After taking office, the Abbott Government stated that it would not pursue an increase in the rate of GST, or broaden its base, unless called upon by the states.
This week’s Federal Budget, which reduced earmarked funding to the states for hospitals and schools by $80 billion between 2017-18 and 2024-25, has blown a hole in state budgets, and effectively dared them to raise revenue via an increase in the GST:
“If they want to maintain that level of funding … they will have to get it from taxpayers, just as we would have had to get it from the same taxpayers,” treasurer Joe Hockey told the ABC on Wednesday.
Abbott said the federal government believed “the states should take more responsibility for their public hospitals and for their public schools and we make no apologies for wanting the states to be grown up, adult governments that take responsibility for the programs that are theirs, for the institutions that they run.”
Asked whether the states had any choice but to provide the necessary support to broaden or raise the goods and services tax, he said they were “perfectly entitled to argue for change, if that’s what they want”.
To say that the states are livid about the Budget is an understatement. New South Wales premier, Mike Baird, who is reportedly a close friend of Tony Abbott, described the Budget as a “kick in the guts”, whereas Queensland Treasurer, Tim Nicholls, has warned Abbott to expect a fight over the funding changes. For its part, Victorian premier, Michael O’Brien, has called for a review of how the GST is divided up among states, complaining that Victoria is being short-changed.
However, most premiers seem to agree that an emergency COAG meeting is needed to discuss the changes.
Whatever the case, it appears that a higher GST is on its way, which in my opinion would be no bad thing.
As illustrated by The Guardian’s Greg Jericho, Australia has one of the lowest reliances on GST in the OECD, but a relatively high reliance on personal and company taxes:
…what is really striking is how little we raise through value-added taxes – like our GST. Of the nations that have such taxes…, Australia takes in the second least amount relative to its GDP. And, given Japan’s consumption tax is about to rise from 5% to 8%, pretty soon we’ll be the lowest.
The Henry Tax Review showed that GST is a relatively efficient form of taxation. It has a relatively low “marginal excess burden” (i.e. a small loss in consumer welfare relative to the net gain in government revenue), because it is broadly applied, is difficult to avoid, and does not significantly distort behaviour (see next chart).
Raising the GST would, therefore, help to reduce the tax burden on the shrinking working-aged population, while at the same time improving efficiency and productivity. If it were broadened rather than raised then it should be accompanied by compensation for low income people to be equitable.
It is for these reasons that Treasury Secretary, Martin Parkinson, last month decided to jump into the GST debate, declaring the federal budget could not return to surplus unless the tax mix became biased towards consumption taxes – effectively code for raising the GST, in addition to fuel excise.
Hockey, too, understands these issues, acknowledging last month that “clearly there is an imbalance in the Australian taxation system”, in reference to its over-reliance on taxes on incomes and profits and under-reliance on more efficient indirect taxes.
Of course, the state and federal governments do have other even more efficient tax options. The state governments could look at raising revenue through broad-based land taxes, whereas the federal government could raise additional revenue via resource rent taxes. While not shown in the chart above, both taxes would have similar efficiency to the Petroleum Resource Rent Tax (PRRT) and Municipal rates, since they would be applied to a tax base that is completely immobile – land. They are also more equitable than either consumption taxes or income taxes.
A broad-based land tax would also have more favourable distributional impacts than the GST, and would effectively boost land supply and help make infrastructure investment self-financing for governments.
Regardless, the Abbott Government’s starving of funds to hospitals and schools could be a back-door way of forcing the states to push for tax reform, which in the process would broaden Australia’s tax base and improve overall efficiency and productivity.
