Andrew Leigh

Raising the GST is not the way to protect consumption, Herald Sun, 12 January

After another Christmas gift splurge, many Australian families will be tallying the cost of last year’s spending spree with trepidation. But as the Turnbull Government begins putting together the 2016 budget, it should have a similarly wary eye on the nation’s future consumption.     

In an interlinked economy, one person's spending is another's income. When you go to the supermarket, fill up at the petrol bowser, buy some new clothes or eat dinner out at a restaurant, that all provides income to other people. This household spending makes up about three-fifths of Australia’s economy. So changes in consumption matter a great deal for the nation’s overall economic health. Treasurer Scott Morrison seems to understand this, as he recently described protecting household consumption as: ‘the most important thing for us over the next 12 to 18 months’.

If protecting consumption is this government’s top economic priority, then jacking up the GST is just about the worst possible approach for it to take. It’s basic economics: make things more expensive and people will consume less of them.

We saw this here in Australia 15 years ago when the Liberals first introduced the GST. Australian Bureau of Statistics data shows that our economy shrank in the six months after the tax took effect, with the nation only narrowly avoiding a recession.

This drop in trade would be bad news for businesses at any time, let alone when they’re already facing lacklustre demand from shoppers scared off by the government’s economic bumbling. Heading into Christmas, consumer confidence was almost 10% below where it was at the time of the 2013 election, showing the ‘shot of adrenalin’ the Coalition promised for the economy has been more like a dose of Mogadon.   

Individual businesses can’t afford to see their sales shrink, and neither can the Australian economy. Falling consumption can actually tip a nation into outright recession, as one of our major trading partners recently found out. In 2014 the Japanese government raised their consumption tax from 5 per cent to 8 per cent. Consumption dropped by almost 2 percentage points in the months that followed, taking Japan’s weak economy into recession.

It has been more than 25 years since Australia last experienced a recession, but it’s not something anyone who remembers the early 1990s would want to see repeated. Unemployment then was almost double what it is today, with double-digit interest rates. Tens of thousands of business went bust, taking with them people’s savings and jobs.

This is what Liberals like Andrew Robb and Dan Tehan don’t mention when they call for the GST to be added to fresh food and other essentials. I’ve yet to hear Malcolm Turnbull or Mathias Cormann acknowledge the risk to growth as part of their ‘wide ranging’ conversation about tax, which in fact seems to begin and end with the GST.

This risk doesn’t go away even if the government pairs a higher GST with income tax cuts. That’s because two-thirds of Australian households currently spend as much or more than they earn each week. So unless the government cuts taxes by exactly the same amount as families will pay in extra GST, there is still going to be a significant shortfall.

Scott Morrison keeps insisting that a GST rise won't increase taxes as a share of the economy. That means he isn't planning any GST compensation via family payments or pension increases. A self-funded retiree who doesn't pay income tax wouldn't get compensation, but would pay more in GST. If you shrink the weekly budgets of most Australian households, the inevitable result will be reduced spending at the dry cleaner, the shoe repairer and the local pizza shop.

Instead of hiking the GST, Labor is focused on closing tax loopholes and tightening access to concessions. We’ve deliberately taken this tack because we don’t want to risk sending the Australian economy backwards.

We plan to get the budget back into balance through policies like ensuring big multinationals pay their fair share of tax and stopping tax breaks for people who already have millions in their super accounts. We can do it without delivering a gut punch to Australia’s shops and small businesses.

Before the election, the Liberals promised to deliver surplus budgets every year without cutting spending or raising new taxes. Scott Morrison saying he wants to protect consumption while looking at ways to raise the GST betrays the same kind of economic thinking: wishful, illogical and dangerous.

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