Mike Baird grasps the nettle, will propose an increase in the GST to 15%

NSW Premier Mike Baird. Photo: Getty Images

NSW Premier Mike Baird hosts the prime minister and the heads of state and territory governments at a retreat in Sydney this week. The agenda will be dominated by the naked reality that Australian governments are bleeding money.

Changes are needed to preserve funding levels for services, particularly in healthcare, where costs will continue to blow out as the population ages.

In a column published in The Australian, Baird states bluntly:

The real issue is no longer who funds what health services, or who carries the greatest share. The fiscal reality is that all the resources of the commonwealth and the states, pooled together, can no longer fund health services to our current standard.

Baird says he will be entering the retreat on Wednesday and the Council of Australian Governments meeting on Thursday with a proposal that has been floated by economists and policy experts for years, but has never found real political support: jacking up the GST rate from 10% to 15%.

Economists have argued for years that increasing the GST rate and broadening its application – especially to fresh food – could transform Australia’s public finances. In December, the OECD noted that in Australia “GST raises only half the revenues (as a share of GDP) compared with the OECD average and significantly less than the countries making the most use of such tax”.

As a result, more money has to be raised through income and company taxes. The basic equation is that an increase in the GST would make room for cuts in those areas, providing more incentives for businesses to invest and for people to work harder.

This OECD chart shows how Australia’s tax base is, by international comparison, over-reliant on income tax and how GST (in the panel on the left) raises a much smaller proportion of the overall tax take than in other countries.

It’s worth remembering that Australia’s comparatively weak GST was introduced in 2000, right before the start of the mining boom that saw billions of dollars pouring into federal and state tax receipts every year. With the peak of the boom now well behind us, the limitations of Australia’s GST are sorely exposed.

New Zealand increased its GST rate from 12.5% to 15% five years ago without much fuss. It can be done.

Some unhelpful battle lines have already been drawn ahead of this week’s talks. Federal treasurer Joe Hockey waded in first, saying last week that he hoped for mature talks in which the states could “take responsibility for their own budgets”. This kind of scene-setting puts the Labor premiers, particularly in Victoria and Queensland, in a difficult position going into the talks. Victorian Premier Daniel Andrews has made it clear he is opposed to an increase in the GST rate, so Hockey has decided that talk of reform is futile. Asked last week about the prospect of GST reform that would help raise money the states need, Hockey said:

If the beneficiary of that reform actually says, no, we don’t want it, you’re on your own, it’s effectively game over. And I’ve said, and the Prime Minister has said on numerous occasions, the only way you’re going to get change to the GST is to have the unanimous agreement of the States, Territories, and bipartisan support in the Parliament, so it goes through the Senate. Well, the Premier of Victoria just ruled it all out. Unilaterally, under no political pressure, ruled it all out, said he doesn’t need the money. So this is the difficult environment in which we operate.

What an optimist!


Baird’s proposal comes with some caveats. He’s proposing no broadening of the base, saying “fresh food, health, education and childcare will continue to be excluded”. He says that “all funds raised would be directed to healthcare, compensation or tax cuts”, and believes households that earn under $100,000 could be unaffected if the income tax relief properly targeted.

And The Australian also reports today:

Mr Andrews told The Australian a levy increase could be accepted by the public if the government guaranteed that the proceeds would be spent on frontline health services such as cancer, strokes and other debilitating conditions.

So it may not be quite “game over”, as Hockey says.

Baird is the most popular government leader in the country and perhaps it’s only from this position that an Australian politician can put a significant increase in consumption tax on the table.

But Business Insider understands that the NSW government has been actively considering its options for plugging its revenue gap, including through land taxes. With a recurrent health bill in NSW alone in the order of $20 billion a year and growing, the revenue shortfall is going to have to be addressed one way or the other. Baird is willing to make a start.

Here’s a video Baird posted on social media this morning on the subject.

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