Q: What politician in their right mind would go to the next federal election promising to raise the tax on goods and services from 10 per cent to 15 per cent?
A: Probably none of them. But that just shows how lacking in courage and desire to fix our problems both sides of politics have become. Go for the simple, indolent life and become prime minister. Leave it for some other mug to repaint the house.
But there’s been a recent flood of worthies urging just that: an increase in the GST. On the Liberal side has been former treasurer Josh Frydenberg and former finance minister Mathias Cormann. Earlier, on the Labor side, we had Paul Keating and former union boss Bill Kelty.
The independent member Allegra Spender has made tax reform her special project. Among the economic experts, there’s been former Treasury secretary Ken Henry and Grattan Institute boss Aruna Sathanapally.
So what’s the problem? First, that old favourite, debt and deficit. It’s perfectly fine for the federal budget to be in deficit – where government spending exceeds tax collections – at times when the economy’s in recession or very weak and needs the government to prop it up, provided it’s back in surplus when things return to normal.
But we’ve run a deficit for most of the past two decades, with the government’s projection showing further annual deficits for as far the eye can see. Twenty years ago, the accumulated debt was equivalent to 5 per cent of the economy (gross domestic product). Now it’s 45 per cent. That’s the highest it’s been since we were paying off the debt from World War II. (You pay off government debt by running a budget surplus, which you use to buy back government bonds.)
Such growth in deficits and debt is clearly unsustainable. What’s more, it’s now clear that the global era of unusually low rates of interest on government bonds is ending, with rates around the world starting to shoot up. Interest payments on the debt already account for a big slice of total government spending. They’re about to start growing like mad.
The second reason the GST needs fixing is that, contrary to expectations when it was introduced 26 years ago, the amount it collects (all of which goes to the state governments) has failed to grow as fast as the economy is growing.
It’s also a declining share of total federal tax collections, meaning we become ever more reliant on by far our biggest tax – income tax. What helps keep income tax collections growing strongly is bracket creep. Not good.
Since nobody likes paying more tax, the smarties always have one objection to increasing the GST: “Oh no, that would be ‘regressive’,” they cry. Regressive means that people on lower incomes pay a higher percentage of their income than people on higher incomes do. This makes it the opposite to income tax, which is “progressive” – the higher your income, the higher percentage you pay.
It’s certainly true that the GST is regressive, but this isn’t the killer punch the smarties imagine it to be. For a start, changes in the mix of taxes – GST increased, but income tax decreased – are designed to ensure people on low incomes are more than fully compensated for the regressivity.
For another thing, none of the other rich countries relies solely on income tax to fund government spending; all of them also have “indirect” taxes like the GST. What’s more, their value-added taxes are levied at rates far higher than 10 per cent.
Of the Organisation for Economic Co-operation and Development’s 38 members, Australia has the equal third-lowest rate of GST. The average rate is about 19 per cent. So 15 per cent would be letting us off lightly.
The third reason for increasing the GST – and the one I like most – is the ageing of the population.
At present, our tax system is designed to favour the old over the young. The young pay income tax but, for the most part, the retired don’t.
The decline of the birth rate and the retirement of the long-living Baby Boomer bulge mean we’ll have ever-fewer people of working age paying income tax to support the retired with all their pensions, healthcare and aged care.
To me, that sounds like an excellent reason to whack up the main tax they do pay – the GST.
This week the Grattan Institute produced a fully worked example of how a higher GST might work. It estimated that if the tax rate was increased to 15 per cent and the exemption for food removed, it would raise about $76 billion a year.
Under the plan, $33 billion would be used to cut income tax. About $25 billion used to boost our “ailing welfare system” with the JobSeeker and Youth Allowance increased by 20 per cent, Rent Assistance increased by 50 per cent, and pensions increased by 8 per cent.
The remaining $18 billion would go to the states.
Grattan calculates that a low-income single-parent family that rents would pay about $79 a week on extra GST but get $202 in higher welfare payments and a tax cut of $27. This would leave them with about $150 a week better off.
By contrast, a higher-income working family would pay about $262 a week in extra GST and get a $100 income tax cut, leaving them paying $162 a week more in tax.
I think this change would make our tax system a lot fairer. (It would certainly have well-off Baby Boomers like me paying more tax overall.)
But, as I hope you’ve noticed, this change in the tax mix would do nothing to balance the budget and, at the very least, stop our public debt getting any higher. Actually, it would be better to run a surplus and get the debt down to a safer level. This would give the government more freedom to help prop up the economy during the next recession, or the next pandemic.
To achieve budget surpluses, this may require Anthony Albanese to take his life in his hands and make the countries that take home our gas leave us with a bit more of the profits.
Ross Gittins is the Herald’s economics editor.
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