Give GST reform a chance: Productivity Commission chair Danielle Wood

Jim Chalmers opened up the tax debate this week promising not to ‘shoot’ down ideas. Productivity Commission chair Danielle Wood says a GST shake-up could be one reform.

Productivity Commissioner Danielle Wood. Picture: John Feder/The Australian

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Productivity Commission chair Danielle Wood says reforming the GST is an option worth ­examining, declaring there are ways of reforming the tax without pushing the government further into deficit.

As Jim Chalmers opened up the tax debate this week, promising not to “shoot” down ideas on the consumption tax if they were revenue neutral and helped boost productivity, Ms Wood said the GST would have its challenges, including compensating those paying higher rates on potentially broader mix of goods and services, and reworking funding to the states.

Ms Wood, handpicked by the Treasurer, echoed Reserve Bank governor Michele Bullock’s view that higher real wages were not sustainable without lifting productivity, and that any new regulation on artificial intelligence should not provide disincentives for investment in technology to lift productivity.

On the eve of the GST’s 25th anniversary, Ms Wood said the commission had so far been ­focused on ways to reform corporate taxation specifically because of the terms of reference set out by the Treasurer in the commission’s review of Australia’s productivity growth, which is at 60-year lows and costing billions in lost government revenue.

Treasurer Jim Chalmers. Picture: Martin Ollman

Consumption tax expansion

She said she was willing to look at modelling higher rates and an expansion of the consumption tax.

“We think the commission would be very open to broader tax reform,” Ms Wood told The Australian on Friday.

“Whether that’s the GST or income tax, we would look at it. The challenge is whether you can come up with a revenue-neutral change that makes sense. I think you can but that requires compensation for lower incomes and once you say some groups can’t go backwards you then get other groups demanding it. It just ­depends on your appetite for reform.”

Dr Chalmers said at the ­National Press Club this week that he was open to most ideas on tax, including the GST, at his productivity roundtable in August.

“I suspect the states will have a view about the GST,” he said. “It’s not a view that I’ve been attracted to historically, but I’m going to try not to get in the process of shooting ideas between now and the roundtable. I suspect people will bring views to the roundtable about the GST. Let’s hear them.

Dr Chalmers slammed the door shut on any compromise on Labor’s planned unrealised capital gains tax, and said death taxes and those on the family home were off limits. Tax changes on family trusts have not been ruled out.

Asked whether the commission would look into the effect on productivity from Labor’s proposed unrealised gains tax, Ms Wood said she preferred not to give her opinion.

“I’m staying away from that one,” she said.

Productivity push

The Treasurer has asked the commission to provide a report into five key areas of productivity. The commission is calling for ­submissions on how to “support business investment through corporate tax reform”.

Nicholas Moore.

It is likely to recommend tax changes when handing down its preliminary report, due in a few months, but Dr Chalmers said he would not agree to all its recommendations.

Some observers, such as former Macquarie Bank chief executive Nicholas Moore, have said tax reform would be difficult because of the number of different views.

Ms Wood asked: “Is tax a distraction? The tax reform piece is an important piece. I love all my children.”

Lifting the GST rate or broadening its base would need to be balanced with lowering income tax rates and compensating anyone whose lower tax rate did not make up for the higher cost of the GST. The government would also have to reduce specific purpose payments to the states from GST revenues so as to make up for the shortfalls in its own ­income-tax collections.

The GST is an act of federal parliament, which can change by legislation how much the states receive.

Ms Wood said the commission had done analysis on horizontal fiscal equalisation, the mechanism used to distribute GST revenue among the states and territories.

“We will review that and we will get terms of reference for that in coming months after the states review the terms of reference. We are legislated to review it by 2026,” she said.

Economist Saul Eslake.

States barrier

Economists such as Saul Eslake have said reforming the GST would be difficult because of funding arrangements with the states and because it would show up as an increase in headline inflation.

Taxation is a key part of lifting productivity because tax rates can give people incentives to work and invest in different ways that can boost economic activity. That activity lifts ­incomes through higher wages.

Ms Wood backed Ms Bullock’s assertion that higher pay without higher productivity was dangerous for the economy – an assertion challenged by Anthony Albanese.

“You can’t sustain higher wages without productivity,” Ms Wood said.

She said there had been higher wages in sectors such as care and health that traditionally did not have high productivity. However she said the commission was researching how such productivity was measured because if there were improvements in quality of life for people then that had some worth.

“We are looking at the improvements in quality not just cost,” she said.

RBA governor Michele Bullock says higher pay without higher productivity is dangerous for the economy. Picture: Nikki Short

Tread carefully on AI

Ms Wood said artificial intelligence would improve productivity in such sectors and that any new regulation should be carefully designed not to impede those gains.

“The key thing in AI regulation will be the jobs interface,” she said. “Robots that can come in and do the dishes at the age care facility or provide mental stimulation … there will be a lot of jobs where humans will now have to start working with machines.”

Productivity is measured as GDP per hour worked, but the 10-year average annualised growth is just 0.2 per cent – the weakest in at least 35 years. Productivity overall has declined 1 per cent in the year to March.

Labor has an assumption in its budget that productivity grows at 1.2 per cent. The Coalition has promised a new target of 1.5 per cent.