The recombination of photoexcited carriers with electrons or holes bound to point defects results in many experimentally observed optical phenomena in wide gap systems, such as ultra-violet, yellow, green, and red luminescence in GaN. Such processes are usually explained with reference to a particular defect state and often such states are studied systematically via computational techniques. The balance between different defect states, however, which may be metastable but relevant in the time-scale of optical processes, is frequently omitted from such analysis. Here we study how different configurations of electrons and holes, whether bound to defects in well-localised ‘compact’ states, or in extended ‘diffuse’ states, can alter the observed luminescence in GaN. For our calculations we employ the hybrid quantum mechanical/molecular mechanical embedded cluster method, which offers advantages over more commonly-applied supercell-based techniques when modelling defects in wide gap materials. The analysis regarding the balance between compact and diffuse states, however, is not dependent on the computational technique we employ. Our results allow us to account for various photoluminescence peaks observed routinely in doped and nominally undoped GaN samples. In particular, we attribute the 3.46 eV and 3.26 eV ultraviolet emission peaks to nitrogen vacancies binding compact and diffuse holes respectively, and describe processes related to gallium vacancy complexes that result in yellow, green and red luminescence. We demonstrate that the competition between these differently bound carrier states is key to understanding the luminescence properties of GaN, a point that also has implications for wide gap oxides. Indeed, we show that taking into account the diffuse states associated with oxygen vacancies in In2O3, ZnO and SnO2 helps explain the different intrinsic conductivity properties of these transparent conductors.