GST Reform is ‘Sailing’ Closer to Shore

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Whenever a politician, no less a prime minister, starts using analogies to illustrate a point, you can be sure of a few things. More often than not, they don’t have anything of substance to say. Other times, they’re trying to gloss over some hard truths. And, in exceptional cases, they’re doing both at once.

Prime Minister Turnbull’s latest speech is a classic example of this. Speaking at the Economic and Social Outlook Conference in Melbourne, the PM gave some insight into his economic approach. Here’s what he had to say:

Fairness is absolutely critical. We will use every measure that we can to achieve that, rather than as some would have us hiding under the doona shuddering at the changes around them.

A reform package must, at the very least, raise the revenue we need, share the burden fairly across the community and do so in a way that incentives employment, investment and innovation.

If a policy doesn’t work chuck it out. Remember the sincerest form of flattery is plagiarism. Reform… should not be seen as a once in a decade or two convulsion accompanied by a hyperbolic scare campaign.

No mention of what policies could help achieve this. Or what policies need chucking out. But if that wasn’t ambiguous enough, he followed it up with this:

Rather it should be seen as a change of political culture that sees us like the sailor surrounded by the uncertainty of the sea and the wind.

Sometimes, the sailor reaches the mark with rapid ease, her sails big-bellied in a following wind. Sometimes with slow and deliberate tenacity, sails close hauled, tacking into the teeth of a gale.

But her vision is as clear as her destination is certain. How to get there and how quickly is the measure of her skill.

Encouraging words if, again, they were backed up with some meaty policies. The destination Turnbull alludes to aims for high wages, generous social welfare, and a first world economy. His words, not mine.

Yet in an era of slowing economic growth, this idyllic Australia is unrealistic. Any policy changes in Australia must come in the context of recovering global growth too. Ultimately, that’s where the money comes will come from to pay for these future goals. Pay for high wages and welfare requires a growing pie, not a redistribution of the existing one.

In saying that, we can read between the lines. Predicting where things go from here doesn’t have to be as cryptic as Turnbull makes out.

GST reform in 2016?

The elephant in the room is, of course, the Goods and Services Tax. GST reform is coming, and probably much sooner than you think. I wrote about this back in September. I’ll share what I wrote at the time here:

The latest development would see the government raise the GST from 10% to 15%.

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 could fall under the GST umbrella in the future.

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

We can assume, with a degree of certainty, that GST reform is one of the key planks of Turnbull’s policy change.

We know the government will be loath to touch corporate taxes. They want to help, not hinder, businesses investment. Especially with capital expenditures falling some $100 billion short in the coming year. What’s more, the corporate tax rate, at 30%, is already among the highest in the world. The OECD VAT average is currently 19.5%. That suggests Australia has scope to increase the GST.

Higher income taxes are another no-go zone. Malcolm Turnbull won’t touch this for a simple reason. The government has an election it has designs on winning next year. The last thing the Libs want is to jeopardise their position ahead of an election. When Turnbull talks about equality and fairness, he’s talking about spreading the burden. And the easiest way to spread the burden on everyone is not through income taxes. It’s through broad based taxes like the GST.

Equally, the government could sweeten any GST hike with income tax cuts. The former PM, Tony Abbott, alluded to this before he was ousted. At the time, he said there was an argument to be made in taxing earners less, and spenders more. And with what Turnbull is saying, it seems that party mantra hasn’t changed.

But would GST reform make sense?

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. And it could leave the lowest income earners worse off.

According to NATSEM research, the poorest households would be worse off. They stand to lose as much as 7% of their disposable income. Whereas the highest earning households would be 3% worse off, by comparison.

But GST reform  is a big gamble. As with most changes to the tax code, 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 we were led to believe. We’re still paying stamp duty to this day.

States will have the final say on GST

Of course, any proposed change depends ultimately on broad state support. From the Australian Financial Review:

The Federal Government continued to insist GST increases must be accompanied by income tax cuts. NSW and South Australia want the GST increase to 15% from 10%. [It wants] all the revenue spent on health. Victoria and Queensland are opposed to any increase in the GST and want the Medicare levy doubled to 4% instead’.

Achieving reform will be easier said than done. But there seems to be enough political will at the federal level to legislate reforms.

A 15% GST ticks all the government’s boxes. It’s a revenue raiser. It spreads the burden across the Australian economy. And it incentivises employment because it’s not a corporate or income tax.

All of which is to say that GST reform is on its way. How to get there and how quickly is the measure of government’s skill…

Mat Spasic,

Contributor, The Daily Reckoning

PS: Another tax reform the government is looking at is the growing issue of super concessions. But any changes to super should come as a result of a broader review of the system.

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