After his treasurer set the stage for an increase in the GST to 15% and associated tax cuts, prime minister Malcolm Turnbull surprised many earlier this week by abandoning the plan.
He told the ABC that:
“You have got to first decide: is this policy is going to give you the economic outcome you want? Then you have to assess the practical politics. With the GST income tax swap proposal, it has not yet passed that first test.”
What was clear in this statement was that the prime minister had reassessed the economic benefits. Equally his statement outlined what it will take for him, and the government, to back an increase in the GST.
But many still wondered what caused this road to Damascus moment.
Writing in the AFR this morning, Laura Tingle suggests that it was Treasury modelling that killed the plan to raise the GST. She says it showed a GST increase and income tax cuts offset each other.
Tingle writes that Treasury deliberations were “unequivocal: raising the GST to lower income tax had virtually identical – but opposite – impacts on efficiency, competitiveness and growth.”
Here’s Tingle again:
Treasury modelled a rise in the GST to 15 per cent and a small broadening of the GST base to include water and sewerage rates.
The rub was that even if every cent of the additional revenue were used to fund a $30 billion personal income tax cut and compensation, it would only generate a once-off increase in growth of between zero and 0.3 per cent.
And there was the nasty shock of realising just how much the cost of compensation would be.
All of which neatly explains why the PM essentially told the ABC the GST increase wasn’t going to deliver the economic outcome and so wasn’t worth the fight politically.
You can read more here.
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