First published in The Australian, 11 October 2013
THE OECD has belled the cat on the tax reform challenges our nation faces if we are to revitalise our international competitiveness and sustain a meaningful post-GFC recovery.
As the West Australian government learned the hard way with the downgrading of its credit rating, our national economy is at a tipping point, struggling to contend with the realities of the end of the mining investment boom.
Those realities were clearly articulated in the minutes of the most recent Reserve Bank board meeting, which noted that "mining investment was expected to decline over the course of the next few years non-mining business investment would remain restrained", and "the unemployment rate had continued to drift higher."
Insulating ourselves against these fluctuations, as the OECD observes, requires us to limit our reliance on company and personal income tax in favour of other, more sustainable revenue sources, such as the goods and services tax.
But are we mature enough to have a considered debate about the GST in Australia? Tax reform is neither popular nor politically palatable. The GST is much maligned and certainly highly politicised in Australia to a point where it has been nigh on impossible to have a decent, rational discussion about either its rate or base in recent times.
Former treasurer Wayne Swan was emphatic early this year "It is not the way to go for the future of Australia." Like the metaphorical elephant in the room, there’s a collective desire to ignore it at all costs. Although CPA Australia managed to get it on the agenda at the National Tax Forum in 2011, where we outlined the modelling undertaken by KPMG on retiring inefficient state taxes by either raising the rate of, or broadening the base of, Australia’s GST, it was specifically excluded from the terms of reference for Australia’s last so-called "root and branch" review of Australia’s taxes.
Contrast this with our neighbours in New Zealand where the government, business and voters have been more sophisticated in not only having these discussions, but acting on the outcomes. Their GST. introduced in 1986 at 10 per cent, was increased to 12.5 per cent in 1989 and again to 15 per cent in 2010.
Other countries are also increasing their GSTs or VATs as some prefer to call them.
OECD data shows that the average rate of VAT among member nations in 2011 was 18.5 per cent. Japan has the lowest VAT rate at 5 per cent, while several countries, including Austria, Norway and Sweden, have combined federal/subnational rates approaching 40 per cent The rates have also risen overtime. For example, as a recent analysis showed, the average VAT rate for the OECD’s 13 countries with VATs in 1976 rose from 16 per cent to 20.5 per cent in 2011.
Australia, on the other hand, has studiously avoided increasing its GST rate for 13 years. The GST remains at the "special year 2000 introductory rate" of 10 per cent and is levied on a narrower base than was initially proposed when it was first mooted back in 1997.
Far from being something to celebrate, when considered in the context of what other nations around the world are doing, it ought be a cause for national concern. After all, Australians carry the burden of more than 120 mostly inefficient federal and state taxes. Just 10 of those are responsible for 90 per cent of the revenue. This is the red-tape nightmare from which governments promise regularly to unshackle us but seldom deliver. Modest adjustments to the GST would enable us to retire many of those inefficient taxes.
There are pockets of reason and common sense. The former Labor Prime Minister Bob Hawke, who scuttled Paul Keating’s plans for a consumption tax on services, now concedes that it’s a "legitimate area for discussion".
While the Abbott government has been clear that the GST won’t be changing in this term of government, its inclusion in the upcoming taxation review is nevertheless a good start. In the meantime, it’s incumbent upon us all to continue a calm and rational conversation about the best tax mix for our nation one that has equity and fairness at its core, while enhancing our competitiveness, incentivising innovation and confidence, improving our flagging revenues and enabling us to continue to enjoy the levels of service we have come to expect from a sophisticated economy.
The clock is ticking.
Alex Malley is chief executive of CPA Australia.