Prime Minister Tony Abbott has, it seems, given the green light for raising more revenue via the GST in a speech at Tenterfield on Saturday (Sir Henry Parkes Commemorative Dinner):
…the Commonwealth could stop funding programmes in areas of state responsibility and stop using its financial power to influence how the states deliver services.
In that case, the Commonwealth would be ready to work with states on a range of tax reforms that could permanently improve the states’ tax base – including changes to the indirect tax base with compensating reductions in income tax.
The obvious change to the indirect tax base would be to raise more revenue from the GST, by either raising the rate or removing exemptions on fresh food, education and health.
The budgetary challenges facing the Commonwealth and State Governments across Australia certainly mean that raising more revenue from the GST is a very attractive proposition for Governments. The Commonwealth can blame the States, saying they wanted it, while the States can say they were forced into it by reductions in Commonwealth funding. The States, which get the increased GST revenue, get more revenue to meet their budgetary challenges, and the Commonwealth can save money through reducing other grants to the States. Ultimately, the States and the Commonwealth all win and everyone blames each other.
While I can see greater reliance on the GST for revenue raising is very likely, I think it’s unlikely the Commonwealth would retreat completely from policy areas such as education and health. Plausible increases in the GST could raise say $20-30 billion extra for the States, but, as the PM noted in his Tenterfield speech, the gap between spending by the States and own-source revenue is some $100 billion. Assuming that State income taxation will be put in the too hard basket, there will likely still be a substantial gap between State spending and own-source revenue, meaning the Commonwealth will still be involved in funding State services and will still want a say.
Indeed, some influential groups in the community would be very concerned about any Commonwealth retreat from particular services. For example, many Catholic and Independent Schools have become significantly reliant on Commonwealth funding (e.g. see my post Large savings for Qld Govt from shift to private schooling), and may be concerned any lost funding from the Commonwealth wouldn’t be replaced by State Governments.
So, while I can see greater reliance on the GST in the future, I don’t think this will be accompanied by a reduction in Commonwealth involvement/interference in State-delivered services such as education and health.
My previous posts on the desirability of GST reform include: