The NSW premier has demanded a fairer distribution of the GST and greater autonomy when it comes to spending it, as she blamed an "antiquated" federal system for holding the state back.
Gladys Berejiklian on Tuesday called for an overhaul of the current GST model which she said rewarded "bloated and ineffective" state governments.
"Over the next four years, NSW will effectively subsidise the weaker states by $19 billion," Ms Berejiklian told a Business Council of Australia function in Sydney.
"That is a perverse reward for strong economic management, reform and investment in services and infrastructure."
The premier took aim at "prescriptive" national agreements between the commonwealth and states and territory governments, arguing there should be more "bilateral arrangements" instead.
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"We need a more flexible approach to deal with an increasingly diverse nation," Ms Berejiklian said when proposing a system of "earned autonomy".
"For the states that take the lead on reform ... the federal government could step back and allow greater flexibility in how we deliver our responsibilities through greater discretion on use of funds."
The premier argued one state - presumably NSW - should be allowed to trial her model with others following suit if it worked.
"This is what I mean by my idea of dynamic federalism," Ms Berejiklian said, adding it had the support of her state and federal colleagues.
