Malcolm Turnbull’s GST message could not be clearer

Last week’s GST Newspoll results

The message from Malcolm Turnbull could not be clearer: the case for a GST increase does not stack up.

After months of work, there is no compelling analysis showing the economy would be better off from an expansion of the GST to pay for income tax cuts.

“At this stage I remain to be convinced, to be persuaded, that a tax mix switch of that kind would actually give us the economic benefit that you’d want in order to do such a big thing,” Turnbull says.

Turnbull’s remarks on the ABC Insiders program offer relief to anxious Liberal and Nationals MPs who do not think a GST is worth fighting for at an election.

Turnbull is careful to emphasise the economics rather than the politics, however, because of the dangerous impression that he is running away from tax reform because he fears a drubbing at the election.

The Prime Minister sets an economic test for an increase in the GST from 10 to 15 per cent. Will it increase growth if it covers the cost of cuts to income tax or company tax cuts? His answer is no.

“With the GST income tax swap proposal, it has not yet passed that first test. And that’s what the analysis is being undertaken [for] so we have not made a decision on that yet. It does pose a lot of complexity, particularly in the area of compensation,” Turnbull says.

This is not the final word. There is a small chance that Treasury may produce a killer piece of analysis that shows the economic dividend is worth the trouble.

Turnbull, Scott Morrison and the full federal cabinet will have more economic modelling put before them when the head of the Prime Minister’s department, Martin Parkinson, prepares the eventual cabinet submission on tax reform.

The cabinet secretary, Arthur Sinodinos, offered an intriguing hint of the work already done. He told Sky News’ Australian Agenda program on Sunday morning that the tax mix switch could add more than 0.5 per cent to GDP.

That is roughly $10 billion in greater economic output — which sounds good except that it is probably a one-off gain and not a recurring boost to growth.

Asked by The Australian’s Paul Kelly whether a 0.5 per cent lift to growth was enough to justify the change, Sinodinos said there was a problem with the modelling.

“The limitation with the modelling is this: it’s static. It’s a before-and-after effect, it doesn’t look at dynamic effects.

“In other words, it doesn’t look at the fact that over time, if the tax system is consistently lower, fairer and simpler, and it’s encouraging people to work to invest and to save, you’re getting a much more entrepreneurial, risk-bearing culture. That’s the challenge for us.”

Last week’s GST Newspoll results

In other words, the work done so far shows the economic dividend isn’t big enough. Sinodinos sounded like he would prefer the modelling to include second-round effects over the long-term.

Given that the government has had several months to map this out, it has probably run out of time to find a rock-solid economic case for tax reform.

Some of Turnbull’s friends believe Morrison was getting too far ahead of the rest of the cabinet last week by talking up the chances of a GST increase. Morrison clearly thought that 37 per cent popular support for a higher GST, as shown in a Newspoll last week, was a solid base on which to win the debate.

On Friday and again on Sunday morning, Turnbull made sure to reset expectations.

The idea of a GST increase is not dead but it is clearly being prepared for the policy graveyard.