The states are crying out for more cash — so should the sacred cow of the GST remain untouched? New South Wales Premier Barry O’Farrell is leading the charge for kick-starting the debate on increasing the GST and expanding its coverage. Federal political parties aren’t having a bar of that, unwilling to even raise the prospect of GST reform in the face of a hostile public. So what do the experts think?

Steve Keen, associate professor at the University of Western Sydney:

I’m not opposed to the idea of broadening the GST tax base or increasing its rate. One of the weaknesses of the Australian taxation system is that states are inordinately dependent on revenue from property speculation for their tax receipts — via stamp duty in particular — which gives them an enticement to actually want to cause asset price bubbles, since it increases their tax take.

We’d be far better off if governments weren’t dependent on property speculation for their income stream, and one way to do that is to enhance what they get from economic activity via the GST. Then we’d have them operating with an incentive to increase economic activity, which is a lot better than having the incentive to cause property bubbles. A GST rate rise would be good if it reduces reliance on stamp duty. I think there would be public protest, however.

Warren Hogan, chief economist at ANZ Research:

I think it’s unusual that taxation reviews in Australia in recent years have excluded the GST. The GST is a critical tax base for the public sector in Australia and that tax base appears to be shrinking because of changes in the economy, because of technology and because the original set-up was not broad enough. I think the breadth of that tax base needs to be looked at, and then there needs to be some serious discussion about whether that tax rate needs to move, not just higher on a permanent basis but also in connection to something that’s flexible over time, so when governments find revenue problems emerge because of economic conditions, they can raise it. And where those economic problems dissipate, they can pull it back. That would obviously require a lot of discipline. The politics of the GST have been problematic from the start, and that’s essentially the reason it’s been excluded from taxation reviews.

The first thing that needs to be done is that the base needs to be looked at critically; the international internet retail purchases under $1000 being GST-free. We have to take a long view on that. Essentially the GST base is shrinking because more and more retail activity is occurring in that space which is GST-free. The argument against putting GST there is that the cost of putting it in place is more than the revenue it raises, but what is that based on? Revenue for the next year or two, or the next 20 years? What projections about the extended online retailing is that assuming? This needs investigation in a more systemic way.

Reform requires political leadership, and ultimately that has to come from the federal level. I’d imagine that any review, any serious analysis and consideration of changing GST arrangements would have to be led by the federal government.

The consumption boom is over. That was a 1990s-2000s story. That was a Western consumer boom, and the GST was established in the midst of that. So consumption as a proportion of economic activity is going to be lower, and is now lower, than it was back then. Those two structural changes going on in the economy may necessitate that there should be a higher GST rate. The other thing is that it should be on everything. Why are there exemptions? We need to address that.

John Quiggin, from the University of Queensland’s School of Economics:

It’s clear that the states need substantially more revenue to deliver the basic services voters expect, notably including taxation, or else they need to shift some responsibilities back to the Commonwealth. There are three main options, which I list in order of preference:

  1. A Commonwealth takeover of TAFE, funded by an increase in income tax/reduction in tax expenditures;
  2. Repair of state revenue base through reductions in concessions on payroll and land tax;
  3. An increase in the rate of GST.

In terms of political feasibility, the second is probably a little easier than the first.

Alan Oster, NAB chief economist:

The general economic rule is that the broader the coverage the lower the rate would have to be. But we’ve been through a pretty torturous election a few years ago about this, so I think it would be really difficult to reopen that can of worms. But in principle, basically broaden the base, don’t exclude anything and that means you can get much more.

It’s something people can look at, but you’d have to have a whole-of-government approach, the states and the feds, and I suspect it’s very difficult. It was set up that way — set up to be almost impossible to change it.

If you’re thinking about raising more revenue to essentially fund some other project then obviously it is a potential revenue raiser. The problem you’ve got is every state and both houses of Parliament have to basically agree and I think the chances of that happening are very small. The states won’t be able to do it in isolation.