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Over recent days, Prime Minister Scott Morrison has ruled out the introduction of a new coronavirus levy on personal incomes.
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GST reform after the fallout — a once-in-a-generation opportunity
24 April 2020
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He has also said that any change to the GST rate is not on the table and that his government will not move towards more protectionist policies. But the $A189 billion elephant in the room is how the state and federal governments will service the multibillion-dollar debts arising from their COVID-19 assistance packages.
Despite the media comments by the Prime Minister, the coronavirus pandemic presents the government with what could be a once-in-a-generation opportunity for tax reform, with the chance to shift the tax balance away from inefficient taxes and towards more efficient consumption-based taxes.
The current international trade restrictions have revealed weaknesses in Australia’s supply chains, resulting from an increased reliance upon imported goods. Australian manufacturing has fallen to an all-time low of just above 5 per cent of GDP. This must be addressed once COVID-19 restrictions are lifted, and any post-coronavirus tax reform measures should have regard to Australia’s “economic sovereignty”, a phrase touted by the Prime Minister in recent days.
Federal Treasurer Josh Frydenberg has promised a revamp of supply chains, and it is understood that his focus will be on enhancing Australia’s niche manufacturing. But Australia’s “economic sovereignty” may not be met by niche manufacturing alone. More significant tax reform may be needed if Australia is to ensure that its demand for essential items can be met during a future health crisis, trade embargo or international military conflict.
Economists have long argued against protectionist policies, but the taxation of foreign manufacturers and retailers through increased tariffs and import duties may now be seen by some as a way of raising much-needed tax revenue while providing a more competitive platform for our local manufacturing industries. This may require a rethink of Australia’s position under its free-trade agreements and there is a danger that any new protectionist measures may be detrimental for Australia’s vital export industries.
Another area of possible reform is the GST. The GST rate in Australia is among the lowest in all OECD countries, which makes it a potential candidate for further reform.
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In 2019, Western Australia Senator Dean Smith was reported as calling for a broadening of the GST base to include fresh food, health, childcare and private school and university fees, or for the rate to increase from 10 per cent to 12.5 per cent. Former Treasury secretary Dr Ken Henry has previously made similar calls.
But even in the fallout of COVID-19, there may be significant political and community reluctance to embrace any broadening of the GST base to include essential items such as fresh food, health, childcare and education as any tax on those items would unfairly impact pensioners, low-income earners and those who are least able to shoulder the tax burden. But a rate increase applying across the board, or the introduction of a higher rate for discretionary items, may be more justifiable.
At an Australian Liberal Party function in 1997, the then Prime Minister, John Howard, addressed the need for tax reform by stating that any taxation reform would need to pass three tests:
- It must generate more employment.
- It must help boost exports.
- It must generate higher living standards, encourage risk-taking and provide greater economic incentives.
Mr Howard’s list must now be expanded to include the need to enhance the “economic sovereignty” of Australia’s supply chains.
Inefficient taxes (such as a tax on payroll) move resources away from their highest-value use, which may lead to lower productivity across the economy. The GST is recognised as one of the most efficient taxes and was thought to pass all of Mr Howard’s three tests.
In 2010, the International Monetary Fund said it would welcome more reliance on consumption-based taxes (such as the GST) in Australia. Former New Zealand prime minister John Key (who in 2010 cut the corporate tax rate and raised his country’s GST from 12.5 per cent to 15 per cent) described the GST model as an “immensely fair” tax.
Cognisant of the need to fund the multibillion-dollar COVID-19 assistance packages, the Australian public and the state and territory leaders may be more accepting of GST reform if the changes will pass Mr Howard’s three tests and restore the budget.
Because the GST is not borne by businesses, an increase in the GST rate (or the introduction of a luxury rate for discretionary items) may be less damaging to local manufacturing than increases to less efficient taxes (such as company tax or payroll tax). An increased GST borne by consumers does not swing the pendulum further in favour of manufacturers and retailers operating in low-tax jurisdictions because, under the GST, all domestic consumption is taxed equally on the price eventually paid by the consumer.
But the question remains whether Australian manufacturers may also need additional support through increased tariffs and import duties if they are to compete with offshore suppliers at a level necessary to guarantee our supply chains in the future.
A delicate balance may need to be struck between protecting Australia’s export industries and encouraging the revitalisation of our manufacturing industry. This requires courage from our politicians, who must be called upon to take advantage of the opportunity before them, which must surely include a full review of the GST regime.
Cameron Steele, partner, Dentons
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