Last night, ABC viewers were treated to the spectacle of Peter Costello banging on about “his” GST on the steadily more dreary Howard Years . A few hours later, Fairfax’s Peter Martin quoted economist Stephen Kokoulas as advocating a cut in Costello’s GST from 10% to 8%. Around the same time, the UK Government resolved to temporarily slash its rate of VAT from 17.5% to 15% in a bid to stimulate its tanking economy. Could the Rudd Government be contemplating a similar move?
The Kokoulas plan: “One very simple plan, which would not have a lasting impact on the Budget balance would be a 12 month cut in the GST to say 8%, perhaps lower. This injects money into the economy immediately, it is fairer in that is does not simply benefit borrowers; if implemented with a 12 month sunset clause, future budget balances would not be impacted and it could dampen inflation expectations. (There are issues of State financing, an effect on bringing forward spending with a hangover after that and the like, but these are small beer when policy makers are doing as much as possible to inspire economic growth.)”
Crikey asked a group of leading Australian economists if a cut in GST could be feasible:
Shane Oliver, AMP Capital Investors: It’s quite a smart move actually and it’s certainly possible. But there’s an upside and a downside. The upside is that if you give a regular tax cut to people they may not spend it — they may chose to save it or pay off their mortgage. The benefit of cutting the GST is that people only get the tax cut if they spend money. So it’s certain to provide some form of stimulus. The downside is that it will result in more administrative complexity for business if you’re changing the rate all the time. But overall, it’s not inflationary and it makes sense and it’s a smart way of ensuring an increase in spending.
Adam Carr, Senior Economist, ICAP Australia: It would definitely provide a stimulus for the economy but the main problem is I just don’t think there’d be the political will. Governments around the world are certainly willing to try different things to kickstart the economy but locally you’d get the state governments, like NSW, kicking up a huge stink in relation to GST revenue. But yes, it would certainly make good economic sense.
Josh Williamson, TD Securities: I think this could arise as a policy option if we find ourselves in a deep recession in ’09 or ’10. The basic premise is that a cut in GST, if properly monitored by the ACCC, would result in downward pressure on prices and perhaps help revive growth rates. I think it’s politically feasible and would prove popular with consumers, although the government would have to make a decision on how to make up losses on GST revenue, especially to compensate the states.
Assoc. Prof. Steve Keen, University of Western Sydney: I’m not particularly fussed. I’d rather see the GST actually increased and used to abolish stamp duty. In terms of a long term performance that’s a much better thing to do. At the moment state governments use the GST as a major source of revenue and this encourages property speculation. So I’d rather see GST increased as a long term strategy rather than pursuing short term stimuli of cutting the rate of GST. We’re not going to be able to spend our way out of this one. Consumers are massively in debt and they have to massively reduce their debt levels.
Having worked for small business for most of my career I know exactly what will happen in reality. Prices will remain the same and the GST remitted to the ATO will reduce leaving the benefit within business. Small to medium business will have a difficult time reconciling why they should reduce their prices when they are already under significant pressure. Sure these funds will eventually filter their way out into the economy by freeing up cost structures within these business’ and allowing them to spend, however I question how if this would be as efficient an injection of funds into the economy as the article suggests. The only solution would be to run wide scale audits that measure trends in prices and margins within business to ensure that the savings were passed onto consumers! Would be interesting to see how the UK plan to administrate and police their VAT reduction.
Once you accept the notion that the GST rate can be varied downwards, you’ve opened the door to the rate being varied both up and down at the whim of the government. GST was made acceptable because the rate was preserved at 10% and successive governments have ruled out any thought of increasing it. I’d prefer it to stay that way.
On the other hand, suspending or removing GST from groups such as public utilities would not only have the same intended effect as a general reduction but also help those who are most in need, namely those on low or fixed incomes.
Cutting GST would help consumers – but only a little bit and there is no guarantee it would be spent. I think governments should also look at removing the incredibly regressive payroll tax that will be an impediment to employment especially in a period of growing unemployment. Employers, because they have grown enough to have around 20 staff or so have to pay 4.75% (Qld) of their payroll as a tax to the state govt. What a great reward for employing too many people! Is the incentive to employ less???