This article appeared on the Adelaide Review web site at this address 


Off The Table: GST Hike To Never Never

The failure of the Turnbull Government to go ahead with the proposal for a higher and/or broader Goods and Services Tax (GST) was largely the result of the massive cost of compensating those losing out from such a change. The fact that pensioners and low- and middle-income earners would ‘lose out’ under a GST hike was never in doubt. It is a regressive tax that hits the poor who pay a higher proportion of their income in GST than high-income earners.

The huge cost of any compensation to the less well-off meant that the residual revenue from any GST hike was not going to be sufficient to cover the cost associated with other policy aims, including cuts in income and company taxes, a reduction in the budget deficit and for funding the ever-growing health, education and aged-care budgets. It is clear that in Australia right now the demands of the electorate, when it comes to government services, mean that there is simply not enough revenue for these items while having the overall budget in balance or small surplus.

The rise and more recent fall of the momentum for a higher GST highlights a strange aspect (no doubt focus-group driven) in the way both sides of politics have dealt with economic policy over the past decade or so.

All sides of politics are now consumed by an obsession that much of the meaningful economic policy reform should have as a key element compensation for those who will be ‘worse off ’ after the change. The Gillard Government made this mistake with the price on carbon when it gave away all of the revenue, and that problem now extends to policy on business tax concessions, negative gearing and possibly superannuation. It is, for some reason, difficult to take away some expensive and unfair privilege from part of the population even if it means a more robust and sustainable policy structure that benefits productivity and economic growth over the longer run.

The Turnbull Government floundered with the compensation issue as it mulled hiking and broadening the GST. Compensation made other reforms difficult or impossible to achieve. What was the point of imposing a tax hike on all of the population if the bulk of the proceeds were recycled so that no one was ‘worse off’ and then having little spare revenue to undertake other policy changes?

As Australia saw in the 1980s with many of the Keating reforms – and has been the case in many countries in the aftermath of the global economic crisis – many good economic reforms take money away from some segment of the community and in the process make them worse off. But many of those decisions are taken either for the good of the economy or with a medium-term recognition that prudent or tough policy now will yield longer run efficiency benefits for the economy. Tariff cuts over the 1970s, 1980s and 1990s are a good example of pain for some, but substantial gains for all.

Much of the discussion of bracket creep has a similar obsession as it is sometimes painted as a handbrake on growth and productivity. To be sure, over the very long run that is true as people’s income grow, but in the current era of low wages growth, a chronic budget deficit and demands from the electorate for the government to fund the lion’s share of health, education, aged-care and disability care, letting bracket creep run for a few years is no bad thing.

On the contrary, it could be a good thing particularly as no one is directly worse off as they get pay rises that put them into a higher tax bracket and the government collects some revenue to reduce the budget deficit.

The mindset of recent government regarding compensation as a trade off for economic reform helps to explain why so little policy change has occurred and why the return to budget surplus has been kicked out to the Never Never.

A smaller deficit and return to surplus requires, by definition, the government to grow its revenue base at a faster clip than it’s spending. In an era of low-growth in wages and company profits, this means some decisions are needed that will leave some people worse off.

Decency suggests that such policy changes need to be fair and meaningful, which is why the GST hike appears dead in the water. It is why any proposals that tax high net worth, superannuation, address negative gearing, slice business tax expenditures and get multinational corporations to pay their fair share of tax are the best places for reform.