The “last great reform”: 20 years later, has the GST delivered what the politicians promised?

john howard GST

forrmer prime minister john howard

The GST commenced 20 years ago yesterday, and within neoliberal circles there’s plenty of commemoration. The GST is — to use the lie of Peter Costello — the “last great reform”, the last time when politicians were bold reformers, in dire contrast to the wishy-washy current generation.

It’s no mere exercise in nostalgia, of course, but the basis for a demand that further reform be undertaken, including of the GST — a demand made all the more urgent by the pandemic.

Rather than being the last great reform, there is no evidence the GST has produced any of the benefits claimed for it at the time by the Howard government and its media cheerleaders.

Let’s go through them.

‘Ending the black economy’

The GST was supposed to end the black economy. “The cash or the black economy runs rampant. The introduction of a goods and services tax will drag the cheats into the net,” boasted John Howard in 1998.

The current government’s own Black Economy Taskforce, however, estimated it was still worth up to 3% of GDP in 2017, or $500 billion to $600 billion — so large that the government has introduced a $10,000 cash limit to try, again, to stop it.

The GST didn’t kill the black economy; rather, as tax expert and (briefly) Labor MP David Bradbury once noted, it merely formalised it at 10%.

Indeed, the government was warned at the time it was engaging in fantasy with its claims about the black economy.

‘Lifting the national savings rate’

As a consumption tax, the GST was also supposed to lift the national savings rate, in line with economic theory.

That’s still an argument trotted out by more recent proponents of consumption taxes. Australians were routinely scolded in the 1980s and 1990s about not saving enough (and relying too much on foreign debt, with the Coalition warning that there was x-thousands of dollars of debt for “every man, woman and child in Australia”).

After the election of the Howard government, the household savings rate fell from 5-6% to less than 2% — it even went negative in one quarter.

But after the introduction of the GST, the household saving rate actually fell even further, with eight successive quarters of negative savings between 2002 and 2004. The only thing that boosted household savings was the financial crisis — between late 2007 and late 2008, the household savings ratio went from 1.6% to 10%, and didn’t fall below 7% until 2015.

‘More revenue for states’

The GST was also supposed to, in Howard’s words, “guarantee growing levels of revenue flows to all of the states. And what that means is that the states will be able to find a secure funding base to provide the schools, the police services, the hospitals, the roads, and all of the other day-to-day services that all Australians wherever they live have a right to expect.”

In fact, the states rapidly fell to complaining about the formula used to allocate the GST. While that’s not a problem about the GST, it has become clear in recent years, as consumer spending has shifted towards food and health services, that the exemptions backed in by the Howard government have crippled the capacity of the GST to fund “schools, police, hospitals”.

The wounding impact on retail trade of the government’s policy of wage stagnation has also hurt revenue. Once-impressive annual GST revenue growth of 9% in the 2000s has now reduced to just 3.6% in the most recent budget papers. And where revenue once routinely exceeded budget forecasts, for the year just ended, even before COVID-19 hit, the government was expecting GST revenue to come in $6 billion below its initial budget forecasts several years ago.

‘More efficient taxes’

The GST was also supposed to be more efficient than the taxes it replaced, with sundry state and federal “nuisance taxes” (which did not need a GST for them to be removed) and previous wholesale sales taxes.

“A goods and services tax will sweep away the 10 inefficient commonwealth and states taxes we now have,” Howard claimed, which would, he predicted, “enable us to reach our dream, our goal, of becoming a major financial centre in the Asia-Pacific region”.

In fact, the GST hasn’t stopped Sydney — our only viable candidate for a major financial centre in the Asia-Pacific — from slowly falling behind other major Asia-Pacific financial centres since then. But more problematically, there is no evidence of any of the efficiency benefits claimed for the GST — because no-one has bothered to try to identify them.

The efficiency gains from a GST were simply asserted by the Coalition, by economists and by the media, but no-one has ever sought to verify whether such “dynamic benefits” were achieved, especially given the distorted implementation of the GST via the Senate, or whether they were simply plugged into the modelling used to justify the GST without any attempt to verify that they existed.

Those benefits may have been realised, but without evidence of them, they have all the substance of the promised elimination of the black economy and rise in household savings we were told we were about to enjoy 20 years ago.

This article was first published by Crikey.

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