I have two free ideas for John Howard to help him sell the GST.
In fact, they are not my original ideas, but as there are two of them, it falls into the category of research rather than plagiarism.
The first relates to the Aussie dollar, which is taking a bit of a battering at the moment. And the second relates to the Queensland election.
Since Australia floated the dollar in the mid-1980s it has floated between 57c after the then Treasurer Paul Keating made his famous “”banana republic” comment in 1986 and above 80c in the middle of this decade. That is a reasonable range. An equivalent to the recent Indonesian currency collapsed would put our dollar at under 20c.
Nonetheless the present dip below the psychological 60c barrier is dangerous. It is dangerous because it is a psychological barrier, not a rational one. And it is nonsense to expect the “”rational” markets to bring it back up to a truer value. If markets were rational, diamonds would be worth a little to people who drill in to rock, but not much more. No, people in the market try to make a rational assessment of other people’s irrationality so they can make an easy buck. So a rational holder of huge amounts of Australian currency will sell if he or she thinks the market value of the currency is about to fall, irrespective of its true value. So they act on other people’s fears and hunches.
The trouble is that if the currency falls too quickly, hitherto very solid businesses go broke because they have foreign-currency loans the interest on which cannot be repaid with the toppled currency. Could you repay your mortgage if the interest rate quadrupled? The broke businesses put people out of work, further suppressing demand.
Australia is not in a good position. Our currency is one of the top 10 currencies traded on earth, usually around sixth-most traded. A high percentage of the trade is speculative. People are not buying the currency because they want to buy Australian goods, or invest in Australia. They are buying it to flog it off later at a profit.
It is fine if the currency rises and falls provided it does so slowly, so people can adjust. But speculation can cause sharp changes.
Even the Reserve Bank cannot deal with this kind of fall. It can run out of reserves or make too large a loss and have the embarrassing situation of no-one believing it when it says (or hints) it is buying when it is not. Usually it makes a handsome profit buying when the currency is at a low and selling when it gets too high.
Another reason for Australia’s precariousness is in fact the banana republic syndrome. Most people have associated Keating with the republic part of the couplet, but the banana part is more important. It is a reference to that depends too much on a single cash crop, like the Central American republics’ dependence on bananas. When the price of that commodity falls, the currency and the whole economy collapses. Australia is fairly dependent of agricultural and resource exports.
If exports fall, or the price received for them falls, the currency is made weaker as there is less demand for it because less hard currency earned from exports has to be converted. In Australia’s case that might be a relatively small movement, but it gets exaggerated when speculators move in.
The answer is not to go back to a regulated currency, because that would involve too big a step when the currency ultimately has to change value. Besides it is a great confidence sapper. But some force has to be applied to prevent too much speculation.
The answer should be obvious. Apply the GST to foreign-currency transactions. I hear the screams from the business end of town now.
There is the trouble of getting other nations to do the same thing, so Australia is not disadvantaged. This was mentioned by an earlier proponent of the currency-transaction tax, John Langmore, the former Labor Member for Canberra. But he, of course, could not call it a GST on currency transactions after his fearless leader had back-balled all thought of a GST in 1991.
But seriously a GST at a small rate, even half a percent, should be applied to foreign-exchange transactions. That would slow the speculators. We know the slowing effect tax has on transactions. Look at all those Mums and Dads shareholders hanging on to their Telstra shares because they don’t want to pay or have no means of avoiding the capital-gains tax. But what a good way to put a brake on a sharemarket crash. What a good way to put a break on a currency crash.
John Howard could sell it as part of his GST package. It would be a tax on the big-end of town as well as the battlers.
I said there was a second GST selling point. It was made by one of my colleagues over lunch and deserves developing. (My colleague has plenty more ideas where that came from so he won’t mind me pinching this one.)
One of Howard’s problems is that few believe him when he says the rate of a GST would never be increased. Another problem is that Gough Whitlam’s adage about change is working: those in favour are only luke warm (because there is no guarantee they will benefit) and those against are vociferously against (because they are convinced of the disadvantage).
Howard could get the states on side, by bringing the states into the fray.
He could legislate to make the GST the states’ tax, so that all the GST went to the states according to how much was raised in each state. The tax would then only be increased at the state premiers’ behest at the Council of Australian Governments.
It is a good time for such a move. Last year the states had a lot of their taxing ability removed by a High Court ruling that their petrol, tobacco and alcohol taxes were unconstitutional. They are now raised by the Commonwealth and paid back to the states. That sets the groundwork for the Commonwealth raising money on behalf of the states.
It is different from the usual cap-in-hand approach.
Both the revenue replacement payments for petrol, alcohol and tobacco, which amount of about $6.5 billion and the suggested GST payments to the states are very different from the usual Commonwealth payments to the states. The usual payments are grants set by the Commonwealth which the states have to argue over.
The GST, which could embrace the tobacco, alcohol and petrol taxes (at the point of consumption), would be an automatic payment to the states on an ever increasing revenue base as the economy expands. Hitherto most of the states tax bases have been contracting. The GST could even be given another name — the Federal-State-Tax (the FST).
It would correct what is called the vertical fiscal imbalance, This is where the Commonwealth has the control over a very large part of revenue raising, but the states carry the burden of the spending. It enables the state politicians far too easily to blame the Feds for starving them of funds. It also means the Commonwealth feels it has to ensure the funds it gives the states are spent effectively and it sets up duplicate bureaucracies to ensure it.
The Commonwealth will give about $32 billion to the states next financial year. The Commonwealth raises 72 per cent of total public revenue and spends just 57 per cent of it. The states raise 24 per cent and spend 38 per cent. Local makes up the balance of under 5 per cent.
This imbalance is a recipe for political irresponsibility. The level of government that raises the money should take the responsibility for spending it. The Constitution prevents direct state GSTs, but the next best thing would be a GST, whose continued rate was set by the Premiers and the revenue from it would go to them no questions asked to spend on things like education and health which the states usually do.
Then the nation could get the other benefits of a GST: reducing the effect of income-tax evasion; hitting services which now escape tax and relieving exports.