'We can't pretend that away': States and territories won't get GST windfall

In a warning to his state and territory counterparts to temper their expectations ahead of a meeting in Brisbane on Friday, Dr Chalmers said discussions on how to share the pool of GST revenue need to recognise the pressure on the Commonwealth budget.

The Council on Federal Financial Relations meeting, which brings together the federal, state and territory treasurers including ACT chief minister Andrew Barr, is expected to hear claims by several states for a major increase in the amount of revenue they receive as they grapple to meet the needs of a rapidly growing population.

But Dr Chalmers said the states had already "done quite well" out of the federal government and needed to be mindful of the strain on federal finances.

"As we have this important discussion about the GST carve-up we need to recognise the pressures on both sets of budgets, Commonwealth and state and territory, and not just the pressures on state budgets. That's a really important thing," he said.

The federal government reported a surplus of $22.1 billion last financial year and Commonwealth Bank chief economist Stephen Halmarick says the budget is on track for a second consecutive surplus of around $20 billion in 2023-24.

Dr Chalmers has talked down the prospect of such a result, cautioning that "people shouldn't anticipate that we will print a second surplus in that mid-year budget update".

But the latest financial update indicates that the flow of revenue as at October was almost $10 billion greater than expected, underpinned by strong receipts from income and company taxes.

The Commonwealth Grants Commission, meanwhile, estimates the pool of GST revenue to be shared among the states and territories will reach $86 billion this financial year, plus almost $4.9 billion of "no worse off" payments from the federal government.

But the nation's rapid population growth, which reached 2.2 per cent in March, is fueling demand for state and territory services like education and housing, and increasing the pressure on infrastructure including roads, rail, energy and water networks.

In recognition of this, the Grants Commission, which advises on the distribution of GST revenue among the states, has updated its recommendations.

"As a result of large upward revisions in population and population-weighted density in Melbourne and Canberra, the assessed GST needs for Victoria and the ACT are expected to rise," it said.

Under its latest assessment, the commission recommends the ACT receive $1.83 billion this financial year, a $233 million increase.

But the formula to determine the allocation of GST revenue was complicated by a deal struck by former prime minister Scott Morrison in 2018 effectively guaranteeing Western Australia a minimum allocation.

Without the deal, Western Australia's soaring commodity revenues would have meant it would receive a significantly smaller share of GST revenue. Under the arrangement, the Commonwealth is committed to make up the difference between what it would ordinarily receive and the 0.7 relatively floor that had been set.

The cost of the policy to the Commonwealth has blown out from the initial forecast of $6.7 billion over the eight years to 2027 to $33.9 billion.

Dr Chalmers said the ballooning cost of the policy needed to be factored in to the discussions he has with his state and territory counterparts.

"That's not irrelevant to us," he said. "We need to factor that in. We can't pretend that away, but these are the sorts of things we need to recognise as we work together."