High time to raise the GST

The force that will reshape business, management and taxation more than anything else won't be economics or technology. It will be the ageing population. This, more than anything else, will force future governments to overhaul tax systems, including the goods and services tax, even raise it beyond 10 per cent. Now politicians these days on either side of the fence don't have the stomach for hard decisions or long term strategic thinking. And with the Fairfax-Nielsen poll showing that 84 per cent of the population oppose increasing the GST or widening its base to include health, education and food – as you would expect – they're unlikely to do it.

But long term, they mightn't have a choice. While climate change and energy are getting all the press, ageing is the slow burning fuse. It will make the GFC look like a picnic.

One lesson for Australia that comes out of Europe and the US is that if you're spending more than is coming in from taxes, you have two choices or maybe a combination of both: cut spending or raise taxes.

The problem here is that consumer spending, which has been a big source of GST earnings, has been falling since 2007-08. That's why the collections of money coming in from this fabulous growth tax have gone, according to Treasury projections, from about eight per cent four years ago to 4.5 per cent through to 2015-16.

And yet at the same time, the ageing population is putting pressure on health care costs. According to research from the Grattan Institute, the costs of an ageing population will grow substantially through to 2050. Health spending on over 65s is projected to grow from four per cent to seven per cent of GDP, costing an extra $88 billion a year. Spending on aged care is projected to grow to $48 billion a year. According to the Government's 2010 Intergenerational report, the number of people between 65 and 84 years old will more than double over the next 40 years. The number of people 85 years and over will quadruple - that's the fastest growing group in that sector.

And that's where the funding problems kick in. Most people in that age group will have disabilities and chronic illnesses. With an expanding population of 80-plus year olds, we can expect more heart disease, cancers, diabetes, strokes and Alzheimer's. That will put enormous pressure on the health care system which will struggle to keep pace with demand. Hospitals and clinics will be crowded out, not only from the elderly but the broader population. People running them will have to make hard decisions. We can expect more triaging.

As the Bank for International Settlements warned two years ago: "''Rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections. The size of these future obligations is anybody's guess. … As frightening as it is to consider public debt increasing to more than 100 per cent of GDP, an even greater danger arises from a rapidly ageing population.''

This is why the Government's tax architect Ken Henry urged the government to look at a higher GST as the population ages. Significantly, Henry was told to exclude the GST when he did his seminal root and branch review of the Australian tax system.

There is nothing to hold him back this time.

Dr Henry's comments coincide with the current GST review being conducted by former premiers Nick Greiner and John Brumby and finance expert Nick Carter, due for release in October.

So what impact would an increased GST have on the nation? Research by CPA Australia last year identified the GST as an efficient tax, compared to motor vehicle tax, conveyancing, payroll tax and insurance tax, pointing out that the GST rate was one of the lowest in all OECD countries. The average GST/VAT rate is around 15.25 per cent. And many OECD countries have rates at around 20 per cent.

The review looked at four scenarios of the GST at rates of 12.5 per cent, 15 per cent, 20 per cent, or a 10 per cent covering all goods and services, including the ones that are excluded like food, education, and health. In all cases, the inefficient taxes would be abolished. It found these increases, provided they were accompanied by the abolition of inefficient state-based taxes, would increase productivity and better living standards. The extra revenue could also be used to reduce company income tax rate and the tax rate on the top bracket of personal income tax.

There is a good argument that the GST is a regressive tax insofar that raising it, or widening it, would hurt those on lower incomes paying higher utility bills. The only way to address that would be to have compensation similar to the handouts that accompanied the carbon tax. It's a political fix but it's better to have that than an inefficient tax system that can't fund our increasingly overstretched hospitals and clinics.

At the very least, there is an argument for widening it to apply for health and education which take an increasing proportion of our incomes. Similarly, the GST exemption should come off food. The exemption, introduced to get the legislation through the Senate, was ill-conceived. It's supposed to benefit low income earners, but it's also available to families in Toorak buying food. And because not all food is exempt, it makes the GST more complex than any tax should be.

The problem of course is that both the Government and Coalition have ruled out any increase to the GST. They continue to pretend we can keep the system intact.

That's not leadership.

Still, the pressure on budgets that's going to come from an ageing population might leave them with little choice. People think that because demographic trends move slowly it's something someone else can worry about later on. Big mistake: the skills shortage is the first sign of its impact. The health care system is next. With demographics being the wild card that's the least controllable, fixing the tax system has to be the one way to keep a handle on it.

That would take a brave government.