WA fails in bid to change GST model, amid threat to distance itself from Commonwealth

Despite Western Australia threatening to step back from the Commonwealth, the states and territories have failed to agree on a new formula for distributing GST revenue.

Their inability to reach a consensus position, so desired by Prime Minister Tony Abbott and his treasurer Joe Hockey, is a bitter blow for the West Australian government, which is struggling to balance its budget because of a sharp drop in iron ore prices.

Mr Hockey told reporters after a meeting in Canberra today he would continue to consult the states before making a determination.

The treasurer laughed off suggestions the commonwealth could give WA a one-off financial grant.

"There is no magic pudding," he said.

But Mr Hockey warned Australia's federation would become an issue if WA's share of GST revenue fell below 30 per cent, as recommended in a Grants Commission report.

"I think the fairness test would suggest that going to 30 cents in the GST per citizen is at the extreme end."

Mr Hockey also flagged the need for WA to undertake "politically painful reform" as other states had done already.

Western Australia had earlier threatened to end co-operation with Canberra if it failed to win changes to the distribution model.

WA treasurer Mike Nahan had urged his counterparts not to be "greedy in the short term" but to recognise the need for changing how revenue is allocated.

The system was "testing the strength of our federation," Dr Nahan said.

When asked about his threat to withdraw co-operation, he said WA would pull back, "not in a petulant matter but in a thoughtful manner" and argue for abolishing the grants commission process.

Queensland Treasurer Curtis Pitt said it was important there was no fraying at the edges of the federation.

If there was special consideration given to WA , other states shouldn't be impacted, he told reporters.

Tasmanian Treasurer Peter Gutwen said his state was not prepared to give any ground on the GST to help WA fix its budget problems.

Victorian Treasurer Tim Pallas also took a swipe at WA, saying the GST fund was not ballast for the federal government to provide for an isolated one-off situation.

NT Chief Minister Adam Giles said he was happy about the way Canberra was currently sharing out funds.

"We want to be able to continue to provide the service we provide and improve it on an everyday basis," he told reporters in Darwin.

"We don't need to continue to go navel-gazing about how we fix tax and have all these fights with other jurisdictions. We think it's the wrong fight and the wrong focus."

Prime Minister Tony Abbott said it was up to WA to convince the other states of its argument.

"If WA is unhappy with the carve-up, they've got the opportunity today to talk to the other states and territories and to come to an arrangement which better suits them," he told reporters near Gympie.

WA Opposition treasury spokesman Ben Wyatt told AAP he had no problem with Dr Nahan "digging in" but urged him to calmly negotiate long-lasting reform of the GST system and not descend into "petulant foot-stamping".

"Keep your head," Mr Wyatt said.

He said the WA government had created much of its own budget mess, ignoring criticism that its iron ore price assumptions were overly optimistic.

The state government assumed the price would average at $123 a tonne this financial year but it has plunged to below $US50/t, punching a multi-billion hole in the budget.

Mr Wyatt said there was merit in using a five-year average for iron ore prices rather than a three-year average in calculating the GST share, which the Commonwealth Grants Commission is considering.

But there was a certain irony that the state government had a few years ago - when prices were buoyant - successfully argued to change it from five years to three.