Last week, the Premier of Western Australia, Colin Barnett, began lobbying the Federal Government to increase the Goods and Services Tax (GST), which he argued was essential to ensure that state government revenues were sufficient to be able to afford to cover basic services. From the Brisbane Times:
”I think the pressure that will come on Tony Abbott as Prime Minister is that all the states will say the GST is not growing sufficiently to fund basic services like health and education.
Do Australians really mind that much if the GST was 10 per cent or 12.5 per cent, if it means maintaining high-quality health and education, disability services and the like?
I suspect the Australian people are mature enough to say: ‘We’ll cop that’.’
It’s a solid argument by Barnett. Australia’s federal system of government has ensured large vertical fiscal imbalances between the federal and state governments.
Essentially, the states are required to provide and fund the lion’s share of basic services provided to the population, such as education and non-Medicare health care, yet since they lost the power to tax incomes during the Second World War, they are reliant on a narrow base of inefficient taxes, such as stamp duties, as well as Commonwealth Grants and the GST for their funding.
Added to the pain is Australia’s ageing population, whereby the proportion of elderly people is expected to grow substantially over the decades ahead, placing greater strain on health and aged care spending. Elderly people also tend to spend less on goods and services than younger, working-aged people, which is likely to crimp GST receipts. Moreover, they are likely to spend a higher proportion of their income on health care, which is currently exempt from GST.
Like it or not, taxes like the GST are going to have to increase in order to fund the government services that we have come to expect. Moreover, with the number of workers per dependent set to fall, Australia needs to find alternative sources of tax revenue, otherwise we will find ourselves with an ever shrinking share of working-aged people being called upon to fund an ever growing army of retires – a wholly unsustainable and inequitable proposition.
That said, it is also wrong to suggest that raising the GST is the only “fix” to funding our ageing conundrum. As argued previously, replacing inefficient and volatile taxes, like stamp duties, with more stable and efficient land taxes offers the prospect of plugging the state’s revenue hole, whilst also raising productivity and improving land/housing supply.
The hit to revenue as an increasing proportion of workers retire, along with growing health and aged care requirements, will ultimately force Australia to embark on much-needed tax reform. However, it would be wiser to begin the process now, by garnering public support through education and awareness programs and detailed studies of our future tax and spending needs, rather than ignoring the issue.
It would also assist greatly if the states presented a united position on these issues, rather than in-fighting and bickering over GST shares, as is currently the case. This way, the Federal Government would be forced to address their concerns, rather than deflecting the issue.
