Spender and Chalmers’ reform adviser back GST change to offset tax cuts

A leading member of Treasurer Jim Chalmers’ economic advisory panel and MP Allegra Spender have separately raised the alarm on high levels of state and federal spending and called for a GST hike to pay for tax cuts for workers.

The Grattan Institute, an influential independent think-tank, has come out in favour of a tax mix switch at a time of near-record tax and spending levels under the Albanese government. Federal ministers and backbenchers have become concerned about inflation and productivity in recent weeks as tension has emerged between Chalmers and Prime Minister Anthony Albanese.

In a report to be released on Monday, Grattan chief executive Aruna Sathanapally urges politicians to raise the GST from 10 to 15 per cent and expand it to include all types of food, raising $76 billion per year. The think tank says $33 billion should be used to cut income taxes for lower- and middle-income workers while $25 billion should be put to boosting JobSeeker, pensions and rent assistance.

Sathanapally, who Chalmers picked for his economic reform roundtable last year, called for fiscal rules to force profligate state governments to curb spending as the RBA threatens more rate rises to reduce demand that is partly fuelled by government spending.

“There are no easy paths back to budget sustainability. But with smarter spending decisions and a tax system that raises sufficient revenue to care for our ageing population, both current and future generations can be better off,” Sathanapally said, adding that lower-income families would be left about $8000 a year better off under the proposed changes.

The institute says state government spending has grown even more quickly than the Commonwealth’s. Federal spending has still grown “substantially”, its report states, but Australia’s credit rating has remained steady while Queensland, Victoria, Tasmania and the ACT have all experienced rating downgrades.

The think tank’s intervention in the economic debate adds to recent calls for tax reform from former Coalition ministers Josh Frydenberg and Mathias Cormann, both of whom argue for change to the GST, and Labor figures Bill Kelty, Paul Keating and Lachlan Harris.

Albanese and Chalmers have been under internal and external pressure to address Australia’s economic problems. Their political headache was exacerbated by an own goal on credit card surcharges, which lead to the tax office refusing to accept credit card payments.

Assistant Treasurer Daniel Mulino admitted on Sunday that ministers knew the ATO might stop accepting credit cards as far back as July. Before Mulino’s comments in an interview on ABC’s Insiders, the government only emphasised its knowledge about the ATO’s final decision, which it learned in September.

“In July, the government became aware that the ATO was looking at options,” Mulino said.

Only about 5 per cent of taxpayers pay bills via credit card, but the move has added to arguments from the business lobby that Labor is not in touch with the concerns of business owners.

Shadow treasurer Tim Wilson seized on Mulino failing to rule out 60 or 70 per cent tax rates for small businesses who use trusts and pay into a “bucket company”. These firms will be incentivised to rearrange their structure.

On the proposal for fiscal rules, Wilson said: “They are like a diet and we know Labor can’t kick their spending addiction.”

Spender, a tax reform advocate who was also on Chalmers’ reform panel last year, said fiscal rules were needed at the federal level, going beyond the Grattan Institute’s call for restrictions at state level.

Rules that would cap expenditure and tax were proposed by former Treasury secretary Ken Henry in last year’s roundtable, but Chalmers has argued against arbitrary caps.

“The government should adopt stronger fiscal rules, particularly to manage expenditure. Spending has grown too fast particularly for a high-inflation environment and we’re not bringing it back quick enough,” Spender said.

“The GST should be on the table, as must better resource taxation, digital taxes and a shift from stamp duty to land taxes.”

ACCI chief executive Andrew McKellar also supported fiscal rules in that meeting, and said on Sunday they were necessary.

Frydenberg, the former Coalition treasurer mulling a return to politics, called for debate on the GST last week but was quickly slapped down by Opposition Leader Angus Taylor.

Australia’s income tax rates are relatively high by international standards and the highest rate kicks in at relatively low-income threshold. Many tax experts say that income taxes reduce the incentive to work, whereas people notice less if the GST creates slightly higher prices, creating fewer distortions and a more efficient system.

The Grattan report says that the Commonwealth should use the higher GST take to cut back on the ballooning level of grant funding to the states in education and health, which are often subject to political dispute and compromise.

Under Grattan’s proposals, a low-income single-parent family who rents would pay nearly $80 more in GST per week but receive $202 in extra welfare and receive a $27 income tax cut, leaving them $150 a week better off.

A higher-income working family would pay about $162 more in tax because they consume more and pay more GST.

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