Time for Canberra to claw back some GST

The demand being taken to today's COAG meeting by state premiers – that the GST base be broadened rather than increasing the rate – is a historic opportunity to right a policy wrong, and the Gillard government must seize the moment.

What wrong? The decision at the time of tax's painful birth, to give all the money to the states. While that was necessary to gain the support of the amendment-happy Democrats in passing the GST legislation in 1999, it has brought nothing but grief since.

Poorer states – stand up Tasmania – like the tax's objective of making good government services available to all Australians, no matter where they live.

Richer states, such as Western Australia, don't like seeing their GST dollars flowing to poorer states when they'd rather spend the money smoothing out bumps on their freeways to make driving their sports cars more fun.

But that's the system we got, and the recent review by Nick Greiner et al says it's actually working quite well.

What's not working so well is the federal government's efforts to balance the budget – and it is a 'federal government' problem, rather than a 'Gillard government' problem. If Tony Abbott wins the next election he intends to substantially cut spending, but it's not as if he would have a choice. Top economists now say we might find ourselves $8 billion in the red at the time of the next budget as corporate profits and taxes continue to disappoint.

What's this got to do with the GST? Well it appears state premiers are so jumpy about the falling-off of this major revenue source, that they're willing to do some serious horse trading to convince the feds to take the politically difficult step of widening the tax's base to include food, health and other essential goods.

The Financial Review reports today that the states are willing to give up some stamp duties to convince Canberra to act, though it's not clear which ones.

But a smart move for the Gillard government would be to leave those to one side and put a different deal to the cash-starved premiers: "We'll widen the base, if you let us keep a bit of the increased tax-take."

That would really be a win-win-win. The federal government would get a few billion more to achieve a surplus; the states would get a more robust revenue stream (spending on those essential goods doesn't vary as much as 'discretionary' spending); and despite what lefties like Kim Carr say, our most vulnerable people will be better off.

"WHAT!" I can hear Senator Carr splutter over his cornflakes. "Better off?!"

Yes. Because some of the policy decisions of his government have indeed been 'Labor reforms' that assist lower socio-economic groups – if only the government had the money to pay for them.

There are the pension increases and tax cuts included in the carbon tax package; there are the as-yet-unfunded Gonski education reforms and the National Disability Insurance Scheme (together costing about $14 billion a year); and there's the historic health funding package agreed last year under which the government pays 60 per cent of hospital costs on an activity-based funding model (A blow to state bureaucracy, February 2011).

A jobless person who finds themselves 10 per cent worse off at the supermarket till when GST is added to their basket of milk, veggies and occasional Tim-Tams (I think we all agree they're a basic human right), will later that day get better health care, better state-funded education for their kids, and perhaps better care for a loved one knocked out of the workforce because of a disability.

The argument that widening the base of the GST is squeezing the most vulnerable works only if it's considered in isolation from other social reforms. Moreover, poorer Australians would pay 10 per cent extra on a bog-standard litre of milk, while investment bankers would pay 10 per cent on a litre of dolphin-friendly-organic-milk-from-happy-cows-receiving-daily-shiatsu-massages – that is, the 'essentials' of wealthier Australians cost more.

The premiers are also demanding a 50 per cent cut in the value of GST-exempt goods flowing into the country via online shopping. That would bring the value down to $500. It's not a bad idea, though dropping that value much lower starts to escalate the cost of policing the policy, which offsets the revenues generated.

The simple way to reform GST is to widen the base and make sure much of the revenue raised addresses issues of social exclusion. And if the Gillard government is smart, this could be the right moment to tell the states it's the federal government that's best placed to handle a good slice of that extra money.