A GST Hike to 15% is Inevitable Thanks to Australia’s Coming Recession

taxation resize medium
Reddit

GST reform is on the way, and it could arrive much sooner than you think.

Raising the idea of changing the Goods and Services Tax was once regarded as taboo. But budgetary pressures are forcing a rethink of Australia’s entire tax code. At the centre of this is a proposed changed to the GST rate.

The latest development would see the government raise the GST from 10% to 15%. Driving this reform is an urgency to increase tax revenues.

No government in the world has a problem when it comes to spending taxpayer money. Every one of them, however, struggles raising revenue. The Aussie government is no different in that respect. But the push factors are now serious enough to warrant further consideration of GST reform. Why?

It boils down to Australia’s ongoing economic downturn. Latest figures show the economy grew at 0.2% in the second quarter. A hefty decline over the first quarter, all signs point to a coming recession. As growth stalls, it only adds to pressures facing the growing budget deficit. At last count, this deficit was over $40 billion.

Yet while the public discourse on GST hikes is new, the idea itself isn’t novel.

Reforming GST has always been part of the government’s long-term agenda. It just needed the right political climate to raise the issue in a public forum. It now has that platform.

Experts suggest such a move would raise $20 billion extra in annual tax revenues. Granted, this would hinge on the broadening of the GST tax base. That means food and education, for example, might fall under the GST umbrella in the future.

Such a change would  fall in line with similar value-added taxes across the world.

For comparisons sake, Australia ranks low on the global goods and services tax scale. New Zealand’s government recently lifted its rate from 12.5% to 15%. The OECD average for value-added taxes sits even higher, at 19.5%. At the extreme end, Scandinavian nations have value-added taxes of 25%.

In the context of other nations, Australian has plenty of scope to raise the GST. But the question is whether any such change makes sense for the economy.

In truth, a 15% GST tax could be a good thing for the economy. But it would depend on the government compensating for this by lowering other taxes. Otherwise it would only damage consumer confidence and spending.

That’s a big gamble though.

As with most changes to tax codes, the government isn’t always good for their word. Taxpayers have been promised these things before.

The Howard government lulled the nation into accepting the introduction of GST in 2000. It did so by promising cutbacks in other state taxes like stamp duties. That didn’t quite work out the way most people thought, did it? It goes without saying that you’re still paying stamp duty to this day.

Economic slump driving GST reform

Explaining the sudden urgency over GST hikes is simple enough. The government needs new avenues for raising revenues.

As mentioned previously, the economic downturn will only worsen the state of Federal budgets. Australia’s exporting sector won’t recover to help fix the deficit.

In fact, were it not for government spending, the economy wouldn’t have grown at all in Q2. Defence spending accounted for all of the 0.2% growth, according to the ABS.

Offsetting declining exports then leaves the government with three options.

The first is to lift corporate taxes.

We can dismiss this idea immediately. The government is loath to raise the current 30% corporate tax rate. After all, business investment is down across the board.

Non-mining expenditures are up slightly, but not enough to offset the fall in mining investments. Lowering opportunity costs for Australian companies makes little sense in a contracting economy. So we can forget about higher corporate taxes.

The next option is to slap workers with higher income taxes. It goes without saying that such a ploy amounts to political suicide.

In any case, the government doesn’t need to lift income taxes, as they have ‘bracket creep’ to rely on. Bracket creep, if you’re not familiar, directly affects your take home earnings. It does this by pushing your income into higher tax brackets through rising inflation. All told, bracket creep is a net gain for the government.

According to accounting firm PwC, it could cost taxpayers $45 billion over the next five years.

That leaves the government with a third option. In this category fall all other non-income taxes, like GST and super taxes.

Strange as it might sound, GST reform has the best chance of gaining wider public approval.

Why? It’s because the government’s proposal in raising the GST involves cutting income taxes too.

Here’s Prime Minster Tony Abbott speaking about this:

There is an efficiency argument for taxing earnings less and taxing spending more. I accept there is a strong argument, but it’s got to be in the context of overall lower taxes’.

Abbott argues that GST reform benefits the economy more than other taxes. At least, he thinks it’ll have the least negative effect on the economy. In his words, GST is the most efficient tax option for achieving economic stability.

But the suggestion that GST would only rise in the context of falling taxes elsewhere is debatable. As the government has shown in the past, walking the talk isn’t so easy.

Raising GST rates today is simple enough by promising lower income taxes. But who’s to say income taxes won’t rise again in a few years’ time? Can you see the GST falling back to 10% in that scenario? No, me neither.

Abbott’s simply indulging in political-speak to ease the fears of irate taxpayers.

What he doesn’t let on is that a GST hike punishes everyone. After all, you need to be a job to be liable for income tax. But you don’t need work to pay goods and services taxes.

Rising GST comes at the expense of every Aussie. And it means that those on lowest incomes stand to suffer most. After all, if your income is lower, then it means you pay a higher percentage of it on goods and services.

Now, you could make an argument that GST is the fairest tax. You pay taxes only for the goods and services you spend money on. It’s true, there is merit to this. But the problem comes when the GST broadens to include everything within an economy.

That then gives the government an excuse to cut back on things like healthcare spending. And that’s a dangerous road to go down. It might work in theory, but in practice it could hurt Australia’s worst-off households.

The hardest task: convincing states to agree on GST reform

The one snag holding back GST reform is gaining nation-wide approval. Currently, states agree on very little when it comes to tax policy change.

The problem is that any GST increase would need full support from all states and territories. From the Australian Financial Review:

The federal government continued to insist GST increases must be accompanied by income tax cuts. [That would] combat bracket creep and ensure there was no net increase in tax take. NSW and South Australia want the GST increased to 15% from 10%. [And they want] all the revenue spend on health. Victoria and Queensland are opposed to any increase in the GST and want the Medicare levy doubled to 4% instead’.

Not mentioned in that is Western Australia, which has little appetite for GST hikes either. Yet you can see why an agreement will take plenty of political wrangling.

Ultimately, this will only push the reforms back. But it won’t succeed in preventing changes to the GST rate. Pressures on government and state budgets will dictate as much.

Widening budget deficits and economic contractions are still relatively new phenomena. Just wait and see how a first recession in 23 years will change the discourse. Once the reality of this enters the public psyche, GST change won’t be far behind.

Mat Spasic,

Contributor, The Daily Reckoning

PS: One tax reform the government could look at is the growing issue of super concessions. Addressing superannuation tax breaks could plug holes in the budget deficit. But any changes to super should come as a result of a broader review of the system.

It’s become obvious to many that the superannuation industry is rife with abuse. And it’s not just government policies looking to steal your hard earned money. In fact, you’re more likely to be a victim of hidden superannuation fees slowly eating away at your retirement fund.

Yet according to The Daily Reckoning’s Bernd Struben, it doesn’t have to be that way. Bernd is the Managing Editor of Port Phillip Publishing. He has more than 20 years of professional finance and management experience. He’s written a free report to help you devise a plan to protect your money.

Bernd will show you how to take control of your own destiny, making your super work for you. In the report, you’ll learn why you should never leave your savings in the hands of fund managers who get paid regardless of their performance.

In addition, Bernd will also talk you through the four core principles of a successful investment philosophy. That way you can use your super to the build the wealth you’ve always dreamed of.

To find out how to download of copy of ‘The Hidden Fees Gouging Your Retirement Money…and What You Can Do About It’, click here.

Reddit

Leave a Reply

Be the First to Comment!

Notify of
avatar
wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au