The past couple of weeks have seen a carry-on over the GST, over whether it should be imposed on tampons, local governmetn services, movie tickets and so on. There has also been a carry on over other minor teething problems like lay-bys and the like. These and the other debates over food and the cost of introducing the new tax have shifted attention away from the fundamental, long-term political change the tax will have on Australia.
The case for reform of the wholesale sales tax system was clear. There has been an argument over whether the compensation to low incomes and people on welfare is enough to counter the GST. But the move to an efficient, broad-based tax which included services has many benefits.
The trouble is that John Howard gave far too much away in his determination to introduce the tax. Not just to the Democrats, but more importantly to the states and territories.
The first taste of how much he gave away came this month with the ACT draft Budget. Sure, the ACT Government has been fairly fiscally responsible. It has also been fairly artful is scattering a little extra for everything. Nonetheless, the ACT has gone into the black and a significant part of the reason is better funding from the Commonwealth. More significantly the projection in future years is for increasing surpluses. Yet the ACT has not dealt with health, education and transport costs to bring them into line with other states. So how has this miracle happened? Answer: the GST.
The Commonwealth has agreed to give all the revenue from the GST to the states and territories. Moreover, it has legislated for this.
It also agreed and legislated an interim agreement to keep existing levels of funding at a minimum after the introduction of the GST for a transition period in the the unlikely event that the GST does not provide enough money.
Other states and territories will folow the ACT in preparing Budgets for next financial year and projections for subsequent years.
The states and territories will be rolling in money. And the agreement will be very hard to unwind.
The ACT’s case is instructive, because it is the first model to go public.
At present the ACT gets 38 per cent of its total $1.8 billion revenue from the Feds. That is about $690 million. Half of that is specific purpose (determined by the Commonwealth) and the other half is general for the Territory to do what it likes with. In all though it is a big whack of dependence on the Commonwealth Government. That pattrn is typical of all states and territories. And dependence on the Commonwealth has been growing every decade for the past 50 years.
For the next two years the Commonwealth has agreed to keep its grants at present rates as a minimum, but if the GST revenue is greater the states get to keep the GST revenue. And thereafter the staes and territories get to keep whatever GST money is raised.
The reduction of dependence will be huge. Under present arrangements the Commonwealth is expected to provide $35 billion to the states and territories this financial year – that is both general and specific purpose grants. Compare that to the original Commonwealth estimate of $27 billion of GST revenue in its first year, going up to $33 billion in its third year. Those estimates are less by about $6 billion now because of creeping exemptions. But the trend is clear. In its first year or very shortly thereafter, the GST revenue will be greater than the general purpose grants to the states and territories. Total grants might be, say, $38 billion next financial year, $19 billion of which is general purpose. The GST is going to provide $21 billion, all of which goes to general purpose grants.
In those circumstances it is difficult to see the Commonwealth continuing the same level of specific purpose grants fpr very long.
As GST revenue grows the states will get more money to do as they please with.
And the GST revenue will grow. Its yield comes from the growth areas of the economy, like services, unlike the wholesale sales tax which concentrated on manufactured goods.
Moreover the Commonwealth’s estimate of how much the tax will bring in is probably a gross under-estimation. At present GDP is about $555 billion. The Government would have to exempt 60 per cent of it for its estimate to be right. The GST is likely to capture more than 40 per cent of GDP. Further, GDP is likely to grow because the GST will bring people out of the black market. If they want to get a GST rebate on the business inputs they will have to come out of the black market. Sure, a lot of the cash economy will remain undetected, but the GST model gives an incentive to be above board which was not there before so at least some will come out of the woodwork.
The trend on new taxes is to under-estimate what they bring in. The fringe-benefits and capital gains taxes were good examples. The Commonwealth had little idea how much activity was going on out there. For several years after the introduction of fringe-benefits tax and the capital gains tax, Federal Treasurers had to admit to under-estimations and great improvements in the Commonwealth’s position. This time though, it will result in a great improvement in the states’ position.
This matters a great deal.
As the general revenue to the states increases, the Commonwealth will withdraw from specific-purpose or tied grants. When you look through Budget Paper No 3, these grants are listed covering about 50 pages. Nearly every last one of them is for some worthwhile thing that the general mass of taxpayers would applaud – flood relief in Wollongong, aged care, blood transfusion services etc etc. Moreover, the Commonwealth ensures the money is spent on the items listed.
If, however, less money is tied, the states will inevitably misspend it on vote-winning pet projects. Immunisation was a good example. The money was handed to the states without a Commonwealth watching brief and they wasted the money. The Commonwealth had to step back in.
Commonwealth-states relations are a less extreme version of the Australia-Papua New Guinea relationship. If you give them general money they will misspend it. If you give them money for specific purposes and monitor it, there is a chance the money will go on worthwhile things.
Australian states and territories are notorious for misspending money on political grand-standing. Their politicians and public servants are of a lower calibre (at least until recently). The Commonwealth has a better record on spending.
Sure, one can complain about the waste in having a set of Commonwealth bureaucrats overseeing what state bureaucracies and state governemnts are doing, but that might be better than the under-supervised spending of general grants.
And that is precisely what the GST entails. The states and territories will be freed from Commonwealth constraints to misspend the GST windfall how they please.
That’s the real tragedy of the GST, not the carry on over tampons.