A GST increase remains all but impossible unless the Turnbull government deals with revenue shortfalls to the states and territories from Tony Abbott's unpopular 2014 budget, Andrew Barr said on Thursday.
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After meeting with federal Treasurer Scott Morrison and state and territory counterparts in Sydney, Mr Barr said debate had gone "around in circles" and the prospect of any change before next year's federal election could be prove difficult to secure.
Any change to the GST rate or base needs agreement from each jurisdiction but Mr Barr said the Turnbull government's position was any change should primarily address federal budget problems.
"There was no substantive progress," a pessimistic Mr Barr said.
"There are some fundamental differences over whether the country has a revenue problem or not. The proposition from the states and territories is about needing to fill the revenue gap as a result of the 2014 Commonwealth budget, an about $80 billion hole in health and education.
"It would be fair to say the Commonwealth is not particularly interested in increasing tax to fill that gap, so that's their starting point."
Mr Morrison threatened to kill off GST reform, warning states extra revenue could not simply prop up their own budgets.
Prime Minister Malcolm Turnbull had said he was seeking a "new dialogue for economic reform", including changes to the GST and possible improvements to state and federal government spending. Mr Barr, who will attend a Council of Australian Governments meeting with Mr Turnbull on Friday, said there had been "absolutely no change" in approach since the toppling of Tony Abbott and Joe Hockey in September.
"If anything there has been an affirming of their policy approach," Mr Barr said. "That question was specifically asked, would the new prime minister and treasurer mean a change in approach? The answer to that was an emphatic no."
Parliamentary Budget Office analysis released before the meeting showed if the GST was increased to 15 per cent, without exemptions, it would collect about $66 billion a year. An additional $7 billion would be raised if the current 10 per cent rate remained unchanged but exemptions for fresh food were lifted.
The federal government has also modelled an increase in the Medicare levy, an option preferred by some of the Labor-led states. On currently estimates, states and territories could face a combined deficit of about $50 billion within 15 years, including about $35 billion for health and $10 billion in education.
Mr Barr said consideration of the South Australian government's proposal for states to take some income tax revenue, not seen in Australia since World War II, would continue but some jurisdictions remained unconvinced.
"The attraction to that switch in the tax mix is the GST revenue stream is not growing as fast as health and education spending, whereas if the income tax pool is growing at a rate fast enough to keep up with the rate of growth in health and education."
He warned the any moves to let the states and territories manage more of their own tax affairs could have flow on implications for public service employment levels in Canberra.
"If the national government is not playing as significant a role in a number of these areas as it has traditionally, then the Commonwealth Public Service would be reduced in size commensurate.
"That's why this kind of change appeals to the current federal government, that they are looking for further ways to downsize the public service."
Mr Barr said GST changes could "fall off the table" as Mr Morrison was unlikely to take a package more beneficial to the states to the election, expected in the second half of 2016.
"I got a distinct impression that they weren't just going to support an increase in the GST for the sake of it," he said.
"What they call "reckless spending" is the states and territories delivering hospital services. The federal Libs "reckless spending" is our elective surgery. That's the fundamental disconnect at this point."
