The GST turns 20 today. Is it time to increase the tax rate or broaden the base?
It was 20 years ago today the GST was introduced, and it was the dawn of a new taxation era for Australians.
After decades of it being on and off the table, John Howard took it to an election, which he narrowly won, and scraped it through the Senate — because he had to.
The forced removal of some taxes on alcohol, fuel and cigarettes punched a huge hole in government revenues, but the compromises made to get the GST across the line have meant it has never raised as much as intended.
Now, the pandemic means government budgets — federal and state — are haemorrhaging.
So, two decades on, is it time to lift the GST, apply it to everything, both or neither?
“We’ve had the pandemic and there’s a lot of churn and tumult in the economy,” former prime minister Mr Howard told ABC News.
“What does that mean for economic reform? Some people will argue it’s an ideal opportunity.”
Mr Howard and Peter Costello’s plan for the GST was for everything to be subject to the tax — including fresh food. But politics got in the way and so fresh food was exempt along with health and education.
The GST now raises around $70 billion a year, which is about 13 per cent of Australia’s total tax haul.
It is well short of what it could be, and has been in decline since it was introduced thanks to our spending habits — more on housing, education and health, less on GST-attracting frippery.
In the coming years, GST revenue will see a far sharper decline than it did in the GFC.
It is a big problem for the states — the GST is a key source of funding to pay for schools, hospitals and everything else. For NSW it is just over 20 per cent of total income, but in Tasmania it is around 40 per cent.
NSW leads push to change GST
NSW Treasurer Dominic Perrottet is the latest state leader to make a big push for a change to the GST.
“It is not broad right across the board, and it has a shrinking base that makes it challenging, and it’s also going to make it a greater problem for funding the states into the future,” he said.
Mr Perrottet is today releasing a review into the tax system, and hoping it will receive the support of interstate colleagues.
It is likely to propose beefing up the GST in exchange for abolishing other taxes like payroll tax, vehicle registration fees and, possibly, stamp duty.
It is also likely to recommend introducing a broad-based land tax to replace the revenue lost from abolishing stamp duty, an idea Mr Perrottet has previously floated.
The scrapping of some taxes in exchange for a bigger GST is supported by ANU’s Prof Robert Breunig and the Grattan Institute.
“These are tough conversations but ones that will drive better efficiencies and better outcomes,” Mr Perrottet said.
It will be a tough call — stamp duty in NSW accounts for 13 per cent of the state’s revenue, so it will require a significant lift in other taxes to fill that budget hole.
How should the GST’s birthday cake be taxed?
So, if the GST needs to increase, is it best to raise the rate, apply it to everything, or both?
There is plenty of room to broaden it.
The Tax Office’s lists on what is and is not exempt from GST are long and incredibly complex.
For food alone the list is 88 pages long, with 45 separate rulings regarding cakes and their decorations.
That will be some comfort to John Hewson who lost the unlosable election over the GST, in part, because of an infamous interview where he could not explain how the tax would apply to a birthday cake.
“It’s made more complicated because it’s not on everything — if it was on everything you wouldn’t have disputes about whether a biscuit is food or not food,” he said.
The Grattan Institute argues that broadening the GST to include all food, health and education would be more efficient and reduce costs for business.
It would also capture more spending by wealthier people, who are more likely to spend on private education and health.
But the idea has not won over Mr Perrottet’s southern counterpart.
“We know that we’re going to see increasing difficulties in the community, so I don’t think now is the time to talk about massive disruption to the settings,” Victorian Treasurer Tim Pallas said.
A 15pc GST would raise an extra $30b
What about just lifting the rate then?
Australia’s rate of 10 per cent is well below the OECD average of 19 per cent.
Increasing the rate to 15 per cent would generate an additional $30 billion.
Concerns that a higher GST would hit those who can least afford it could be alleviated by putting some of the extra money raised into beefing up the welfare system.
The Grattan Institute has suggested spending about 30 per cent of the additional revenue from a 15 per cent GST on increasing welfare payments, which would leave two-thirds of low-income households better off overall.
With budget deficits heading into the hundreds of billions of dollars, governments need to do something now.
The fallout from the pandemic provides the opportunity to make the next bold move.
Politicians remain wary of the GST
But who will be brave enough to tinker with the GST?
When asked about it this week, Commonwealth Treasurer Josh Frydenberg said the Government’s “focus has been on cutting taxes, recognising that tax reform is one of those key areas that we need to drive forward on”.
Prime Minister Scott Morrison this week dodged the question, after declaring last year: “We’re not doing it.”
Victorian Treasurer Tim Pallas is more pragmatic.
“We’ve all had the opportunity to shed ourselves of our doctrinaire positions because of the pandemic, or our responses to it,” he told ABC News.
NSW Treasurer Dominic Perrottet is hopeful that his federal and state counterparts will want to write themselves into the history books.
“I think the history books shine brightly on the Hawke, Keating, Howard, Costello era — the reforms that they achieved set up our country for 30 years of economic prosperity,” Mr Perrottet said.
“The reality is today we need to be look at what are those reforms are that are going to do the same for generations to come.”
Mr Howard believes changes could be made — because he has already done the heavy lifting.
“It’s not as if that one big reform is still there to be tackled,” he argued.
“It’s a question of whether incrementally, at the right time, certain changes can be made. That’s up to the Government to decide.”