News & Current Affairs
03 November 2014
by Mikayla Novak
NO! To increasing the GST
Reform of the Australian federation should not serve as the stalking horse for worsening our already uncompetitive taxation burdens.
On the 125th anniversary of Sir Henry Parkes' famous Tenterfield federation speech, Prime Minister Tony Abbott spoke of the need to reform what is widely seen as an increasingly dysfunctional federal system.
Abbott posed a question that many would not have foreseen a Liberal Prime Minister, rhetorically inclined to lower taxation, to ask: "might the states be prepared to accept responsibility for broadening the indirect tax base?"
With the commonwealth government imposing a goods and services tax (GST) since 2000, and transferring all the revenues raised to the states and territories, Abbott's question was code for suggesting the GST rate be increased, or its base be broadened.
But the arguments in favour of a heavier GST tax load for Australia are weak.
They ignore the fact Australia already imposes a very heavy taxation burden, from an international perspective, and that institutional arrangements preventing the commonwealth unilaterally increasing the GST are in place for good reason.
Numerous academics, social welfare lobbyists and trade union officials cite published OECD statistics, showing our tax-to-GDP ratio some seven or eight percentage points below the OECD-member average, as irrefutable proof that Australia is a "low taxing country".
However these figures do not present a "apples with apples" tax comparison since they include European social security contributions, but not Australia's compulsory superannuation guarantee scheme which fulfils similar policy purposes.
Within the latest OECD Revenue Statistics publication a "apples with apples" comparison (excluding European social security contributions) is also published, illustrating that Australia's tax-to-GDP ratio is over a full percentage point greater than the OECD average.
In our globalised world, Australian tax policymakers also need to bear in mind that international tax burden comparisons should incorporate much lower taxing non-OECD member countries in our region, which we compete against for capital and skilled labour flows.
Much of the frustration for those supporting a higher GST stems from the fact that a longstanding intergovernmental agreement indicates changing the GST rate or base requires unanimous support from the commonwealth and all states and territories, as well as the successful passage of legislation through Parliament.
The rationale, and indeed importance, of this GST "fiscal constitution" becomes apparent when one considers the frequency of increases in similar taxes in other developed countries.
From 2000, when the Australian GST was introduced, to 2013, central governments across the OECD raised value-added tax or GST standard tax rates on 35 occasions, including 22 times during the aftermath of the 2008-09 global financial crisis.
The prohibition against unilateral changes to the GST rate or base can also be argued on other grounds.
For one, those on lower incomes would be likely to financially suffer as a result of increasing the GST, particularly in the absence of offsetting compensation, because more of their disposable incomes are directed toward everyday consumption items.
The rules surrounding GST rate and base changes also provide some protection against the dissipation of efficiency gains, in the event that any resultant growth in revenues from GST extension are to be spent by governments upon wasteful programs and activities.
In any case, contrasting the notion that the prohibition against unilateral changes to the GST rate or base has punitively starved the states of revenue is the fact that Australia has recorded a substantial increase in GST revenue collections.
As a consequence of general growth in nominal consumption expenditures, GST revenue has increased from about $24 billion in 2000-01 to about $51 billion last financial year.
This GST revenue growth was equivalent to an annual growth rate of about six per cent; well in excess of the average annual increase in general prices throughout the Australian economy.
With Australia hamstrung by duplicated bureaucracies and predatory commonwealth intervention in state policy affairs, the case for federalism reform is as obvious as it is imperative.
But the federalism reform Australia needs is not a GST hike worsening our tax competitiveness, and which would fail to resolve the underlying spending and tax assignment problems inherent within intergovernmental relations.
Therefore, the only reasonable answer to Abbott's Tenterfield question about a bigger GST would have to be a resounding "NO!".