NSW Liberal Premier Mike Baird will make a final attempt to break the tax reform stalemate with a GST proposal that would give the federal government about $100 billion up front to dramatically cut income taxes while looking after the states’ growing health and education costs over the longer term.
With talks between the federal and state governments on the brink of collapse, and the Turnbull government all but resigned to going it alone on major tax changes, Mr Baird will propose on Monday that the GST rate be increased from 10 per cent to 15 per cent, with no expansion to the base, a move that would raise about $32.5 billion a year and more.
In the three years from 2017-18 to 2019-20, the federal government would keep all of the revenue except for $7 billion, which would be given to the states to make up for funding cuts to schools and hospitals in the 2014 federal budget. The federal government would be able to use the revenue windfall on large cuts to corporate and personal income tax and compensate welfare recipients and low-income earners.
For example, NSW suggests that of the $32.5 billion in extra revenue in the first year, the federal government could spend $8 billion in cutting the company tax rate from 30 per cent to 25 per cent, $16 billion to reduce all income tax brackets by 7 percentage points and about $8 billion on compensation.
Then, in 2020, the states and the federal government could renegotiate the redistribution of the revenue to fund health and education over the long term, taking into account how much was being generated by the GST, efficiencies in health costs that the states had been able to make and the extra revenue being driven by the economic growth generated by the tax cuts.
A PwC report in November calculated that the economy would be about $100 billion larger by 2025 if corporate tax was cut to 25 per cent.
“This modified proposal can place a secure foundation under our health and education systems, while boosting national productivity and competitiveness and providing extra support for the most vulnerable,” Mr Baird writes in today’s The Australian Financial Review.
“These reforms could adjust both our income tax and corporate tax burdens so they more closely match those of our international competitors.
“And, at 15 per cent, our GST will still remain low by OECD standards.”
When Prime Minister Malcolm Turnbull and state and territory leaders last met in December, there was no progress towards reaching a consensus on changing the tax system. The federal government insisted any GST increase must be fully spent on tax cuts and compensation and said tax cuts alone would generate growth and revenue.
Mr Baird and South Australian Labor Premier Jay Weatherill said proceeds of a GST increase must be used, at least in part, to fund hospitals and schools, while other premiers remained opposed to any GST increase.
With a final Council of Australian Governments meeting scheduled for late March or early April, before the Turnbull government goes it alone, Mr Baird will call his state and territory counterparts together for a meeting in about a month in a bid to try and take a united position to that final COAG.
Attempt to break deadlock
Late last year, Mr Weatherill tried to break the deadlock by proposing the federal government keep all proceeds from a 15 per cent GST rate while the states in return received a guaranteed 17.5 per cent of the income tax take. Income tax revenue grows faster than the GST. Mr Weatherill and Mr Baird agree that the states need funding stability over the longer term rather than a short-term cash burst.
Last week, Labor leader Bill Shorten announced plans to provide the $4.5 billion in slashed school funding that Mr Baird seeks.
Federal Labor opposes a GST increase and will fund its promises from the proceeds of increases to tobacco taxes, a crackdown on multinational tax minimisers, tax hikes for wealthier superannuants and cutting government spending in a new baby bonus and abolishing its budget-driven direct action climate policy.
On the weekend, Mr Weatherill was unconvinced this was a sustainable way to fund health and education – which earned him a swift rebuke on Sunday from opposition spokesman for finance Tony Burke.
“It’s a comment drowning in ignorance. Completely drowning in ignorance,” Mr Burke told Sky News.
“I accept with that one, the government’s held a gun to his head with the [2014 budget] cuts. So I can understand why he is in a desperate situation in trying to find money. On the characterisation of claiming that we haven’t funded our promises, it is just so demonstrably wrong that it needs to be called out.”
In an interview with the Financial Review, Mr Weatherill criticised a lack of policy leadership by both federal Labor and the Coalition on tax policy.
He said he would “continue to speak honestly about the issues we face until we reach agreement about sustainable solutions and I won’t be deflected”, a reference to growing attacks from federal Labor colleagues.
It’s a revenue, not spending, problem
He argued that, despite the federal government slashing $80 billion from state health and education budgets, “we’ve still been seeing a doubling of the federal budget deficit.
“We have a problem to be solved. Instead the Treasurer [Scott Morrison] is misleading voters saying that it is a spending problem, when it’s a revenue problem. We need to be more honest. Federal Labor has shut down debate about solutions.”
He said both sides of politics lacked the willingness to be honest about the problem.
“The Treasurer doesn’t want to be driven to a solution that will destabilise the government. Labor doesn’t want to concede there is a revenue problem”, because of the implications of that for the politics of the federal election campaign.
Mr Weatherill said he entered the tax debate after Mr Baird called out the need to increase the GST.
While Mr Morrison kept repeating a “jobs and growth” mantra about tax, Mr Weatherill said he “hasn’t demonstrated any correlation between change in the tax mix and jobs growth.
“The other dimension of the federal argument seems to be that the states should be raising more of their own taxes”, he said.
“But this seems to run contrary to their arguments about the correlation between growth and tax change, since they are effectively advocating an increase in inefficient taxes.”