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Where’s the money coming from? Australia faces a growing gulf between revenue and expenditure. Photo: James DaviesWe’ve been told we’re heading for ever-growing deficits. Is the problem with revenue or expenditure?
Both. As a number of leading economists have said, Australia doesn’t only have a spending problem. It also has a revenue problem.
That’s because revenue that comes mainly from taxes – such as company tax – is falling as the mining boom ends and iron ore prices take a hit.
There’s greater economic uncertainty – both locally in terms of how strongly jobs will grow – and overseas with uncertainty in China and Europe.
At the same time as incoming revenue is falling, government spending on areas such as health, education, welfare and defence is rising.
Leading economist Saul Eslake has said that: “The problem we have is a long-term mismatch between what people expect government to spend on them and what they’re willing to pay in taxes.”
How much will increasing the GST to 15% raise?
KPMG did economic modelling for CPA Australia that showed increasing the GST rate from 10 to 15 per cent leads to additional GST revenues of more than $20 billion a year.
But how much money is raised depends on whether there’s associated compensation.
Preliminary modelling that NSW Premier Mike Baird presented at this week’s COAG retreat said that lifting the GST – without broadening its base to include food and education – would raise an extra $36 billion by 2020.
And what about compensation for low-income earners?
There’s also been talk of using money that would come from a GST rise to abolish a number of inefficient state taxes, hand down personal income tax cuts, and/or provide compensation.
Mr Baird says if the GST goes up to 15 per cent households on less than $100,000 a year should be compensated.
But NATSEM’s Ben Phillips has said, if compensation’s introduced for households earning up to $100,000, “you would be compensating most households and not getting much in net terms”.
Mr Baird says after households earning below $100,000 are fully compensated for the rise, and those earning between $100,000 and $155,000 receive back half the increase, the revenue boost would be about $18 billion.
This would still fall billions of dollars short of the revenue that modelling suggests is needed to cover escalating national healthcare costs.
Is 15% high on a global scale?
Australia’s 10 per cent GST rate – which hasn’t changed since its introduction by the Howard government in 2000 – is now half the average of the developed world, according to the Organisation for Economic Co-operation and Development.
The OECD average rate is 19.5 per cent, and it says there is scope to lift the GST rate and broaden the base to bring Australia into line with other countries.
The New Zealand government in 2010 increased its GST rate from 12.5 per cent to 15 per cent.
Nordic countries, including Denmark, Hungary, Norway, Iceland, Finland and Sweden have some of the highest value-added tax (another term for GST) rates internationally at or near 25 per cent.
Is there a plan to broaden the GST?
The federal government’s tax white paper is examining an increase to the GST as part of a broader tax reform agenda.
Treasurer Joe Hockey has said that any changes to the GST need to be supported by the states, as they will be the beneficiaries.
While Mr Baird is supportive of increasing the rate, other state premiers – who went to state elections promising no GST change – have said they will not support an increase in the rate or broadening of the base.
Queensland and Victoria are instead advocating a 2 percentage point rise in the Medicare levy (the levy was already increased from 1.5 per cent to 2 per cent last year to pay for the National Disability Insurance Scheme).
This would mean the levy hits 4 per cent, and would push the highest marginal tax rate to 51 per cent.
It seems like the Abbott government is pushing this discussion by removing funding from health and education. Is that correct?
The states face a long-term funding shortfall as our population grows and there’s greater demand for public health and education services.
In last year’s budget the Commonwealth withdrew $80 billion in long-term funding, leaving the states unable to fund the increased demand for such services.
The recent leaders’ retreat was aimed at discussing where they can go to now.
Is there a politically palatable way to raise taxes?
The Abbott government has not yet sold the case for tax reform, and unfortunately what makes economic sense does not always make political sense.
The problem with the GST is it is considered a regressive tax. The lower your income, the higher the percentage of that income that is spent on the goods and services covered by the tax.
That means that any reform needs to be associated with compensation, and or lower personal taxes. But then as stated, there’s less revenue coming in.
Business and community stakeholders in the tax debate have said it is important that the federal government looks at the tax system as a whole, and not cherry-pick.
Rather than just increasing the GST, the government could also look at thesacred cow tax breaks – billions of dollars going to superannuation concessions and negative gearing that primarily benefit the rich. Mr Hockey and Prime Minister Tony Abbott have ruled out doing so.