How Howard’s Great GST Bargain Got Trashed By Canberra

Written by:
28 June 2017
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Policy elites take the view that former prime minister John Howard did a deal with Meg Lees and the Democrats to introduce the GST. In a trivial procedural sense that is accurate. More importantly, however, Howard did a deal with the Australian people that in return for repealing a huge bunch of nuisance taxes, the Commonwealth could levy a broad-based goods and services consumption tax.

The electorate has held politicians to that deal – tampering with the GST has very quickly become a no-go zone. Politicians who try to vary the rate, or base, fast find themselves on the receiving end of voter dissatisfaction.

Australia has done very well out of the GST settlement – many inefficient taxes have been repealed and massive revenue flows have been directed to the states and territories. While there is some dissatisfaction with the distribution of GST to Western Australia, the tax quickly became a widely accepted and understood part of the fiscal landscape.
Howard’s genius in devising the GST was to ensure that the Commonwealth that collected the tax had no incentive to vary the arrangement while ensuring that it bore all the political cost of doing so. After 17 years, the political class has found a loophole.

An unprincipled Coalition government is trashing the Howard settlement. First, we saw the attempt to apply the GST to low-value imported goods bought online for under $1000. That piece of silliness is at the Productivity Commission to work out how it can be done – mind you, the start date for this yet-to-be-designed tax is July next year. But it is the bank levy that looks to be the most egregious violation of the GST settlement.

The levy announced at the last budget is a nuisance tax – exactly the sort of tax the GST was meant to eliminate. All sorts of propaganda has been proposed to justify the tax, but the bottom line is that there is a hole in the budget due to excessive spending and the government needed a plug. Who better to whack than those ungrateful banks – who, apparently, have plenty of money and can afford it anyway.

Contrast the bank levy with the ill-fated mining tax. Taxing rent is the economic equivalent of a perpetual motion machine and was always a bad idea. Nonetheless, the government hoped to substitute a tax on rent for royalties – in theory, at least, an economic improvement. Contrast the bank levy with the carbon tax. There the government had the notion that a less carbon-reliant economy would lead to improved living standards sometime in the future. That view seems to be bipartisan policy.


The bank levy has no such noble notions – rather, it is a mechanism to raise revenue from people who have annoyed the government.

That South Australia would copy the bank levy seems to have caught everyone off guard. In an audacious move, the South Australians have not just wedged the federal government, they have skewered them. How does it argue that the state-based bank levy is a violation of the GST agreement but the identical federal-based levy is not?

Of course, we should all have seen this coming. After all, when the federal government introduced the mining tax Mark II they promised to refund all royalties and the states responded promptly by raising their royalty rates.

One way of thinking about federal-state fiscal arrangements is as a cartel. The various tax bases are carved up and shared out with a dominant player and a series of smaller players. At the last budget, we saw the dominant player create a new tax base and provide political cover for the smaller players to increase their share.

It gets worse.


If South Australia manages to “get away” with its bank levy, all the other states will almost certainly be compelled to follow suit. The GST distribution mechanism penalises states that do not fully exploit their existing tax bases. Not only will not having a bank levy result in lower tax revenue, it could also result in lower GST revenue from the Commonwealth.

Howard’s GST settlement requires the Commonwealth to jealously maintain integrity of the system. But when the Commonwealth itself breaks the deal, it could be impossible to stop the states from defecting as well.

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