“Other states need to consider where their state will be in six months to 12 months’ time if they don’t encourage their borders coming down.”

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GST collections are driven by household spending which has been hit disproportionately hard by pandemic-related shutdowns and a loss of consumer confidence.

Because the GST is collected by the federal government in a national pool, all states and territories suffer when that pool shrinks.

“Particularly dire household consumption and private dwelling investment in one state does affect all others,” says ANZ economist Cherelle Murphy.

A federal government budget update in July slashed the forecast total amount of GST to be collected in 2020-21 by $7.6 billion. Over four years the reduction could mount to $33 billion. That translates to a revenue loss of about $2.2 billion in NSW this financial year alone.

But the way the GST is carved up between the states will also be affected over time by the way each state’s economy performs.

A complex formula adjusts the way the GST is distributed in a bid to ensure all states and territories have an equivalent capacity to provide public services.

But that method has come in for harsh criticism.

The system was overhauled in late 2018 after a decade-long campaign by Western Australia which was aggrieved by the relatively small share of GST it received during the mining boom, although it boosted other sources of revenue in WA.

NSW and Victoria, which have larger and more diverse tax bases than most, often grumble about how they “subsidise” smaller states thanks to the GST distribution formula.

Under the current methodology, a state government stands to lose GST when it undertakes productivity-enhancing tax and other reforms, even when those reforms are in the national interest. Last year NSW Treasurer Dominic Perrottet said: “States that do nothing to strengthen their economies reap windfall gains from other states that do. This is not a system that’s fit for purpose.”

The coronavirus recession will put state budgets under extreme pressure.

The way Berejiklian has now linked border closures with state revenue shows the GST carve-up could stoke further tensions in the federation.

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Matt Wade is a senior economics writer at The Sydney Morning Herald.

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