Tuesday, 4 November 2014

Benefits of raising GST are not worth the political cost

A good speech might lift expectations of reform but expectations not fulfilled are always a letdown. Remember Kevin Rudd? And given that there is no suggestion that Prime Minister Tony Abbott yet knows what reforms he wants to take to the next election, his Tenterfield speech is more likely to be a disappointment than anything else.

Big reform does not start with just one speech. It should start with strategy, policy, consultation, tactics, advice and many late nights, all behind closed doors and over time. Looking back on Fightback, I suppose Hewson and I had a touch of "crazy brave" but heck, why be in politics if you don't do what's worth doing? So in that sense, good luck to Tony Abbott. But is a bigger GST worth the trouble?

We are now encouraged to think that the formerly risk averse Abbott agenda will soon have a touch of the "crazy brave" and will include reform of the federation, tax reform, more budget cuts, pension reforms and labour market reform. It sounds ambitious but so far his economic reform agenda is limited.

Let's start with the politics.

No PM should start a big debate like the GST without lining up the support of his colleagues.

I sense that Abbott lit the match on the GST without a Cabinet meeting. Unfortunately Abbott has a penchant for unilateral decision making. It is true that Howard went solo on opening the 1998 GST debate but Howard did not act unilaterally. The GST was discussed many times in the cabinet and beyond well before Howard raised the issue and Howard had key ministers urging him on.

And a big issue like this is not just for the front bench.

In the days after the Abbott speech, MPs I spoke to knew nothing of the GST except what they read in the paper. Abbott owes it to his backbenchers and especially the marginal seat holders to talk to them before he goes to the media and puts their seats at risk. Abbott obviously thinks he could win a GST election because the Coalition won the GST election in 1998. But in 1993 we failed to win government and in 1998 the Coalition lost many seats because of the GST. We offered income tax cuts on both occasions and still we lost votes. The New Zealand experience (very similar to what Abbott may propose) was that the Kiwis were much angrier with their first small increase of the GST than they were with the initial introduction of their 10 per cent.

The political circumstances surrounding the GST are not as good as 1998. The 1998 campaign had the benefit that many of the 1998 campaigners were also in the 1993 campaign. The 1998 campaign also had a strong team. Howard and Costello were good salesmen, their first budget was a success and by the time of the 1998 election the government had proven its reform credentials through big items like fixing the waterfront. Howard also had a lot of political momentum from business, including small business, in support of abolishing the wholesale sales tax. Business collected the GST but they got the money back thereby reducing the cost of doing business. The narrative in 1998 was crystal clear. What would be the message for 2016? Of course, the abolition of payroll tax would be a good selling point but it would reduce revenues for the states and the GST would have to be pretty high. Sadly, I doubt it will have many supporters.

The 1998 reforms gathered most of the benefits of a value added tax. A few extra percentage points would not be that significant. Without a clear justification for a tax increase, the public would quickly see the GST as just another revenue increase.

Even if reduced income tax rates were persuasive (which I doubt), the broadening of the GST base could be pretty lethal in an election campaign.

Adding health and education would be problematic. The result would be a lot of churning rather than a lot more revenue. An anti-GST campaign would be unhelpful just as the new tertiary funding arrangements are implemented. Food could be taxed but the two previous attempts to include food have been thrown out in the Senate.

In reality, the rationale to change the GST base is limited. Australia has an internationally, efficient, modern GST. The GST's 58 per cent coverage of household consumption is similar to other advanced economies. Yes, New Zealand has the purest GST of any country but they ended up with a voter backlash that produced proportional representation in their unilateral parliament.

Any increase of the GST would be a huge fight; it is just about certain it would lose seats for the Coalition and be a major barrier for the return of the Abbott government.

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