So how does one judge the success or otherwise of a new tax regime?

The second point is that GST is a growth tax. In nominal terms GST revenue is expected to grow at an average rate of 9.27 per cent per annum over the three years to 03-04. This is at a time where the inflation rate is expected to average 2.76 per cent and Gross Domestic Product (GDP) 3.44 per cent over the same period. Thus GST is a growth tax in both nominal and real terms and that has a number of implications.

For one, it suggests that GST has indeed secured the touted "cash economy dividend". This was the claim that those working in the black economy would be compelled to pay at least some, or a greater amount, of tax. This they would do by paying GST embedded in the purchase price of goods and services they consume. They would also arguably be more easily identified by the audit trail provided by GST.

The existence of the "cash economy dividend" can be surmised from the excess of the top line or nominal GST growth rate over and above the combined inflation and GDP growth rates. The nominal GST growth rate indicates the extent to which GST extracted more dollars out of "the whole economy" than expected. Insofar as that was due to inflationary and real growth in the formal economy, this is indicated by the combined inflation and GDP growth rates. The excess over and above that implies penetration of the black economy, all things being equal.

Take for example the financial year ended 30 June 2002. The nominal GST growth rate was 9.36 per cent. The combined total GDP growth and inflation rates was 6.88 per cent (2.8 + 4.08). In reality it is unlikely that the whole of the 2.48 per cent excess is explained by the "cash economy dividend". But even if it only explains 50 per cent of the excess that is still a whopping $330 million (2.48 per cent x $26.63 bn x 50 per cent) for the year.

There is therefore some truth to the Federal government's assertion that the States and Territories are financially better off under GST - to the tune of $88.7million in 2002-03 (estimate $269.6 million 2003-04) than would otherwise be the case, although that is somewhat obscured by the Budget Balancing Assistance. Or as members of the Federal Government repeatedly assert whenever the opposition challenges GST, GST does indeed go to paying for more hospitals.

That said GST is unlikely to be a growth tax of the magnitude that some predict, in the absence of an increase in the GST rate. In the short term the Federal Government has predicted a 70-odd per cent decline in the nominal growth rate from roughly 14 per cent to 4 per cent. The reasons for this predicted decline are not made clear.

In the longer term there are features within the GST Act itself which are likely to constrain revenue growth. The age profile of the Australian population is expected to tilt towards the elderly. An ever-increasing proportion of both public and private expenditure will therefore be diverted to health care. The supply of health-care services will not yield any GST revenue to the States and Territories; they are GST-free. Therefore, somewhat ironically, while GST provides funds for health care, the provision of health care deprives the states of GST funds for health care.

Should state governments predicate future expenditure on the basis that GST revenues will continue to grow at a rate over and above economic growth they are likely to be disappointed. All things being equal it will be necessary for them to either rein in expenditure or increase the rate of GST. Yes, the States and Territories must unanimously agree any increase to the rate of GST. However, as they have much to gain and will bear little of the political cost such unanimity is likely. The federal government must also agree, but it has little to gain and will suffer most of the political fallout. Accordingly, there is likely to be an impasse. Thus we may see the intergovernmental agreement scrapped such that GST revenue goes to the federal government and intergovernmental state funding reverts to a system of grants.