This idea that a GST increase would simply whack poor people is nonsense

Homer Simpson in ‘Whacking Day’ / Fox

Take your pick today: modelling by the Institute for Whatever expects the impact of an increase in Australia’s GST rate to be this many thousand dollars, and the poorest households will feel it the most.

This increase in the GST must be a terrible idea, because it hurts poor people, right?


This is a furphy. It is running headline-grabbing interference on the debate about changes to the taxation mix in Australia which are needed to address the deteriorating fiscal outlook for the commonwealth and the states.

Because nobody is proposing that the tax Australians pay on goods and services would increase 50% overnight without some other parallel changes that would compensate low-income earners, pensioners, and welfare recipients for the extra cost of living.

There are a range of mitigating measures available and the most obvious are:

  • Increases to welfare payments to ensure nobody on the margins ends up worse off, and
  • Changes to the income tax system, most likely through an significant increase in the tax-free threshold.

Just as with the $15 billion compensation package Labor rolled out with its carbon tax to compensate people for increased costs in some areas, especially energy bills, a GST increase would come with some adjustments to other taxes.

If you think the carbon tax compensation package was big, consider the scenario modelled by Chartered Accountants Australia and New Zealand. Its analysis found that broadening the base and increasing the rate of GST to 15% would pull in $265 billion over four years. Compensation in welfare payments and tax breaks to lower income earners would cost $171 billion.

So under this model (which goes further than what NSW Premier Mike Baird has proposed, because he wants to keep fresh food, healthcare and education exempt) the compensation measures would dwarf those associated with Labor’s carbon tax many times over.

This would leave $94 billion over four years to start plugging the gaps in budgets. (For perspective, the cumulative deficits over four years in the federal budget alone add up to $69 billion.) Sooner or later, as the saying goes, it adds up to real money.

An increase in the tax-free threshold would put more money in the pocket of practically every single working person in Australia because you can earn more money before the government reaches out with its sticky fingers. Then there’s the benefit of the changes to the tax mix. With that extra money that’s collected from taking an extra clip from the millions of transactions across the economy each day you can do something that will make everyone happy: reducing or even killing off some other taxes altogether.

Getty/ Graham Denholm

Social Services Minister Scott Morrison got right to this yesterday when asked about it by Ray Hadley on 2GB:

I mean I have listened to this debate on increasing the GST for a while and it seems that it is always about spending more money. So more taxes for more expenditure that is how we have gotten into this problem in the first place with the Budget being where it is. I mean first we have to get our expenditure under control and I am quite sure that Australians out there if they had to pay more for GST they would want to see things like stamp duties go, they would want to see land taxes go, they would want to see payroll tax go, they would want to be paying less tax, simpler taxes, fairer taxes not more tax for governments to spend even more money.

What this highlights is that an increase in the GST is, clearly, not going to happen in a vacuum. It’s not simply a matter of prices going up. Waving around numbers about the thousands of dollars in impact on the poorest people in society is facile, and any politician who starts reciting it should be called out for the scaremongering that it is.

The OECD thinks increasing the GST is a good idea. So does the Business Council of Australia. A conga-line of economists (now there’s an image) have also stepped out in favour of it over recent years. And public resistance to an increase in the GST is falling: a poll in April showed support for an increase in the GST rate rose from 33% to 37% in just 12 months – and that’s without anyone mounting a sustained, broad campaign to get people behind it.

New Zealand successfully did this five years ago, increasing its GST rate from 12.5% to 15%, along with a raft of tax cuts that cushioned the blow.

The real hurdle here, and the factor that won’t have the nation holding its breath this week awaiting a deal, is that government leaders need to strike an agreement. Perhaps most difficult for the state premiers to swallow is that they already are beholden to Canberra for so much of their money that they would be loathe to countenance reducing the revenue lines they do control, such as land and payroll taxes. But there have been some encouraging noises from Prime Minister Tony Abbott, SA Premier Jay Weatherill, Tasmanian Premier Will Hodgman and, perhaps most surprising of all, WA Premier Colin Barnett, who has long complained about how GST distribution short-changes his state. So there is some momentum, even if it’s faint, ahead of the leaders gathering in Sydney tomorrow.

This is not to understate the scale of the task in either reaching consensus between the leaders of governments or convincing the electorate to get behind it. The Abbott government, as evidenced in last year’s budget, does not have a good track record with its treatment of marginalised people. So there is a long way to go.

But at the very least, Baird’s proposal for a significant increase in the GST should serve to open up the debate about the weaknesses of Australia’s current taxation structure – and not invite a round of bleating about the wanton inflicting of hardship on the very people that we pay taxes to protect.

Update: This article originally stated that the Australian Council on Social Services supported an increase in the GST. ACOSS has been in contact to say this misrepresents their position. ACOSS says it wants “to see everything on the table, not just the GST, but also land taxes, superannuation tax breaks, capital gains tax, negative gearing and other areas of taxation” and has an extended statement here. We are happy to clarify this point.

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