GST reform discussion requires facts and analysis, not ideology

Treasury Secretary Martin Parkinson has highlighted structural Budget pressures facing Australia. He wants a conversation about spending cuts and reforms to our tax 'system', including the GST.

Labor won't discuss GST reform. It supported a GST in the mid-1980s, but opposed it in the early- and late-1990s, wanted more GST exemptions in 2001, and barred the Henry Review from considering it in 2009.

Labor says a GST is regressive, hitting the poor more than the rich. Yet, even when we had wall-to-wall Labor governments, not one called for GST abolition. (The states were, and are, too busy squabbling over why each should get a larger share of its revenue.)

Does this 'regressive' argument stack up?

As Parkinson (again) reminds us, we must do everything more efficiently if we are to deal with falling terms of trade, sluggish productivity growth and an ageing population. The alternative is falling living standards. Average real per capita net national incomes have already been falling for the last two years.

Amongst other reforms, inefficient low-income support measures must be replaced. Using GST exemptions or a low GST rate to assist the poor is very inefficient from all perspectives, not least Budget cost.

Suppose we offer the poor, say, $1,000 a year in tax concessions, but do so using a policy that also gives high income earners $2,200 to $2,700 a year. Even if $1,000 is a proportionately larger concession for the poor, most would agree this is a very wasteful approach.

Thanks to Labor and Australian Democrat opposition to the original Howard Government GST in 1999, that is what current GST exemptions for fresh food, health and education deliver. The dollar benefits of these exemptions are far greater for higher income groups than for the poor (see Chart).

Proportion of total household spending on food and health by equivalised income quintile (%)

Source: ABS Household Expenditure Survey, Cat. No. 6530.0, 2009-10 (latest release).

Most of the Budget cost of these exemptions does not go to the groups they supposedly are meant to support. It is sprayed increasingly up the income scale, reducing Budget scope to finance better ways of helping the poor. The top 60% of households get about 70% of the total cost of GST exemptions for fresh food and health. Only about 30% goes to the bottom 40% of households.