Crisis we cannot afford to waste

As Australians struggle through our economy’s largest contraction since the 1930s, the case for tax reform — shifting away from incentive-killing income, company and payroll taxes, stamp duty and other “nuisance taxes” — is compelling. Adam Creighton has reported a new analysis by PricewaterhouseCoopers showing that a revenue-neutral switch from less efficient taxes (mainly income taxes) to consumption taxes would increase gross domestic product. The national cabinet, unlike the sclerotic Council of Australian Governments it has replaced, affords governments on both sides a better chance to enact reform. Broadening the base of the GST to include fresh food, childcare, health, education, water and sewerage would raise about $21bn. Lifting the rate on the existing base from 10 to 12 per cent would raise $14.5bn. These would be worthwhile goals. The current rate, compared with the 19.3 average rate among OECD nations, is very modest.

Even ardent advocates of reform admit such change — which on paper would deliver a windfall to the states while the Morrison government wore most of the political flak — is highly unlikely in view of the realpolitik. But a willingness to put growth, jobs and the national interest first on the part of the major parties — in the states and at federal level in the Senate where any battle would be fought — could curtail the political fallout.

For all its manifest shortcomings, Anthony Albanese’s invitation to Scott Morrison to work co-operatively to achieve “bipartisan agreement” on climate change suggests COVID-19 appears to be changing the politics of that issue. Taxation reform demands a similar constructive mindset, informed by good economic policy — similar to the approach the Coalition, in opposition, took to many of Labor’s initiatives in the Hawke-Keating years.

But Labor, which does not govern but can veto, equates the GST with tax inequity, as Paul Kelly wrote last week. It does not accept the benefits of GST reform as argued by many economists. And opposition Treasury spokesman Jim Chalmers has made clear the party will not accept GST reform by lifting the rate or extending the base. For the Morrison government, the threat of a Labor campaign against any GST-led tax reform, even one that compensated losers, would be a critical disincentive.

Expanding the GST is not the be-all and end-all of tax reform, however. As Creighton wrote on Saturday, GST reform received only a few pages in NSW Treasurer Dominic Perrottet’s federation and tax review. That report, from the government of our largest state, demonstrates there is an appetite for reform, much of which should be supported by other states. The report canvassed replacing stamp duty with land tax and improving payroll tax — the ultimate jobs killer. It also discussed replacing petrol excise with road-user charging. Those measures, as Creighton wrote, “are all bigger and lower-hanging pieces of fruit on the tax reform tree’’. The national cabinet is the ideal forum in which they should be debated and refined, with a view to simplifying the tax system and encouraging economic activity and the creation of new jobs.

In his statement on Tuesday, Reserve Bank governor Philip Lowe reported that while leading economic indicators have picked up, “the outlook remains uncertain and the recovery is expected to be bumpy and will depend upon containment of the coronavirus”. The six-week shutdown of Melbourne and the neighbouring Mitchell Shire announced by Daniel Andrews will compound the already difficult challenge of post-COVID-19 recovery. So will the closure of the Victorian-NSW border. Dire as it is, the crisis gives all governments and political parties an opportunity to take a long-term view. The farsighted reforms of the Hawke-Keating years, and John Howard’s GST, which almost cost him the 1998 election, set Australia up for several decades of growth. A mix of well-planned, sensible taxation reforms, to be implemented as recovery gathers pace and not in the middle of the crisis, would set the nation up well for the future.