In the biggest shake up since the GST was introduced in 1999, Treasurer Scott Morrison has revealed that the Commonwealth will boost the GST pool by $5.2 billion over six years from 2021.

Tasmania’s share will be $112 million over the six years, while Western Australia will get $3.3 billion and Victoria $425 million.

Tasmania could have been $1.1 billion worse off under a proposed change to the GST distribution recommended by the Productivity Commission, which was rejected.

This proposal suggested an equalisation to the standard of the average off all states and territories. 

Mr Morrison said the changes would reinforce and protect the “fair go” system used to distribute the GST that supports public services, especially in smaller states, while removing the volatility in how these funds are distributed by removing the impact of external shocks, like a mining boom.

“The proposal will involve transitioning to a new (horizontal fiscal equalisation) system over eight years from 2019-20 in a way that is fair, reasonable and sustainable, and that will ensure all state or territories are left financially better off,” he said.

“By proposing an update to the way the GST is distributed, the Turnbull Government is moving to protect the long-term integrity of the [equalisation] system, ensure it is fit for purpose and can continue delivering on its objectives now and into the future.”

Mr Morrison said the government’s preferred model would be to benchmark the the fiscal capacity of all states and territories to NSW or Victoria – whichever has a greater capacity.

He said this would remove the impact on states of extraordinary financial windfalls, like the affect the mining boom had on Western Australia and the resulting impacts of distributions under the current method.

Mr Morrison said to help with the transition to the new system, short-term funding would be provided over the three years from 2019-20 to 2021-22 to ensure that no state received less than 70 cents per person per dollar of GST. 

This funding would be untied.

He said a special meeting with state leaders would be held in September with a view to reach a final agreement on transition arrangements by the end of the year.

The Productivity Commission had recommended a new carve up of the GST, which would have favoured NSW and Western Australia.

It recommended either a four-year or eight-year transition towards change with Tasmania predicted to lose $1.16 billion under a four-year transition and $814 million over eight years.

On Wednesday, economist Saul Eslake said he did not believe the commission’s recommendations were as bad for Tasmania as initially predicted but said the recommendations would be significant.  

“Although not as bad from a Tasmanian perspective as it could have been, the PC’s recommendation is clearly a step away from the principle that has governed the distribution of general purpose grants to states and territories since 1981,” Mr Eslake said.