High anxiety in partyroom over GST plans

There was near universal concern in cabinet that the GST reform could destroy the government after just one term in office.

Peter Costello and John Howard in August 1998.

When John Howard and Peter Costello agreed to overhaul Australia’s taxation system, including introducing a goods and services tax, there was near universal concer­n in cabinet that this reform could destroy the government after just one term in office.

“Most of them had been through a defeat in 1993 and some people in the partyroom had lost their seats and come back in 1996 — they weren’t in a mood to lose them again,” former treasurer Peter Costello told The Australian.

“We’d had a GST election in 1993 which the Coalition should have won but ended up losing the unlosable election, so this spectre hung over all of us. This was the stuff of nightmares.

“The lesson coming out of the 1993 election was don’t ever try and put a tax on everything because­ it doesn’t matter what else is happening, you’ll lose.”

Mr Howard was also conscious of “the very chequered history” of consumption taxes, including his own failed attempt to broaden the indirect tax base as treasurer in 1981, but thought it was the next big economic reform Australia needed even though he had promised to “never ever” introduce a GST prior to the 1996 election.

“It satisfied my two key prin­ciples of winning acceptance of reform­ in Australia,” the former prime minister told The Australian. “A, it had to be good for the country and, B, it had to be fair, and we went to great lengths to enlist people on the basis of fairness.”

The 1998-99 cabinet papers revea­l considerable anxiety among ministers as the tax package — known as A New Taxation System (ANTS) — was finalised ahead of the 1998 election and then negotiated with state governments and the Australian Democrats in the Senate.

In July 1998, cabinet insisted on improving the compensation measures associated with the 10 per cent GST that was to be collected by the commonwealth and distributed to the states in return for the abolition of wholesale sales tax and several state indirect taxes, and introduced on July 1, 2000.

Ministers agreed on reductions in income tax rates, a new family payments system, and assistance for pensioners, welfare recipients, self-funded retirees and small business. Throughout July and ­August 1998, cabinet made considerable revisions to the package, including a 4 per cent boost to pensions­ and welfare benefits to ensure the less well off were “overcompensated” for the increase in prices as a result of the GST.

Ministers were not shy in ­giving the treasurer instructions on how to better sell the benefits of the tax changes, wanting him to “highlight the positive impact the reforms would have on employment and wealth creation, effic­iency, and business costs”.

Cabinet also wanted it noted that “Treasury’s distributional analysis shows that no household type or income range loses as a ­result of the package”.

Cabinet met nine times in four weeks to consider tax reform. Mr Costello used a PowerPoint slide show from a laptop computer to brief ministers. The last briefing went for seven hours.

The treasurer had settled on a GST rate of 10 per cent but recalled Mr Howard suggesting to him, just prior to the launch, that it be reduced­ to 8 per cent. “I almost had a seizure,” he remembered. “I nearly lost it.” He told Mr Howard he would not change the policy.

The government’s plan was announce­d in August 1998. Soon after, an election was called for October that year. This strategy was integral to implementing a reform­ of this magnitude. While the government won the election, it still had to negotiate an agreement with state governments and win passage through the Senate.

The changes to the tax system were so comprehensive 27 separate bills were needed, and it was not enshrined­ until the Coalition won the November 2001 election.