Why is Abbott considering a GST hike?

October 28, 2014

By Stephen Koukoulas

Tony Abbott’s recent consideration of GST hikes is more about covering his costly policy priorities than plugging a revenue hole in the budget over the next decade, writes Stephen Koukoulas.

It is not altogether clear why Prime Minister Tony Abbott is giving consideration to hiking the rate of the goods and services tax.

This is especially the case when the budget his Government brought down in May confirmed that government revenue would be rising to a healthy 24.9 per cent of GDP in 2017-18, to be well above the historical average and some 2 to 3 per cent of GDP higher than the revenue take under the previous Labor government.

Increasing the rate of the GST is, at face value, a simple and very effective way to boost government revenue. Based on 2014-15 data, each 1 per cent extra on the GST would raise about $5.4 billion (increasing to $6.4 billion in 2017-18), meaning a hike in the GST rate from the current 10 per cent to, say, 15 per cent would add more than $25 billion per year to government revenue, escalating to more than $30 billion per annum within three years – if nothing else changed.

Hiking tax rates, including for the GST, raises the question, “What is the money being used for?”

One very popular misconception in todays politics is that the Abbott Government is about shrinking the size of government. Overlooked in the discussion of fiscal policy under Mr Abbott are the big spending government programs, including the paid parental leave scheme, roads and other infrastructure expenditure, defence and the staggering $8.8 billion cash grant to the Reserve Bank of Australia.

The revenue base and the desire to hike the GST would not enter into the current political debate if these spending measures either didn’t exist or were smaller in scale.

The facts show that Treasurer Hockey’s budget in May delivered government payments, as a share of GDP, at 25.3 per cent in 2014-15 and it will remain at or above 24.7 per cent throughout the forward estimates. By way of contrast, the last three Labor budgets had government payments to GDP averaging 24.6 per cent.

If Mr Abbott and Treasurer Hockey were in fact fiscally tight and their budget cut government payments to, say, 24.1 per cent of GDP, the level delivered in the last full year of the Labor government in 2012-13, the current tax take without hiking the GST would see the budget deficit of 0.1 per cent of GDP in 2015-16 and a surplus in 2016-17 and beyond, even with the expensive spending plans of Mr Abbott.

While there is no doubt the revenue base is problematic in the current global climate of low inflation, Mr Abbott’s consideration of GST hikes is more about covering the high spending associated with his policy priorities than plugging a revenue hole in the budget over the next decade.

The beauty of the GST is that it is a transparent tax that is well understood and widely accepted by both business and consumers. The downside of the GST is that it is regressive, meaning that those on lower incomes are hit with a larger proportionate share of tax on a given basket of goods and services than is a rich person buying the same basket of items.

This is where much more detail of Mr Abbott’s notion of hiking the GST would need to be considered. What other changes will accompany the tax increase?

Where would the money go? To have any appeal electorally, pensions and other social security payments would need to rise, making no welfare recipient worse off when confronted with grocery and utility bills boosted by the higher rate for the GST. There may be a case for adjusting income taxes lower as the GST increase took effect. But the problem with giving too much of the money back to pensioners and income earners is that overall impact on the budget bottom line and moving to and locking on budget surpluses is undermined if the money is merely recycled through the economy.

Any review of Australia’s tax system must include the GST – its level and coverage. This in turn needs to feed into the shape of the budget and issues of fairness and equity. At a time when the Coalition Government is increasing spending at a hefty pace and cannot get the budget to surplus, reverting to tax hikes has an unpleasant whiff of big government about it.

Before any increase in the GST is contemplated, a lot more information needs to emerge on why the extra revenue is needed and perhaps a tighter reign on government spending would deliver a budget surplus without the tax take jumping to new highs.