Tony Abbott hints at GST hike, says he accepts ‘efficiency argument’ behind tax

Australian Prime Minister Tony Abbott has hinted that his government is not against a rise in the GST, saying there is a powerful argument in favour of changes to the goods and services tax. However, the PM was careful to couch his statement in financial jargon by saying he accepted the "efficiency argument" behind the GST, provided other taxes come down.

“There is an efficiency argument for taxing earnings less and taxing spending more, I accept there is a strong argument, but it's got to be in the context of overall lower taxes,” he told 2GB's Alan Jones.

Linkage with income tax

The PM’s comments came after Finance Minister Mathias Cormann’s made a statement saying that there was a “conversation to be had” with the community on changes to the GST and that any cut in income tax would be subject to a broader reform package that will come out as the coalition’s main plank in the election campaign, reports the Australian Financial Review. The PM’s comments about “efficiency” is considered as an in- principle nod to advance arguments in favour of hiking the GST and convincing the public that such a move would not have any negative effect on the economy unlike hiking other taxes. The point was reinforced by many other economists and business leaders during the National Reform Summit.

So far, state and territories treasurers have not agreed on a broader GST reform. In an alternate suggestion, NSW Liberal premier Mike Baird and South Australia Premier Jay Weatherill called for raising the GST from 10 to 15 percent and spending the extra on public health to aid many states’ soaring healthcare bills.

Mr Abbott made an indirect criticism of those advocating a hike in the GST to expand government’s spending.

"The problem with a lot of the people who are saying just whack up the GST is that they want the overall burden of tax to go up, they want government spending to go up," the PM said.

However, a coalition MP raised concerns about the wisdom in taking the GST rise to the next election. “I'm just observing it's an incredibly complicated front to take on as a government," Queensland MP-- Andrew Laming said, adding he was "more optimistic" about a campaign that offers job creation policies rather than tax reforms.

GST reform soon

Meanwhile, reports say that changes in the Goods and Services Tax will happen very soon. This is because budgetary pressures are forcing the government to rework Australia’s entire tax code, in which GST has a central place.

The push factors also include the slow growth of the economy at 0.2 percent in the second quarter, which marked a hefty decline over the first quarter. When growth falters, pressures mount on the bulging budget deficit, which is already huge at AU$40 billion. At this rate, a recession is also not ruled out.

Experts say the GST hike would raise an extra $20 billion in annual tax revenues and broaden the tax base even if it means forgoing exceptions for food and education sectors. Such a change would also align Australia with similar value-added taxes across the world.

At present, Australia ranks low on the global goods and services tax scale. Even New Zealand recently lifted its rate from 12.5 percent to 15 percent. In OECD countries, the average VAT is even higher at 19.5 percent while Scandinavian nations have it at 25 percent.

Compared to these nations, Australia has the leeway to raise the GST. But the biggest question that must be answered is -- whether such a change would make sense for the economy. In reality, a 15 percent GST could be a good thing although it depends on how the government will compensate it by moderating other taxes. Without a convincing strategy, the GST hike would only boomerang by hurting consumer confidence and spending rates, notes Daily Reckoning.

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