"GST is more efficient than payroll tax and its abolition would remove a disincentive to employment and improve competitiveness by cutting costs." Photo: AFR
Forget about increasing the goods and services tax. The welfare lobby might like the thought but just about everybody else thinks it's a crazy idea.
I fought for the GST back in the early 1990s. Then, the tax was designed so that a big chunk of the revenue was allocated to abolish the very inefficient wholesale sales tax. When finally implemented in 2000, the abolition of the wholesale sales tax gave businesses a shot in the arm because although they collect the GST, the massive hidden costs imposed by the former tax were removed. It was a huge boon to the economy.
The successful fight for the GST became one of the single most pro-business reforms in the past 40 years. The tax was opposed by Labor.
Today’s advocates do not want a better tax system; they just want to raise more taxes. The states will not want to be seen pressing for the GST, especially as some will soon be facing elections.
Some say budget funding decisions for the states are a ploy to force them to advocate GST increases. I think that is just Opposition Leader Bill Shorten’s fantasy. The states just want more dollars from wherever they can find them. But people do not want to be handing out more cash to governments; they want governments to better manage their finances and to do more to cut waste.
Any discussion about the GST could be considered only if the additional revenue was used, not for more spending but for abolishing inefficient taxes such as payroll tax.
The GST brings in about $50 billion a year. Payroll tax gives the states about $20 billion annually. GST is more efficient than payroll tax and its abolition would remove a disincentive to employment and improve competitiveness by cutting costs. When, as shadow treasurer, I first put some GST proposals to then leader John Hewson, I suggested 10 per cent. In 1992, 15 per cent was proposed in Fightback!, which also proposed the abolition of payroll tax. This was not revived by the Howard government because the cost of abolishing payroll tax would be about 4 per cent of the GST. Howard thought a 15 per cent rate was more than the public would be prepared to accept. He was right then and that reform would still be hard to sell today.
Labor and its running partners, the Greens and the populist Clive Palmer, are also unlikely to agree to a change in the GST. Broadening the base on food might raise $6 billion to $7 billion, and of that about $2 billion might be given back in compensation. But most people would think the compensation is not enough, some will worry that it will not endure, and the Senate will never agree to tax food because it is regressive.
Some believe the GST is not sustainable but the tax's 58 per cent coverage of household consumption is similar to other advanced economies. Broadening other targets such as health, education or imputed rent would also be very difficult.
The bottom line is that there is no easy path to more revenue. Money for government is going to be tight for some years to come. The recent big shift in consumer behaviour has been the reduction of consumption and much bigger savings, and hence less GST revenues. Labor’s answer to this situation is to continue borrowing, but our debts are ballooning to unsustainable levels. The future is structural reform to encourage better economic performance that will boost income for families and eventually encourage more consumer spending. This can be done but it will be hard to achieve because Senate opportunists will block many of the reforms that are needed.
In the meantime, the premiers will not let up until they get more cash.
The government could at least pacify some by changing the distribution of the GST receipts. In the past, per capita funding was the formula for 10 years. Today, Western Australia (per capita relativities 37.6) and Victoria (88) are right to complain that they get a bad deal. The present system really suits only the two mendicant states, Tasmania (1.6) and South Australia (1.2): the four other states should be funded on a per capita basis. The two poorer states should then be funded by direct negotiation with the federal government. The benefit of this approach is that the bigger states are then in a position to make decisions based more on their needs rather than the needs of the two poorer states.
Politically, this would be a case of divide and rule, and a better policy neatly aligning with the outcome of getting the big states off the federal government’s back and limiting the whingers to Tasmania and South Australia.
Peter Reith is a former Howard government minister and a Fairfax columnist.