Opinion: Hot And Cold Chooks And Aussie GST

Simon Orme writes from Sydney

Australia's GST is about to become law, after it was passed through the Senate on Monday, just days before the current Senate ends. A GST will be implemented in Australia on 1 July 2000.

Only thirteen years after New Zealand. But it is a very different package from the one presented last year, and is not a GST New Zealanders would readily recognize. This followed intensive negotiations between the Government and the leader of the Democrat party, Meg Lees, last month to break through the previous gridlock. The big concession obtained by the Democrats is that "basic" food is exempt - the "Irish GST model". A raft of other goods and services are also exempt, including health and education services.

Another messy compromise was reached on the diesel fuel issue. The current tax will be reduced, appeasing the bush, but this will not apply in the cities, appeasing the environmentalist lobby.

The tax cuts remain, albeit shaved slightly. This is achieved by increasing the thresholds at which the various tax rates cut in. The top rate remains 47%. But it will cut in at $75,001 PA not $50,001 PA as at present.

In addition, a number of highly irritating State taxes are also to be removed, although later than before.

The tax cuts more than compensate for the expected additional costs imposed by the new GST. This means wage and salary earners will have more cash in their hands following the GST.

So if earners and social welfare beneficiaries are better off after the GST, how has this been done?

The Commonwealth Government gave a massive tax cut. Its total tax take is expected to decline by over $5 billion PA. On one estimate the tax cut will equal $7 billion PA.

In other words, the GST is funded from the projected Budget surpluses.

This is the beauty of a strongly growing economy. It provides options.

Major impacts of the GST, therefore, include a massive fiscal stimulus in the second half of next year, together with a corresponding higher risk to the projected Commonwealth Budget surplus in the event economic conditions turn sour.

Economists are worried the GST will put greater pressure on Australia's trade deficit.

The political fallout could be significant for the Democrats and Leader, Meg Lees, who led the GST negotiation. Two Democrat Senators crossed the floor and voted against the deal, including the telegenic 20-something Deputy Leader Natasha Stott Despoja, because books are captured in the GST. The Democrats are set to vote on whether Meg Lees should be replaced.

The Democrats are a South Australian based party, with no seats in the lower house, but with the balance of power in the Senate.

They have tended to be on the political fringe and have seldom had to make the hard choices - instead having a bet each way.

The GST negotiation has been a baptism of fire into real politics. The Democrats have never been more relevant, but it is highlighting internal divisions.

An assessment of the GST.

It is very much a fourth or fifth best option. The exemptions are hard to support on policy grounds and will vastly increase the complexity and cost of administration.

Cooked chooks are in, but cold chooks and hot chooks that have cooled are out. Soup in a packet is in, but soup in a can is out. Aspirin and cough mixture have been exempted. So too acupuncture, naturopathic and herbalist services.

Lengthy regulations list goods that are out. The regulations include a recipe for GST-free bread. Compliance costs will be high, resulting in further ad-hocery in a methodology for guesstimating the GST liability for corner shops.

Treasurer Costello's jibe before the deal was the Democrat's GST is a "nightmare on mainstreet". This came back to haunt him, though, after he did the deal.

There will be a whole new category of tax rorts now. Also, GST exemptions will be electioneering fodder for the foreseeable future.

Liberal Victorian Premier, Jeff Kennett, publicly trashed the compromise GST.

The income tax regime remains a mess, because of the large gap between the statutory rate and the effective rate. The 47% top marginal rate is largely presentational. "Packaging" of salaries is widespread, resulting in a much lower real rate.

There is a strong irony in the outcome. The Democrat's avowed objective was to make the GST package fairer. They have certainly achieved better top ups for the not so well off. But this has been achieved by what is likely to be a permanent reduction in the size of the Australian State.

It will be that much more difficult for a new Government to wind the tax rate back up again as a share of GDP.

The rate of the GST, for example, is locked in because all the States would need to agree to a change. And it is axiomatic the States can agree on hardly anything.

So the real long term losers from the new tax regime are those most dependent on the State. The poor and vulnerable, in other words.

It is for this reason the influential welfare lobby has refrained from endorsing the package. So, despite the compromise on food, the revised GST package is a major win for the advocates of a smaller State. The political right won after all. And the GST odium is shared with the Democrats.

The problem was the debate focused far too much on who wears the tax, overlooking the fact that tax is what funds government services.

The new GST package is probably good news for New Zealand. The package will provide additional impetus to the Australian economy next year. Other things being equal, this will flow through into higher demand for New Zealand goods and services.

Simon Orme made narrow escapes from both the New Zealand Treasury and Ministry of Foreign Affairs and now lives in Sydney, attempting to make the NSW electricity sector user friendly.

Email: simonorme@hotmail.com

Copyright: Simon Orme 1999

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