Tony Abbott and Joe Hockey: Ditch debt tax and fix GST to improve budget

THE people hired Tony Abbott and Joe Hockey to fix the nation’s budget defict. Turns out, they underquoted for the job, writes Jessica Irvine.

THE Australian people hired Tony Abbott and Joe Hockey to fix the nation’s budget.

Turns out, they underquoted for the job.

Before the election, Tony Abbott insisted he could do the necessary repairs with spending cuts alone, without resorting to tax increases.

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On closer inspection, Abbott and co have discovered a budget beset with rising damp, in need of major structural repairs to both the spending and tax sides of the budget.

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Fair enough, but their proposal for a temporary tax levy on high income earners is little more than a political patch-up job that risks exposing them as the most amateur of home renovators.

It’d be like painting over rising damp, rather than identify the source of the water leak, fixing it and rebuilding the wall.

The leak in Australia’s budget can be easily identified: it’s the GST. The greatest economic reform of the Howard and Costello government is raising less revenue than previously hoped.

The exclusion of services like health, education and childcare from the GST is bleeding ever more money from the budget.

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This is a fine mess you have got me in ... Prime Minister Tony Abbott with Treasurer Joe Hockey.

Why? Because as Australians have got richer, we have increasingly chosen to spend more of our income on these things. More Australians are purchasing more medical services and sending their children to private schools and childcare centres. Health and education, as it turns out, are what economists call “superior” goods — demand for them increases as incomes rise.

This trend will only continue as our ageing population increases demand for health care.

The problem for the budget is that, thanks to political carve outs agreed to a decade and a half ago, no GST is collected on these transactions.

Modelling by Deloitte Access Economics shows that Abbott and Hockey could raise $12 billion in one year alone — more than a debt tax would raise in four years — by broadening the base of the GST to include these goods and services.

That would go a long way to repairing Australia’s tax base for good.

Arguably, Australia’s headline rate of 10 per cent is also in need of a sprucing up. New Zealand has increased its consumption tax twice since introducing it at a rate of 10 per cent in 1986. Today it is 15 per cent and the kiwi budget will be back in the black this coming financial year.

Lifting Australia’s GST rate from 10 per cent to 12.5 per cent would raise another $12 billion a year. It would also likely be very unpopular, leaving a broadening of the GST base as the more likely outcome.

But it’s not just the money an expanded GST would raise.

Broadening the GST would also save time and hassle for small retailers who still have to decide which goods are subject to GST. Yes to pre-packaged cakes, but no to milk, flour, sugar and eggs.

The GST is also a good tax for an ageing population. Fewer retirees will be earning incomes and paying income tax in coming years, they’ll still have to eat. That might sound harsh, but the unavoidability of the GST is precisely why economists like it so much. Unlike income taxes, people can’t go to lengths to avoid paying the GST, like working less, hiring fancy accountants to reduce your liability or pouring money into tax preferred vehicles like family trusts.

Revenue raised by broadening the GST could be recycled into lower income taxes or one-off compensation for low income earners. That’s the sort of lower taxes voters had expected from an Abbott government.

Australians are sick and tired of constant tax tinkering. Hockey and Abbott should ditch their hastily constructed debt tax and instead lead a national conversation about broadening the GST.

Of course, Abbott must do as he promised and take any tax reform proposals to the next election for a mandate for change.

The truth is, Australia’s budget repair job can’t be done in one go.

Yes, Abbott and Hockey should go in hard in next Tuesday’s budget to fix the spending side of the budget.

But the repair work must continue beyond next week to fix our leaky tax base.

There can be little doubt fixing Australia’s budget will be a politically costly repair job — greater perhaps than Abbott or Hockey ever suspected.

But it’s a job they owe it to the Australian people to do properly, or we face a budget rot that will continue for decades to come.