Turnbull gives some shape to taxation reform debate

Federal expenditure is unsustainable. Fiscal reform is required but a plausible way forward is, so far, far from clear.

A telling reality of the taxation debate is that the two politicians at the vanguard of arguments for an increase in the GST are state premiers who want to raise more revenue to cover higher levels of spending.

From either side of the political divide, NSW Liberal Premier Mike Baird and SA Labor Premier Jay Weatherill have slightly different plans but expect Canberra to endure the political pain for raising revenue to fund their big spending budgets. This is less about tax reform than a tax grab.

The introduction of the GST at the turn of the century was an enormously difficult political project — its proposal almost saw John Howard defeated at the end of his first term in 1998. Yet it was a true reform, eradicating a range of sales taxes and transaction duties levied by state governments and giving the states a guaranteed revenue source linked to economic growth. Even then, a crucial part of the package was strict guarantees that neither the reach nor rate of the tax could be easily changed. For good reason.

Malcolm Turnbull and Scott Morrison are now invited to endure all the pain of increasing the GST in order to bail out states unable to live within their means. Alternatively they would have to change the arrangements so that GST revenue could go to Canberra to fund income tax cuts. Yet — absent indexation of the new rates, as some other OECD countries do — these cuts might amount to handing back bracket creep that Canberra should rightly aim to do without other tax hikes. Worse still, politically, would be the option of increasing the tax on consumption to deliver a company tax cut.

As Judith Sloan today outlines in Inquirer, all of these complications add up to a proposed “reform” that might not do much for productivity and could create more political headaches than would be resolved. The debate has a long way to go, and with Coalition backbenchers already speaking out against a GST rise, there is no certainty this proposal will fly. Notably the two most successful treasurers of the modern era, Paul Keating and Peter Costello, have separately lent their credentials to arguments that revenue raising is not the part of the fiscal equation that needs tackling. From either side of the political divide, these reformers say spending restraint is what is required. Both suggest that increasing the GST to reduce personal income tax rates could presage a European-style descent into ever increasing public sector growth.

Against this deepening discussion, the Prime Minister yesterday gave some shape to the debate, laying down some important preconditions. “We are not going to raise more tax overall, number one,” Mr Turnbull said. “Two, any changes are going to be rigorously fair. And three, they’ve got to drive jobs and growth.” Fairness is a mandatory political buzzword and driving jobs is an attempt to explain why reform might be desirable. The pledge not to increase the overall tax take is most important. It repudiates the ambit claims from the NSW and SA premiers and should go some way to blunting Bill Shorten’s inch-deep GST scare campaign.

This newspaper will always support innovative economic reform designed to enhance growth, fairness and national prosperity. There can be no doubt the tax system is too complex, and personal and company tax rates are not internationally competitive. But no cogent argument has been made for increasing overall revenue and, at 25.9 per cent of GDP, federal government expenditure is clearly unsustainable. Fiscal reform is required but a plausible path forward is, so far, far from clear.