Due to popular demand, I post a transcript of my recent ABC Drum piece about the fiscal constitutionality underpinning the GST design framework.
To my mind, one of the more astounding aspects of the effective prohibition against free-wheeling GST rate and base amendments is that the political propagators of the “thou shalt only change the GST unanimously” rule quite possibly had never read James Buchanan and Geoffrey Brennan, The Power to Tax, which placed great import on explicit tax rate and base constraints not unlike those in force today.
In fact, I am quite certain that not many senior policymakers within federal Treasury at the time had done so, either.
Nonetheless, the design features of the GST have saved Australians from the worst of the fearful discretionary tax hikes seen elsewhere, thus far. To the extent that we remain lumped with this terrible “monster tax” (HT: Paul Keating), long may the fiscal constitution reign!
Australia should get its excessive spending under control without resorting to the tempting but unwarranted consumption tax grabs we have recently seen in other countries.
That’s why the current institutional arrangements for managing the GST should be preserved in the face of recent pressure from revenue lobbyists like Martin Parkinson and Ken Henry.
As a mid-ranked bureaucrat in the Commonwealth Treasury during the late 1990s, I witnessed first-hand the first agreement signed by the Commonwealth and state governments concerning the distribution and administration of the GST.
Signed by former prime minister John Howard and treasurer Peter Costello along with the state premiers and some senior bureaucrats, the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations ensured that the states receive all GST revenues (less administrative collection costs).
Importantly, the agreement also contained a set of provisions aimed at protecting Australian taxpayers from policies to increase the GST.
The original agreement stated plainly (Part 3: 32-36) that changing the GST rate or base required unanimous support from the Commonwealth and all states and territories, as well as the successful passage of legislation through Parliament.
These arrangements have been maintained in a revised Intergovernmental Agreement signed in 2008, and remain in force to this day.
The importance of this GST ‘fiscal constitution’ becomes clear when one recognises the frequency of increases in similar taxes in other developed countries.
From 2000, when the Australian GST was introduced, to 2013, central governments across OECD economies increased value-added tax or GST standard tax rates on 35 occasions, including 22 times during the aftermath of the 2008-09 global financial crisis.
Australia hasn’t needed an increase to its own GST rate or base to record a dramatic increase in its GST revenue – it has increased from $23.9 billion in 2000-01 to an expected $50.2 billion this financial year simply as a result of a nominal growth in consumption.
This GST revenue growth was equivalent to an annual growth rate of 6.4 per cent; well in excess of the average annual increase in general prices throughout the Australian economy.
As painful as the GST is, particularly for poorer individuals and families, the prohibition of unilateral GST structural changes has, at least, spared Australians from the extreme discomfort of quicker and easier consumption tax grabs experienced elsewhere.
Even so, politicians, bureaucrats, academics, special interests, and other members of the ‘revenue lobby’ occasionally advocate that all governments band together to loosen the fiscal constitutional constraints, which would allow them to help themselves to more GST revenue.
In his first appearance as prime minister, Kevin Rudd proposed to claw back 30 per cent of GST revenues from the states, in order to boost Commonwealth funding of the states’ public hospitals.
This plan was abandoned after several jurisdictions, particularly Western Australia, raised concerns that the partial federal confiscation of GST would further reduce the states’ fiscal autonomy, and invite future GST revenue grabs for other federal policy purposes.
As well, responding to the growing popularity of online shopping, some state governments and interest groups, such as retailing associations, have suggested lowering the $1,000 threshold below which GST is not payable on imported goods purchased online.
Taxpayers can breathe a sigh of relief – at least for now – knowing that the recent Council for Federal Financial Relations meeting between Commonwealth and state treasurers failed to come to a decision on that baseâ€‘broadening proposal.
By and large, the GST fiscal constitution has stuck, but a recent round of tax proposals by current and former senior bureaucrats illustrates that the revenue lobby won’t let go of their GST hike dreams too easily.
In a much-publicised speech last week, outgoing Treasury Secretary Martin Parkinson suggested that those authoring a forthcoming White Paper on taxation should “consider the mix of taxes, including whether there is a role for a greater contribution from indirect taxes”.
Parkinson’s immediate predecessor as the head of Treasury, Ken Henry, claimed a GST increase is inevitable, stating, “Raising the GST rate one day will be seen as necessary to underpin fiscal sustainability.”
These, and similar, proposals to increase the GST tax burden are usually couched as part of a broader shift in the taxation mix from mobile income and capital taxes in favour of immobile consumption taxes.
This tax substitution is generally adjudged by economists to improve economic efficiency, but a key consideration, often overlooked in the contemporary debate, is that any resultant growth in revenues from tax reform is likely to be spent by governments on wasteful programs and activities which, in itself, would hamper the attainment of efficiency gains.
Another dimension of the GST debate which perhaps deserves more attention is that the poor, who generally pay little in income taxes in any case, are likely to financially suffer as a result of increasing the GST because more of their disposable incomes are directed toward everyday consumption items.
It is surprising that many calling for a GST increase probably identify themselves with political-left causes, although there are still some voices from the left arguing the traditional position against raising the burden of the regressive GST.
Politicians generally do not respect fiscal rules for too long, as attested by precedents stretching from the federal government keeping surplus revenues from the states in order to fund age pensions, through to the recent abolition of the federal statutory debt ceiling.
If Australia can overcome its excessive government spending problem, as it should, without fiddling with the structure of the GST, then that would rank as a minor miracle.