Who are the winners and losers if GST is increased?

WHAT Mike Baird is proposing is a big political risk but will the pain be worth it? Who will be the winners and losers if GST is increased?

MANY would consider NSW Premier Mike Baird’s latest plan as political suicide.

Mr Baird’s proposal to increase the GST from 10 to 15 per cent will no doubt be a tough sell to both fellow politicians and the public. A Fairfax-Ipsos opinion poll in April found almost 60 per cent opposed an increase to the GST, although this result was better than the 86 per cent opposed in 2012.

So how badly do we need the money? And who will be the winners and losers if the GST is increased?

WHY DO WE NEED IT?

Mr Baird has proposed lifting GST from 10 per cent to 15 per cent to help fund Australia’s future health needs. It would be accompanied by compensation for households with combined incomes under $100,000 and continuing exemptions for fresh food, health, education and childcare.

The states are desperate for the money. In a column inThe Australian yesterday, Mr Baird said modelling showed annual budget deficits across the Commonwealth and states would be about $45 billion by 2030. About $35 billion of this would be due to health spending.

“If we tried to cut services to match it, it would be equivalent to the running costs of about 30 Westmead hospitals,” Mr Baird said.

The states have essentially been pushed into a corner by the federal government, which withdrew about $80 billion in health and education funding (over a decade) from the states in its last Federal Budget.

Mr Baird suggested there was little chance of making major health savings to address the funding shortfall. He said COAG data showed total health spending in Australia was very efficient compared with other similar nations such as the US, France, Germany, Canada, New Zealand and Britain.

“We need revenue. I know it’s not popular, but the best way of dealing with it that I see is to increase the GST ... and put all the dollars raised in to health,” Mr Baird told the Australian Financial Review.

But Shadow treasurer Chris Bowen said Mr Baird had “capitulated” to Mr Abbott’s plan to force the states to consider GST reform by cutting $80 billion in funding.

Meanwhile, an expert on state taxes, the University of NSW’s Neil Warren also toldThe Australian, he thought state governments were partly to blame for their own financial problems because they had handed out tax breaks worth about $23 billion in their latest budgets, mostly benefiting small businesses and farmers.

WINNERS AND LOSERS:

One of the reasons the GST is such a great way of raising money is because it is placed on goods and services that people buy so it’s difficult to avoid paying it. It’s also a tax that most consumers do not notice.

The current 10 per cent GST raised $53.7 billion in taxation revenue, a 5 per cent increase is expected to raise an extra $26.9 billion, not taking into account compensation for lower income earners.

Professor Miranda Stewart, director of the Tax and Transfer Policy Institute at ANU, said she agreed the government needed to raise more money to fund public health.

“Mike Baird makes the point, which I think is valid ... that it’s necessary to raise more revenue, but I hope that the GST is only one piece of a broader tax reform package,” she told news.com.au

Prof Stewart said increasing the rate would be simpler than trying to apply it to areas currently exempt from GST such as food, health and education, and it could be done quickly. However, it would miss the opportunity to apply the tax to items that wealthier consumers could afford to pay for. One example of this was bread.

“A luxury loaf of bread, an artisan sourdough that costs $8 has no GST, but rich people could afoord to pay GST on their bread,” Prof Stewart said.

“Rich people pay a lot of money for food and it would be good to tax high income earners for food, although we would have to compensate low income earners.”

Ironically, cheap takeaway foods such as McDonalds or KFC would have to pay the higher GST.

Increasing the GST could also make housing affordability worse as GST is currently only applied to new homes, and those buying existing homes don’t have to pay.

Monarch Investments chief executive Peter Icklow told the AFR a GST increase to 15 per cent would “whack another $50,000 on every new home”.

Prof Stewart said this could be one of the possible impacts, although she does not have data to confirm whether it would actually impact the supply of new homes. She said a GST was not charged on existing homes because they were essentially considered “secondhand” and anyone buying and selling secondhand goods did not have to charge or pay GST.

Melbourne Institute economist Roger Wilkins told The Australian that education and childcare exemptions also probably favoured high-income earners.

Let’s face it, rich people could afford to pay GST on their $8 sourdough.

At the moment GST is only paid on about 48 per cent of Australia’s goods and services because fresh food, health, education and financial services are exempt. This is aimed at keeping the costs down for low income earners.

In contrast New Zealand has a GST on around 98 per cent of goods and services and has also increased its rate to 15 per cent.

If the GST is increased in Australia it will hit low income earners more because a higher proportion of their income would go towards paying the tax compared to a high income earner.

Mr Baird believes the impact could be addressed through income tax and the welfare system so the most vulnerable would be protected.

But the plan relies on Federal Government cooperation as the Commonwealth sets income tax rates and manages the welfare system.

Social Services Minister Scott Morrison is cautious, saying voters would want to see tax cuts before they would accept a GST increase.

Figures crunched by Curtin University’s economics centre suggest average costs could rise by $3987 a year while the University of Canberra’s National Centre for Social and Economic Modelling estimates the households would be up for an extra $2915.

According to NATSEM, the bottom 20 per cent of households would be hardest hit.

Those on average incomes of $41,000 would spend 11 per cent of their annual income on GST (about $4500 a year), while those on average incomes of $181,000 would spend about 8 per cent of their income (about $14,000 a year).

HOW WOULD IT HAPPEN?

Increasing the GST is expected to be the hot topic of discussion when the heads of all the states and territories meet with Prime Minister Tony Abbott on Wednesday.

While Mr Abbott said the GST would not change unless all states agreed, Prof Stewart said legally, the Commonwealth could reform the GST without state approval.

“Increasing the GST and reforming the welfare system, both are in control of the Federal Government,” Prof Stewart said.

“There is a political agreement that all GST revenue goes to the states — and both levels of government talk about it (GST) as a state tax — but legally that is not the case.

“It’s not a state tax, it’s a Commonwealth tax, which is why it needs to be part of a bigger reform package that also reforms income tax, some state taxes, hopefully, and provides compensation in the welfare system.”

Labor does not support any increase to the GST.

“Mike Baird can do that if he wants to, but the Labor Party will stand consistently against increasing the GST,” Shadow treasurer Chris Bowen said.

Acting Greens leader Scott Ludlam said the Greens were opposed to a GST increase, and would hold Mr Abbott to his promise not to increase it.

So far two state leaders, in Queensland and Victoria, have ruled out supporting an increase.

Other states including South Australia, ACT and Tasmania have suggested they are open to talking about the possibility, especially if compensation for low income earners was adequate.

West Australian Premier Colin Barnett has backed increasing the GST to 12.5 per cent and extending it to online goods and fresh food, according to The West Australian.

Victorian Premier Daniel Andrews has an alternative proposal to address health spending and says there should be a one per cent increase to the Medicare levy, which is currently set at 2 per cent. This is expected to cost families about $1000 a year.