Got a PM, PM we can’t trust
Said a higher GST is a must
Doin’ the GST-a-rosy-rag
Told the voters you must pay
If you want to see a surgeon on another day
He was doin’ the GST-a-rosy-rag
Been around, and new is old
Catch your cold and blow your gold and spend
Doin’ the GST-a-rosy-rag
[Apologies to Arlo Guthrie]
We’ve been around and around and back again, doin’ the GST-a-rosy-rag. I am usually not one to say ‘I told you so’ but back in April, in my piece ‘Beware there is a plan’, I suggested that Abbott and Hockey were looking to reduce the commonwealth government’s involvement in health and education and leave those matters to the states. How could they do that? — by increasing the GST, all the revenue of which goes to the states. At the time they ruled out an increase in the GST because it did not have bipartisan support. I did predict, however, that they had managed to put it on the political agenda and that it would raise its head again — I did not expect that it would be so soon.
So in July, what happened? Leading into the ‘leaders’ retreat’ before the formal COAG meeting, NSW Premier Mike Baird raised the prospect of increasing the GST to 15%. His main argument was that it was necessary to meet rising health costs — and, of course, those costs for the states rose dramatically after Abbott and Hockey cut $80 billion from future funding to the states for health and education.
When asked about it at the WestConnex sod turning in Sydney on 20 July, Abbott supported —
… Mike Baird’s willingness to discuss revenue issues because obviously, if there is a problem with revenue, it can’t just be the Commonwealth’s responsibility to solve.
Right? Wrong! Why isn’t it the commonwealth’s responsibility when it is the commonwealth government that collects all income tax and company tax and the states have to come as mendicants to get back some of the tax their citizens have paid? Has Abbott forgotten that income tax was originally levied by the states and they gave it up in a time of war expecting a fair deal afterwards?
The full transcript of Abbott’s words is here
but there are some interesting things to note:
When specifically asked if this was part of the plan, ‘Having turned off the tap of federal health and education funding and forcing the states to come up with their own solutions’, he simply avoided the question and said:
- not once does he admit that he has anything to do with it nor that he has ever suggested it;
- three times he manages to insert his new mantra of ‘lower, simpler, fairer’ taxes;
- he constantly refers to it only as a ‘discussion’.
I’m just really pleased that Premier Mike Baird, along with Premier Jay Wetherill, are prepared to have a constructive, responsible discussion. It is a sign that this generation of leaders at both the State and national level are prepared to do what’s necessary to make our country strong …
Still nothing to do with him! It is all about having a ‘discussion’ and luckily for him someone else raised it. (Was there any prodding behind the scenes? We will probably never know but is it merely coincidence that Abbott’s federal electorate takes in Baird’s state electorate?)
I want to see the overall tax burden go down. I want to see lower, simpler, fairer taxes. But at the same time, I do want to see a more rational arrangement of finances and responsibilities between the Commonwealth and the States.
With that last statement, Abbott is certainly pursuing his line that many ‘responsibilities’ should be handed back to the states and the real issue then is how the states will fund them. ‘A more rational arrangement’ could include giving back the right to tax individual incomes and the commonwealth government could totally withdraw from funding schools and hospitals and many other services — but that would be a step too far! The commonwealth government is now reliant on income tax for about 48% of its total revenue or 56% of its revenue if we remove the GST from the calculation (based on the 2015-16 estimates).
Mike Baird claimed that it is primarily to do with rising health spending. He suggested that state and commonwealth deficits in 15 years (in 2030) will total $45 billion of which $35 billion will be health costs. Even at an annual rate of 2% growth, government revenue in 15 years will be 32% higher than currently. Yes, all government costs will also increase in that time but surely there must be room within that increase to absorb some, if not all, of the rising health costs? (Also watch for my pieces on ‘Funding health’ in the next two weeks where I suggest that a key issue is managing economic and wages growth to cover costs, not simply increasing taxes.)
A problem with raising the GST is that it hits everyone the same in dollar terms and eats into proportionally more of the income of those on lower incomes and government benefits — a regressive tax. That is why Baird suggested that families on incomes up to $100,000 should be compensated. Abbott is also talking about lower income and company tax. So are we only paying more GST but getting it back in compensation and lower income tax with no nett benefit to the government? —and the bulk of that compensation would be borne by the commonwealth government while the states get all the revenue, so that doesn’t appear to make sense in solving the commonwealth government’s fiscal problems. So if there is no, or little, nett gain, who benefits?
The states will benefit: they will get the dollars as all the GST revenue is passed on to them. Given that the total deficit in 15 years, as Mike Baird pointed out, is $45 billion across all governments, it seems they do not really need a large increase. Based on the 2015-16 estimate of GST revenue, even the 2% growth in annual revenue I suggested would provide $20 billion extra in 2030. If the GST is increased to 15% and that same 2% real growth is applied, it would actually double the 2015-16 estimate to almost $120 billion in 2030: the additional amount ($60 billion) would give the state governments $25 billion more than Baird says they need for the health part of the deficit and $15 billion more than the total deficit: but Baird included the commonwealth government in his $45 billion estimate of deficits, so does that mean the states pick up extra funding that otherwise could have met commonwealth costs? — perhaps it is a neat trick he is attempting! (Personally I think Baird is smart enough to know that.)
Look also at the benefit for the Abbott government. It is able to make significant reductions in the funding (other than the GST) it provides to the states for health and education. With expenditure thus reduced, it can offer some of the tax cuts it talks about. It leaves the commonwealth government able to argue that it didn’t increase taxes — that was due to the states — and it has kept its promise and lowered taxes.
But does that add up? I do not see how a cut in income tax and company tax is valid as a cut if GST has also been increased. That is just shifting the tax mix (and shifting it between levels of government), not reforming taxes. Does it really lead to a lower overall tax burden as Abbott promised? It may benefit the Abbott government (politically) but not necessarily anyone else. Will an increase of 5% in the GST be enough for the states? Will they abolish stamp duty and payroll tax as was promised when the GST was first introduced? That didn’t happen then and I don’t think the proposed increase will make it happen now: so, effectively when state and commonwealth taxes are put together people are likely to be no better off, possibly even worse off. And if the commonwealth government has reduced taxes to compensate for the increased GST, of which it gets nothing, what nett benefit to the budget bottom line has it achieved? It can only benefit if the tax cuts do not match its reduced expenditure on health and education — but it won’t explain that because people would realise they will lose out in the deal.
Premiers Andrews (Victoria) and Palaszczuk (Queensland) suggested, instead, an increase to the Medicare levy. It has the advantage that it is a progressive tax. In my health pieces I suggest that isn’t necessarily the way to go, but could it work?
All the money raised by the Medicare levy goes into the consolidated revenue of the commonwealth government. The commonwealth government pays out significant amounts in Medicare benefits and the current levy covers about 55% of those costs. The levy does not directly contribute to hospital funding. An increase, however, would mean that the commonwealth does not have to use as much of its other revenue to meet Medicare benefits, theoretically leaving that amount free to be added to hospital funding to the states. The main drawback with that approach is that it leaves the funding entirely in the hands of the commonwealth government which may be okay when Labor is in power but, as we are seeing, not when the Liberals are. Given what Abbott and Hockey have already done to health funding for the states, and their pursuit of less commonwealth involvement in health and education, how could they be trusted to hand the benefit of a higher Medicare levy to the states? While an increase in the levy may provide some benefit, and as a progressive tax is preferable to an increase in the GST, I certainly wouldn’t have any faith in this government to pass on the benefit.
I note, however, that the leaders’ meeting actually raised the idea of extending Medicare into public hospitals which would guarantee the funding rather than relying on commonwealth government beneficence. I doubt the commonwealth would be keen on that approach as it would have little control over the amounts paid as they would be dependent simply on the number of services performed and, with the number of medical services increasing each year, the cost could end up being higher.
As many commentators have pointed out Abbott and Hockey are consistently ignoring, even ruling out, other ways of raising revenue. Changes to negative gearing and superannuation have been ruled out even though they disproportionately benefit those on higher incomes. To use their own words, that approach fails the ‘pub test’ because it will be seen as unfair — but that no longer seems to concern them.
Tax concessions on superannuation will cost the government $170 billion over the forward estimates (to 2018-19). While the current concessions provide a benefit in encouraging retirement savings, there is certainly scope to trim that amount as Labor is proposing but which Abbott is ignoring. Also over the forward estimates, the government will spend $27 billion on the private health insurance rebate and forego just over $7 billion in tax by not taxing that benefit — a notional total of $34 billion which could otherwise go to support health funding (even allowing that there may be an increase in demand at public hospitals if the private insurance rebate is abolished). I mention these only as examples of places the government might look for revenue without raising the GST, if only it wanted to, and if only it was willing to pass on at least some of the increased revenue to the states.
There is little doubt that the debate about the GST has arisen from the Abbott government abrogating agreements the Rudd and Gillard governments had reached with the states regarding health and education funding. The obvious intention was to put pressure on the states to request an increase in the GST. The states have few other ways of getting money out of the commonwealth government, especially when it has made clear that it intends retreating from its involvement in health and education. The commonwealth control of the purse strings is, in that regard, a problem but via the GST the states, at least, have more control of the money. The Abbott government wants to redefine the federation and reduce its involvement in areas over which the states have direct responsibility but it won’t hand back the funding to allow them to take responsibility and it won’t hand back the income tax power, leaving the states with few options. It is clearly a political and ideological push by the Abbott government dressed up in fine phrases regarding federation and fiscal reform but it has little to do with either.
The GST is always going to be a political football and so here we go again ‘doin’ the GST-a-rosy-rag’.
What do you think?
In the piece above, Ken discusses the ‘opportunity’ given to the Prime Minister to ‘discuss’ taxation. Is increasing the GST a better idea than increasing the Medicare Levy or are there better options? We welcome your views below the line. Who knows, if a political staffer reads your suggestion, it may just become policy!
Next week Ken follows this up by presenting Part 1 of ‘Funding health’ which looks at the data and questions the real extent of the problem.