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Times have changed for Australians since the Howard Government rolled out the goods and services tax (GST) in 2000. Household spending was much higher in those days, the global financial crisis was years away and overseas online sales were minuscule.
The changing economic and social fabric of the nation has put tax reform back on the agenda, along with the controversial notion of overhauling the GST.
Despite being acknowledged as one of Australia’s most effective taxes, some economists believe it needs to be tweaked to reflect modern Australia and shore up revenue for state governments.
Yet the tax continues to be a political football, with parties of all persuasions wary of entering the playing field.
Does it require a broader base to take in goods and services such as food, health and education, which were put on the exemption list 14 years ago? Should the rate of the GST be lifted from the existing 10 per cent?
INTHEBLACK canvasses the views of three economic experts.
Public policy specialist, Grattan Institute
The starting point for any discussion about the GST and taxes, according to Cassie McGannon, is that federal and state government budgets are in strife. She says the nation faces a decade of deficits – up to 4 per cent of gross domestic product, or A$60 billion a year in today’s terms, by 2023.
“Clearly something has got to be done about that,” McGannon says. “Our current budget position is not sustainable and at some point tax revenues are going to have to increase.”
The Grattan Institute has proposed a package of reforms which it says could add about A$37 billion a year to the bottom line of Australian Government budgets, including about A$13 billion annually from the GST.
“That’s a pretty significant contribution towards our budget deficits,” McGannon says.
The package includes expanding the GST net to include fresh food and private spending on health, education, child care and water, while also calling for the age at which Australians can access their pension or superannuation to rise to 70. McGannon admits such measures are controversial in some quarters and could be politically challenging to sell.
“But it’s very difficult to find a way to tackle the budget deficit that isn’t politically really tough.”
A key component of such reforms would be compensation to help “the people who would be hit hardest” through changes to welfare payments and the income tax system.
McGannon believes broadening the base of the GST to include goods and services such as fresh food and health is the fairest way to extract more revenue, and would be far more efficient than tinkering with stamp duties and company, personal income and payroll taxes.
It’s very difficult to find a way to tackle the budget deficit that isn’t politically really tough.
She says the Australian GST applies to about 60 per cent of the nation’s possible tax base, citing OECD figures that rank it seventh lowest among OECD countries. Including fresh food, education and health in the GST base would go a long way towards addressing that situation.
McGannon acknowledges concerns that applying the GST to fresh food may spark a backlash from poorer people who struggle to afford such food.
“But we also know that the wealthiest 20 per cent of households spend six times as much on fresh food as the poorest 20 per cent. Effectively the wealthiest 20 per cent are getting A$2 billion a year in exemptions on fresh food.”
While the Grattan Institute thinks it is worth discussing lifting the rate of the GST, it argues that broadening the tax base should be the priority because Australians are spending more and more money on GST-exempt services such as health and education.
“We expect that trend to continue, so the concern is that if we raise the rate without broadening the base of the GST we will have a less sustainable tax base. We would not be picking up areas of spending that are growing quickly.”
Although calls from domestic retailers to address tax exemptions on overseas online purchases have gained plenty of headlines in the past year, McGannon says the 2012-13 exemptions on overseas retail totalled a modest A$650 million, so the issue is a furphy in the context of the wider economic and tax debate. In any case, administration costs to pursue such retail exemptions would eat up most of the revenue gains.
“It’s just not an issue.”
Cassie McGannon is Fellow, Australian Perspectives, at the Grattan Institute, an independent public policy think-tank. She worked in public sector strategy and education policy for the Victorian and Commonwealth governments. At the Grattan Institute, her focus is on economic and fiscal reforms, including contributing to the Balancing Budgets: Tough Choices We need report.
Saul Eslake says there are two key reasons why changes to the GST should be part of broader tax reforms.
First, lower household spending since the introduction of the GST, combined with existing exemptions, is eroding its reliability as a revenue raiser.
Eslake points out that consumers are spending less since the global financial crisis, and a growing share of household budgets is going towards GST-exempt items such as education, financial services, health, rent and basic foods. As well, people don’t pay GST on offshore purchases.
“So the GST has turned out to be a less buoyant revenue source than it was originally intended,” he says.
Second, with state governments having to meet rising public expectations in areas such as infrastructure and health care, they are likely to require more tax revenue.
“Unless something is done to broaden the base of the GST and, if needs be, raise the rate of the GST, then state government finances are going to come under increasing pressure.”
Lifting the rate of the GST is of secondary importance to broadening its base, Eslake argues. He says New Zealand presents an ideal GST model in that it has few exemptions, so GST is much easier to collect for both business and the tax office. In short, it is much more efficient.
“Broadening the base ought to be considered and implemented before any consideration is given to raising the GST rate, but if it is deemed necessary after either broadening the base or at least contemplating what broadening the base would do to revenue, then the obvious thing would be to consider raising the rate to 12.5 per cent or 15 per cent,” Eslake says.
What GST exemptions should be scrapped in Australia?
Eslake says all items, including food, should be on the table, but he concedes that some are more problematic than others. For instance, imposing GST on health services worries him because poorer households spend a higher proportion of their incomes in this area. Likewise, lower-income earners are more likely to suffer if rent attracts GST.
By contrast, high-income households typically spend more of their incomes on food, financial services and education – which are currently GST-free – than lower-income families. So including those items could make sense.
Broadening the base ought to be considered and implemented before any consideration is given to raising the GST rate.
Despite economists debating possible changes, Eslake is “profoundly sceptical” that there is political will to reform the GST. He says there may be a window of opportunity to press the matter between March and November this year when, depending on the outcome of polls in South Australia, Tasmania and Victoria, all the state governments and the Northern Territory could have Coalition governments.
“And that may create the circumstances in which some sort of agreement could be reached, with the ACT perhaps being the holdout as they still have a Labor government.”
Regardless, the current Australian Government has ruled out any GST changes in its first term.
“So it will be politically difficult,” Eslake comments.
Saul Eslake is chief economist at the Bank of America Merrill Lynch and has worked as an economist in the Australian financial markets for 25 years, including more than a decade as chief economist at ANZ. He is a non-executive director of Hydro Tasmania. Eslake was a member of the Howard Government’s Foreign Affairs and Trade Policy Advisory Councils.
Business and investment policy adviser, CPA Australia
More pressing than GST changes is a “root and branch review” of the entire tax system in Australia, according to Paul Drum.
Yes, the GST must be up for discussion, he says, but the real considerations are what governments would do with any additional revenue and how they would package any reforms to the taxation system.
“The problem is that people often look at GST in a vacuum and by doing that you miss the bigger picture,” he says.
Drum believes it is time to seriously debate GST changes in the context of retiring other inefficient taxes. CPA Australia tried to put the issue on the agenda at the National Tax Forum in late 2011, but there were a lot of denouncers. Why?
Drum says politicians “run scared” at the prospect of putting up the price of consumables, while the public will inevitably say “no” when asked if they want the rate of the GST to rise above 10 per cent.
However, Drum believes if issues around national revenue shortfalls and low productivity are explained in detail – and appropriate compensation is delivered for those most disadvantaged by GST changes – they may be persuaded of the benefits.
“The discussion has not been properly publicly aired and presented. If you look at it in isolation you get the wrong answer,” he says. “You must do it as part of a package that includes compensation.”
KPMG modelling included in a report commissioned by CPA Australia that examined ways to raise Australian productivity and living standards, suggests that lifting the rate of the GST to 15 per cent would deliver the best results.
Drum says a more wide-ranging review of the tax system is required to consider what measures could complement GST reforms, including household compensation, increases to pensions and welfare payments, and possible cuts to taxes on business and families.
More pressing than GST changes is a 'root and branch review' of the entire tax system in Australia.
Such an evaluation would help inform a viable reform package for the current Australian Government to take to the next federal election and let it “present a case the same as John Howard and Peter Costello did when they brought in the GST”, he notes.
“If we don’t do it there’s going to be consequences. That’s the discussion that needs to be had,” he adds.
According to Drum, of almost 130 taxes in Australia, just 10 raise about 90 per cent of government revenue.
“That does not look like a sensible, efficient model that is going to enhance productivity – quite the converse.”
Looking abroad for better GST models, Drum nominates New Zealand’s as one of the best, noting that it included food from the start, unlike the Australian GST package.
“So ours was corrupted moderately from the outset because of a deal done with the Democrats to get it up in the first place.”
He believes the truth is there are few options besides tax reforms to help lift the nation’s productivity. And recent history shows that it is tough to introduce efficient new taxes in Australia. The carbon and minerals taxes, for instance, are already on the way out.
“So you don’t have a lot of choices of new taxes that you can bring in and be sustainable,” Drum says.
“The GST is already in and can be used to help. We’re not going to have to have a seismic shift in implementation – it’s already there.”
Paul Drum is head of policy at CPA Australia.
- Any GST changes should be part of a package of tax reforms
- Many economists prefer broadening the base of the GST to any immediate rate rises
- Political will to make changes to the GST is questionable
- Higher GST revenue could enable the retiring of some inefficient state taxes
What do you think? Should the rate of the GST be lifted from 10 per cent? Weigh in on the conversation by posting a comment below.