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Issue #1496      6 April 2011

GST – A tax for the rich, a tax on working people

When the GST (goods and services tax) was introduced there were promises of great things to come. The tax system would be simpler, a number of state taxes would be wiped and state governments would have all the funds they needed for public education and health services. The GST has not delivered on a single promise.

It added to the complexity of the taxation system, states are still cash-strapped, and public health and education are grossly under-funded. The states removed some taxes but not all that were promised.

The federal government has now set up a review of the distribution of GST revenue between the states and territories. Prime Minister Julia Gillard has appointed two former state premiers and a business consultant to carry out the review. The terms of reference for the new formula rewards states for “efficiency” and penalises those that do not carry out certain “reforms”.

The GST proved expensive for small businesses to administer. It hurt those on lower incomes most, taxing them at the same rate in the dollar on goods and services as the rich. It also paved the way for cuts in the taxation of corporate profits.

The problems faced by states were compounded by successive federal governments – Labor and Coalition – who failed to keep up with their share of the responsibility towards public education and health.

Last year the federal Labor government made a grab for 30 percent of GST revenue in return for taking over the public hospital system. It came close to succeeding, but now with three Liberal state governments to contend with (WA, Victoria, NSW) it looks much less likely.

The states are at war over the distribution of the GST, all seeking a larger slice of the cake. The Commonwealth Grants Commission has responsibility for recommending allocations to the government. The Commission does this using what is called a “horizontal fiscal allocation” formula. This takes into account a particular state or territory’s capacity to raise revenue and its expenditure needs which depend on such things as population, geographical dispersion of population, Indigenous population, etc. The stronger state economies support the weaker ones.

The aim is to ensure all states have the capacity to provide a similar level of service.

For example, for years Western Australia received a higher proportion than warranted on population alone. But since the big mining boom and increased intake in mining royalties, its share has been reduced. WA Premier Colin Barnett was one of the premiers campaigning strongly for the review. He claims that the state will only receive 68 cents of each dollar of GST raised in his state this financial year. Barnett is calling for a simple formula based on population.

Queensland, another state that has had a booming mining industry, also wants a larger slice of the cake. Victorian Treasurer Kim Wells wants urgent action as it faces a smaller share of GST takings (down from 23.4 to 22.5 percent) next year under the Commission’s latest allocations.

Tasmania with a smaller and weaker economy fears that it will be hit by the review. NSW has been relatively quiet with around 30.9 percent of takings – at present around $50 billion per annum.

Failed states model

Gillard is looking at a radical change in approach. She claims that the present model “penalises economic growth” (eg WA) while “underperformance in service delivery and economic growth can be rewarded” (eg NSW). “States should not be put in the position where they can be penalised for investing in economic growth and improved service delivery,” Gillard said.

“States should have an incentive to invest in economic reform; they shouldn’t be unfairly punished for success.” Gillard said she wanted a new formula to give more incentives for states to make reforms.

The review panel, former NSW Liberal Premier Nick Greiner, former Labor Premier of Victoria John Brumby and corporate solvency expert Bruce Carter, have been given terms of reference that could turn the current equalisation model on its head.

In particular, they have been told to take into account “efficiency, including … reform, service delivery and investment decisions to best meet the requirements for growth.”

The term “efficiency” is code for reducing costs by such means as sacking public servants, holding down wages; cutting services; contracting out to contractors that use cheaper, non-union labour; charging more for services; etc.

“Reforms” include privatisation; industry deregulation; and reductions in taxations on businesses.

The investment decisions refer to such things as giving the go-ahead to developers for new projects; giving approval to the opening of new coal mines; subsidies to the corporate sector; building of new infrastructure in partnership with the private sector.

The likes of NSW’s new Liberal Party premier Barry O’Farrell with his plans to sack thousands of public servants and get stuck into the trade unions should do well out of the new model envisaged by Gillard.

The model is a classic neo-liberal import of some of the worst, failed practices in the US where it has been used in education, where “failed” schools are punished with less funding or taken over by the corporate sector. Gillard is attempting to apply this approach to the public hospital system through casemix, where hospitals that churn the most patients through at the fastest and cheapest rate are rewarded with higher payments.

There are calls from some business sectors and economists for the GST to be increased. This is outside the terms of reference of the review panel, but could well raise its ugly head at the taxation summit later this year.

The panel are due to hand down an interim report to the Treasurer by February 2012 and a final report by September 2012. The aim is for the new system to come into force in 2013-14 – after the next elections.   

Next article – Lies of Our Time

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