Let’s get real on tax, Australia

The Goods and Services Tax was in the headlines this week, but that doesn’t mean that genuine tax reform is back on the political agenda, writes John Hewson. 

Genuine tax reform is clearly back on the political agenda – or is it?

This week the Sydney Morning Herald broke the story in glowing terms, boasting “a leaked document” they had obtained, revealing “modeling prepared by the Treasury at the request of the states in July”, from which they concluded that “massive increases to the GST that would raise up to $45 billion annually will be on the table when Malcolm Turnbull and state premiers meet”.

Of course, the story was run throughout the media, but without much substance, except that the Opposition said they wouldn’t support an increase in the GST, calling on Prime Minister Malcolm Turnbull and Treasurer Scott Morrison to rule it out, as did Premier Daniel Andrews in Victoria, with the Government simply leaving it as “all options are on the table”.

What about a dose of reality?  Let’s begin with the impending release of MYEFO – the mid-year economic and fiscal outlook. If that doesn’t clearly predict that our economy will probably remain weak for some years, with our growth rate with a 2 rather than a 3 in front of it, then the Government should not be taken seriously.

There are highly regarded predictions that the growth of the industrial world could remain for years in a ‘growth recession’, with rates of 2 per cent or less. With very weak growth in Europe and Japan, with the US Fed wanting to raise interest rates, and with China’s growth much slower than they are prepared to admit, not to mention mounting geo-political tensions, the Government would be kidding themselves if they maintain the recent inaccurate, political forecasts.

Similarly, they would need to admit that expenditure promises made by both sides – such as school reform, the National Disability Insurance Scheme, the National Broadband Network, and a host of infrastructure projects – are largely unfunded in the Budget ‘out years’. This suggests that realistically the overall tax burden will need to increase, even more so, if we recognise the significance of the intergenerational and infrastructure challenges.

Morrison should not be able to stick with his fiction that the Budget problem is an expenditure problem that he can fix with further cuts in expenditure, and no increase in the tax burden, especially with a negative Opposition and a hostile Senate.

But, equally, I can’t see the Government laying out a host of expenditure cuts/tax increases to seek a mandate at the next election, which makes you wonder whether, despite assurances, Turnbull may yet still decide to go to the polls early, before the next Budget.

Reality, in tax itself, would recognise that even with such large potential revenue numbers as the Sydney Morning Herald suggested, they wouldn’t be enough to satisfy the now significant demands from various interest groups.

To begin, about half the revenue raised from the GST would need to be spent in compensating low-income groups. But, remember New South Wales Premier Mike Baird’s support for a rise in the GST was simply to be able to fund his prospective health expenditures over the next 10 years. State premiers would expect to get most, if not all, the additional revenue.

Big business will support an increase in the GST, but to fund a substantial cut in the company tax rate – now at 30 per cent, the UK at 20 per cent gets mentioned as an objective.

And then commitments are being made, and expectations created that, at the very least, the Government will refund bracket creep that would also cost tens of billions through the end of the decade.

And what about the welfare lobby’s desire for a substantial increase in the aged pension and Newstart to lift them above the poverty line.

Finally, most punters won’t accept a small drop in personal tax rates as genuine reform, but personal tax cuts are expensive – each 1 cent costs some $5-6 billion. Our high tax-free threshold means our rates are very high at relatively low incomes and expensive to change.

GST makes great copy, and still carries some fear, but let’s see some reality.

This piece was also published by the Southern Highland News.