Is the Federal Budget a precursor to a GST hike?

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The deep cuts in the 2014 Federal Budget could spell a GST hike.

So far, the Coalition Government has ruled out changes to the GST, set at 10% with revenue going to the states and territories. There will be a tax review this term, paving the way for a potential debate over the GST at the next election.

The 2014 Federal Budget has pulled back on Labor’s previous commitment in health and education, slashing $80 billion in the states’ funding.  According to the budget, these cuts will be achieved by “adopting sensible indexation” arrangements for schools from 2016-17 and hospitals in the 2018 financial year.

This is bad news for state governments already struggling to balance budgets because of rising service costs, higher debt and volatile state-based tax revenues.

The bottom line is simply this – these cuts will put pressure on the states to seriously consider changes to their revenue and cost bases, including expansion of the GST.

War of words

In March, former Treasury boss Ken Henry said that the GST will inevitably have to be raised to fund new spending. The increase was necessary to shore up not only future Commonwealth budgets, but also state budgets. “Raising the GST rate one day will be seen as necessary to underpin fiscal sustainability in the Australian federation,” he said.

At the time, Tony Abbott dismissed Dr Henry’s suggestions saying the Government already had a tax reform program beginning with the repeal of the carbon and mining taxes.

But the Budget papers made it clear that the Commonwealth will not be funding the states for education and health, pointing out that the federal government does not run schools or hospitals. “Commonwealth funding arrangements in these areas have reduced the incentive for states to be more efficient and accountable for their spending and delivery of services, and were unaffordable,” the government states.

The government expects to save more than $4 billion over the next four years by cutting or reshaping funding agreements with the states.

States furious

According to the Budget papers, the state and territories collect a combined $53.7 billion from GST revenue. The biggest recipients are NSW ($16.8 billion), followed by Victoria ($11.8 billion) and Queensland ($11.7 billion). The states are furious about the cuts and New South Wales treasurer, Andrew Constance, has vowed to “fight tooth and nail for every dollar”.

Treasurer Joe Hockey now says the Commonwealth will sit down with the states and work through the details. Asked if this could lead to an increase in the GST, he implied it could be the issue in 2016 by saying the government wouldn’t move on GST without taking it to an election. But if the states wanted more money from the consumption tax, he told ABC Radio “it’s up to them to argue the case to change the GST. “

In effect, however, the Government is giving the states little choice but to argue for an increase in the rate. In 2016, the big political debate will inevitable be about the GST.

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