OECD Report Card: Australia's Challenges And Why GST Needs To Go Up

Brendon Thorne/Getty Images

The OECD (Organisation for Economic Co-operation and Development), in its latest economic survey of Australia, recommends a change to the tax mix including increasing the GST (Goods And Services Tax) by 50% or more.

“Make greater use of efficient tax bases such as the Goods and Services Tax and land tax,” it tells Australia.

While the overall tax burden in Australia is light, the “heavy reliance on direct taxation is not ideal”.

The OCED points to New Zealand and Israel which have wide bases and GST rates of 15% and 18% as a better model for Australian to adopt from the current 10%.

The OECD notes that the Australian government has initiated a review of taxation.

“With a rate of only 10% and fairly widespread exemptions, 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,” the OECD says.

“Consequently, the tax burden falls more on other taxes, including those on labour and business.”

The OECD also says broadening the GST base by reducing the number of exemptions would make sound economic sense.

Most of the GST exemptions are accounted for by zero rates on food, healthcare, education and exemption of financial products.

“The fiscal cost is sizeable,” the OECD survey says. “The total effect of GST zero rates and exemptions for 2013-14 in these categories is estimated at around $20 billion (1.3% of GDP).”

Overall, Australia’s economy is slowing as the prolonged mining boom recedes. The OECD says economic growth of about 3% is expected for 2014 and 2.5% in 2015.

Current policies are appropriate while long term prosperity depends on ensuring that structural settings help all forms of economic activity and promote broad-based productivity growth.

However, gross public debt has risen to more than 30% of GDP from below 20% since the global financial crisis.

And the housing market where prices have risen 10% in a year should be under intensive monitoring for speculative growth, the OECD says. And consider using macro-prudential tools.

The main findings:

Ensuring price and financial stability. Inflationary pressure is contained. Low interest rates are supporting activity and the rebalancing of growth. House prices have grown by about 10% over the past year, prompting construction activity but also attracting some speculative demand. Strong prudential regulation and a concentrated financial sector have supported financial stability, but the latter has also created concerns about competition and credit supply in some segments.

Pursuing fiscal consolidation and ensuring efficient tax and public spending. Gross public debt has risen from below 20% of GDP to over 30% since the global financial crisis. The budget faces significant volatility from movements in global prices for natural resources, and past spending commitments have created a medium-term structural fiscal challenge. Australia’s heavy reliance on inbound investment and exposure to resource market fluctuations provide strong arguments for fiscal discipline and low public indebtedness. The country has a comparatively light tax burden overall, but the heavy reliance on direct taxation is not ideal. Public-spending efficiency in some services is adversely affected by overlapping responsibilities and complex funding arrangements between federal and state governments.

Improving framework conditions for business. Improvements in productivity growth will require reforms across a wide range of structural policy areas including taxation, competition and deregulation. Government plans to ramp up infrastructure investment make sense, but only if funds are spent efficiently. Targeted business support needs to be judicious as it can be a short step from value-for-money subsidy to outlays on corporate welfare.

Encouraging employment, deepening skill, and addressing inequality. The importance of raising participation, combined with budgetary concerns, means effective welfare-to-work policies remain a priority. The government plans to incentivise unemployed youth, including lengthening the benefit waiting period. A proposed liberalisation of higher education tuition fees and reforms to student support aim to improve competition, access and choice. It will be important to monitor the impact of these reforms, particularly for students from disadvantaged backgrounds.

Tackling environmental challenges. The government is fundamentally changing Australia’s environmental policy, replacing a carbon tax with a suite of planned new measures, including a mechanism to provide incentives to businesses for reducing emissions. Ramping up road building provides opportunities to extend road pricing. Ensuring efficient supply chains for water is important.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.