Monthly Archives: March 2015

Will the Abbott government increase the GST?

The framework of Australia’s Commonwealth-State financial relations is described in Chapter 4 of Australian Political Institutions 10e pp 105-107. Commonwealth grants to the states include goods and service tax (GST) payments distributed among the states in accordance with the principle of horizontal fiscal equalisation to enhance the capacity of both small and large states to provide comparable standards of government services. GST revenue is not ‘tied’ and can therefore be spent by the states according to their own priorities. The GST since its introduction in July 2000 has been levied at 10 per cent, with some exemptions including fresh food. Under Schedule A13 of the Intergovernmental Agreement (IGA) on Federal Financial Relations any proposal to vary the rate of GST requires ‘the unanimous support of the State and Territory governments, the endorsement by the Commonwealth Government of the day, and the passage of relevant legislation by both Houses of the Commonwealth Parliament (www.federalfinancialarrangements.gov.au/content/inter_agreement_and_schedules/current/scheduleA.pdf).

No Commonwealth government since 2000 has been prepared to risk electoral damage by proposing the rate of the GST be raised or that it be extended to include fresh food. In keeping with this trend Liberal leader Tony Abbott promised on the eve of the 7 September 2013 election that there would be ‘no change to the GST’ if his party was elected to government (http://australianpolitics.com/2013/09/06/abbott-promises-no-cuts-to-key-programs.html). Shortly after the election he rejected pressure from West Australian Liberal state premier Colin Barnett for an increase in the GST and is reported to have said: ‘Let me be as categoric as I can, the GST won’t change, full stop, end of story’ (Wilson, L. 20 September 2013, http://www.theaustrlaian.com.au/national-affairs/tony-abbott-dismisses=fresh-push-to-reexamine-the-gst/story-fn59niix-1226723309057).

The issue was reignited after the Abbott government’s first budget in May 2014 cut over $80 billion in health and education funding to the states, raising suggestions that the state governments should mount a case for changes to the GST to make up the shortfall. Federal Treasurer, Joe Hockey, said that if the states ‘want to increase funding in their areas of responsibility, they they’ve got to run the argument on the GST’. He also said: ‘We went to the last election promising that we would not change the GST. We are honouring that commitment…Any changes we would take (to the entire tax system) we would obviously take to the next election’ (Massola, J. & Nicholls, S. 14 May 2014 http://smh.com.au/business/federal-budget/federal-and-state-governments-on-gst-collision-course-20130514-zre5m.html).

Reform of federal-state financial relations was broached in October 2014 by prime minister Abbott in a commemorative speech he gave in Tenterfield, the place where 125 years before then NSW Premier Sir Henry Parkes spoke in favour of creating a Commonwealth of Australia. Abbott referred to the perennial question of ‘vertical fiscal imbalance’, meaning the shortfall between the amounts the states receive and the funds they have to spend in delivering goods and services (see p. 106 of Australian Political Institutions 10e). Abbott said ‘we could either adjust the states’ spending responsibilities down to match their revenues, or we could adjust their revenues up’. He said the Commonwealth was ‘ready to work with states on a range of tax reforms that could permanently improve the states’ tax base – including changes to the indirect tax base with compensating reductions in income tax’ (Abbott, T. 25 October 2014, http://www.pm.gov.au/media/2014-10-25/sir-henry-parkes-commemorative-dinner-tenterfield). This caused media speculation whether Abbott was about to raise the GST (Farr, M. 27 October 2014, http://www.news.com.au/finance/is-tony-abbott-planning-to-raise-the-gst/story-e6frfmli-1227103537861). In responding in parliament to a question from the Leader of the Opposition about his intentions with regard to the GST Abbott reiterated the thrust of his Tenterfield remarks: ‘Obviously, if we are going to have a mature debate about our federation, we need to look at spending responsibilities and at revenue capacities…I am very happy to have that debate. I invite the Leader of the Opposition to participate. I invite all of the states and territories to participate…the GST is a matter for the states but certainly it is something which ought to be looked at as part of the federation reform process and as part of the tax reform process’ (Abbott, T. 27 October 2014, House of Representatives, Debates, p. 11974).

Clearly the prospect of raising the GST was already on his mind because it was reported that prior to his Tenterfield speech he had raised the issue of increasing the rate of the GST or broadening its base in private talks with cross bench Senators, whose votes clearly would be crucial to the passage of any enabling legislation (Maiden, S. 9 November 2014, http://www.dailytelegraph.com.au/news/tony-abbott-floats-increased-gst-relinquishing-education-health-to-states-and-tax-cuts-for-workers/story-fni0cs12-1227116899252).

The deteriorating electoral standing of the Abbott government following hostile reaction to its May 2014 budget and media speculation about a challenge to Abbott’s leadership meant that any prospect of promoting increases or changes to the GST had to be placed on the political ‘backburner’. On 14 December 2014 the government’s two-party preferred rating stood a 42.5 per cent compared to Labor’s 57.5 per cent (http://www.roymorgan.com/morganpoll/federal-voting/2pp-voting-intention-trend-1901-2015). Treasurer Hockey indicated that the Abbott government would not attempt to increase the GST in its next term on the basis that the budget could not afford the compensation necessary to encourage the electorate to accept an increase and because the ‘move would be politically unpopular’ (Coorey P. 18 December 2014, http://www.afr.com/news/politics/gst-rise-inttohard-basket-joe-hockey-20141218-12a7s7).

In early January 2015 with the government performing badly in two-party preferred polling and heightened speculation about a leadership challenge to Abbott, it is not surprising a comment by Country Liberal MP Dan Tehan that the Abbott government should being the new year ‘by broadening the GST’ to cover currently exempt items such as fresh food, health and education which raised the ire of Australia’a farmers, evoked a response from Assistant Treasurer Josh Frydenberg that the GST would be part of the government’s white paper on tax, but ‘we have no plans to either increase the GST or broaden its scope’ (Hutchens, G. & Heffernan, M. 6 January 2015, http:www.smh.com.au/federal-politics/political-news/think-tank-abbott-government-would-raise-6-billion-from0-gst-on-fresh-food-20150105-12i9b6.html). Abbott reiterated there would be no changes to the GST before the next federal election (http://www.insideretail.com.au/blog/2015/01/06/abbott-says-no-gst-change).

The government’s poor political polling eased after Abbott survived the 9 February 2015 party room challenge to his leadership failed and his government had retreated on unpopular budget measures which it had failed to get through the Senate. However, there is a marked discrepancy in the polls. A Roy Morgan poll taken 14/15 March and 21/22 March 2015 shows the ALP at 56 per cent and the Coalition well behind at 44 per cent on a two-party preferred basis (http://www.roymorgan.com/morganpoll/federal-voting/2pp-voting-intention-trend-1901-2015). A Newspoll-Australian two-party preferred poll taken on 20-22 March on the other hand put Labor at 51 per cent and the Coalition at 49 per cent (http://www.newspoll.com.au/opinion-polls-2/opinion-polls-2). Even though the latter poll is more encouraging for the government it would still be likely to lose an election on those figures.

The GST continues to simmer along on the political agenda. Reserve Bank Board member Roger Corbett is reported to have said the federal government must raise the GST (Lynch, J. 17 March 2015, http://www.afr.com/business/media-and-marketing/roger-corbett-calls-on-tony-abbott-to-raise-the-gst-and-get-his-house-in-order-20150316.1m0t7t). The Western Australian Treasurer sought a greater share of the GST for his state from Federal Treasurer Joe Hockey on the base of of the state’s falling revenue base following a marked drop in mining royalties and declining GST revenue (O’Connor, A. 19 March 2015, http://www.abc.net.au/news/2015-03-19/gst-fight-goes-to-canberra-nahan-meets-hockey/6333420). It has been reported that the Abbott government is considering giving Western Australia a $400 million GST windfall and reducing the amount given to NSW by$200 million. Abbott commented: ‘No doubt this is a matter that will in the fullness of time be dealt (with) by the Commonwealth Grants Commission’, he said. The Treasurer’s office stated ‘the Treasurer had received the Commonwealth Grants Commission Report and the government would ‘now consider its recommendations and consult with the states in the usual way prior to finalizing 2015-2016 GST relativities before the 2015-2016 budget’ (Borello, E. 26 March 2016, http://www.abc.net.au/news/2015-03-26/hockey-considers-plant-to-give-wa-more-gst-cash/6349694).

The sticking point for any increase to the rate of the GST or the basis of its distribution lies with getting the unanimous agreement of the states and the federal government getting its legislation through the Senate. Not surprisingly the states are squabbling about the proposal to give Western Australia a $500 million ‘windfall’ with the South Australian Premier reportedly saying ‘the WA government was trying to “rob” the smaller states and territories’ (Kagi, J. 26 March 2015, http://www.abc.net.au/news/2015-03-26/gst-war-erupts-between-jay-weatherill-colin-barnett/6351822). Andrew Constance NSW State Treasurer prior to the NSW state election held on 28 March 2015, is reported to have pledged to fight the GST shake-up and shift to a formula based on population that would favour NSW: ‘We don’t agree with this proposal. We want our per capita share of GST and that’s what we’re fighting hard for’ (http://afr.com/news/politics/nationa/nsw/labor-slams-mike-baird-over-gst-carve-up-20150326-1m82cxz).

The release by the Commonwealth Treasury of a discussion paper on tax reform setting out the case for an increase to the GST suggests the issue is firmly on the Abbott government’s policy radar. The cautionary note in the discussion paper that proposals for changes to the GST would only be considered if there was ‘broad political consensus for change, including agreement by all states and territory governments’, however, highlights the groundwork and politically difficult discourse with the electorate and the states and territories that has to be done before any changes become hard policy.

It was reported that the release of the discussion paper including suggestions that the GST should be increased, ‘flagged that the government is open to raising the rate of GST’, but Hockey insists he is ‘not going to buy into the debate about broadening the base of the GST’ but ‘is hoping for a meaningful conversation’ about the issue which needs ‘community and political backing’ to be implemented (Danckert, S. 30 March 2015, http://theaustralian.com.au/national-affairs/treasury/treasurer-joe-hockey-wants-gst-changes-with-state-backing/story-fn59knsif-122784235009).

It would be a brave, if not foolhardy, government that led the charge for an increase to the GST as long as it is trailing in the polls. However, if its electoral standing should improve markedly then it is possible, but not necessarily probable, that an increase to the GST may be placed on the Abbott government’s political policy agenda.

Dr Gwynneth Singleton
30 March 2015