Paul Osborne
(Australian Associated Press)

Malcolm Turnbull has promised every state will be better off under the government’s proposed changes to the way GST revenue is carved up.

The federal government will announce its plans on Thursday, but has rejected the key recommendation made by the Productivity Commission in its report on a fairer formula.

The commission’s report, also to be released on Thursday, recommended using an average figure as the basis of the carve-up, which would have resulted in severe cuts for Queensland, Victoria and South Australia.

“We will set out a model tomorrow where no state will be worse off and indeed every state would be better off,” Mr Turnbull told reporters on Kangaroo Island on Wednesday.

State and territory treasurers were briefed on the report on Wednesday but not on the federal response.

The current formula, known as horizontal fiscal equalisation, ensures all states can provide a similar level of services with the strongest state setting the benchmark.

However, Western Australia was outraged its share of the GST take fell to about 30 cents in the dollar.

Under the “average” model, over an eight-year transition, NSW would have been $8.9 billion better off in the period to 2026/27, while Queensland would have been $8.2 billion worse off.

Western Australia would get an extra $7 billion, while Victoria would be down $3 billion.

There would also be negative impacts for SA ($2.7 billion), Tasmania ($814 million), ACT ($689 million) and the NT ($376 million).

Tasmanian Treasurer Peter Gutwein was outraged by the report’s recommendation, saying he had expressed his disappointment directly to the Productivity Commission.

“What’s important now is the federal government’s response and I welcome the prime minister’s comments today … that all states will be better off than they are now,” Mr Gutwein said in a statement.

Victoria’s acting premier James Merlino warned Mr Turnbull not to put politics ahead of economics.

“We know Victoria is being short-changed when it comes to health funding – it would be ridiculous to be punished again by Malcolm Turnbull just because we have a strong economy and don’t have a by-election,” Mr Merlino said.

A Queensland government spokeswoman said it was right to reject the “averaging” model but the answer lay in broader tax reform beyond just the GST.

A spokesman for the ACT government said it would not support anything that took money away from the territory.

Shadow treasurer Chris Bowen said Labor, which has announced a funding package for Western Australia after it complained of the GST shortfall, would ensure no state or territory was worse off.

“We have recognised the legitimate grievances of Western Australia and the virtue of our policy is we can say the same thing in Perth as we say in Brisbane or Bundaberg,” Mr Bowen said.

“We have said we will top up WA’s GST payments with payments from the Commonwealth.”