybe a practical way to change this impasse is to require the federal to contribute, from its own revenue, 50% of the amount that is required for the redistribution from the current calculation and the other half is from the GST pool. In this way the federal government would have some incentive to make the system more efficient and still keep its fiscal equalisation role.
Another way is to distribution the GST by population shares and let the federal government provide all the equalisation funding, so it would have an interest and say in having the system reformed for the better of the nation. But both political persuasions in Canberra are unlikely to be interested in such nation/federation building project. Maybe a worthwhile trade-off is to ask the states to implement some reforms of their inefficient taxes identified in the Henry Review report as a condition for the increased funding from Canberra. It seems another review would be needed, even though a number of reviews done previously ended in failures.
There are entrenched "interest groups" that would like to maintain the current system devoid of any real reforms. This has been reflected even in the various reviews of the GST distribution, but all have failed as a result of that at least partially because of the divergence in any potential outcomes. It's an unfortunate tragedy for the nation.
The most recent one was commissioned by the PM and Treasurer and conducted by two former state premiers Mr Nick Greiner from NSW and Mr John Brumby from Victoria and a South Australian businessman Mr Bruce Carter, who were hand picked by Canberra. That review was first announced when the PM visited WA at a time there was strong tensions between Canberra and Pirth in terms of funding and hospital reform that the PM was keen to get it done.
The final report of that review was particularly disappointing because it represented a complete failure with virtually no meaningful reforms recommended except some face-saving wording, enormous waste of time and money and a huge retreat from its interim report which raised at least some hopes of reforms to the distribution system.
A potential reason for that failure is likely to be the lack of representation of people from WA and for that matter Queensland in the review panel. It was understandably difficult because any reforms would results in benefits to mining states at the time of mining boom when mining royalties can bring huge amount of revenue to mineral rich states particularly WA with Queensland ranked as the second.
The current GST distribution completely ignores the many changes in the past three and a half decades,such the many economic and tax reforms in Australia.