GST hike appears very likely, but Commonwealth retreat less so

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:

New Treasury modelling supports change in tax mix towards GST

Dr Parkinson right that the GST should be broadened

GST changes should be considered as part of wide-ranging tax and expenditure review

Government has to rely on inefficient taxes to fix budget – GST reform needed

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4 Responses to GST hike appears very likely, but Commonwealth retreat less so

  1. John Craig says:

    Gene

    Federal involvement in (say) education and health could perhaps be achieved through reforms like those suggested in Fixing Australia’s Federation (2010+). Influence through financial control (which was originally escalated by special purpose funding during the Whitlam years) is highly dysfunctional (see Federal Fiscal Imbalances, 2003+). There are much less ham-fisted ways of promoting the ‘national’ interest.

    Another area where reform is critical is in terms of infrastructure (see Sorting Out Australia’s Infrastructure Mess Needs ‘Government’ not Micro-management, 2014). Central planning does not work.

    Regards

    John Craig

    Centre for Policy and Development Systems

    CPDS supports leaders developing enterprise, economic, community and governance systems

    Visit CPDS website – which addresses local and global issues from the perspective of Queensland, an Australian state

    • Gene Tunny says:

      John, thanks. You may be right that constitutional change would be required to end the imbalance between the Commonwealth and States.

      • Jim says:

        Gene

        Perhaps a silly question, but couldn’t the Commonwealth effectively render the State almost irrelevant in some portfolios (e.g. education) through a much greater use of special purpose payments or tied grants and reducing general grants ? I don’t think that requires any constitutional change, but it would significantly reduce the State’s discretion on spending.

  2. Gene Tunny says:

    Jim, yes, it possibly could, but I think the States would push back massively given they would still have to partly fund the services from own-source revenue and would be denied a say over policy. Still, an interesting suggestion. Thanks for the comment.

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