Treasurer Scott Morrison may have found a neat way to get the GST off the overburdened tax reform table, but the contradictions and incoherence in his arguments illustrate how the tax debate under the Turnbull government isn’t proceeding much better than under the Abbott government.

Morrison has now introduced a threshold issue into the tax debate ahead of his extended meeting with the states today and tomorrow: no rise in the GST can be used by the states to fund services — despite the Commonwealth stripping $80 billion in funding from them for health and education services in the 2014-15 budget. “The states want to support increased spending,” said Morrison. “We want growth and jobs. The various fiscal objectives of the states and Commonwealth are becoming clearer: there’s a clear divergence. There’s not a lot more to talk about.” That’s music to the ears of Coalition backbenchers worried that talk of a GST increase, and Labor’s incessant discussion of it, was doing them electoral harm.

It’s a little hard to understand Morrison’s logic, however. The Coalition has always argued that the GST was a states’ tax. For a long time, Peter Costello actually tried to pretend it should be treated in the budget as a states’ tax. Suddenly, the GST is no longer a states’ tax, because the states might do something terrible with it, like use it to fund health and education services. Morrison wants a GST rise to pay for income tax cuts and company tax cuts, instead — both of which are Commonwealth taxes. He’s hijacked the states’ tax.

Morrison redirecting the GST to the Commonwealth’s purposes might reflect where the political damage of a GST rise might accrue — state premiers have all care and no responsibility, because voters will go after the federal government over any GST rise — but is also likely to lead to worse tax outcomes. As Morrison says, the states have their own taxes that they can raise if they want to fund services. But many of these taxes are far more economically damaging than the GST — taxes like stamp duty and insurance levies that have perverse and and significant real-world outcomes. We might all hope and pray the states see the light and realise they should shift to land taxes — an even more efficient tax than the GST — but history says that’s very unlikely, with ACT Labor so far the only ones brave enough to risk a move to a land tax (and it came within a whisker of losing government due to a Liberal scare campaign on it).

Indeed, replacing nuisance and economically damaging state taxes with a more efficient tax like the GST was one of the few ways in which much-vaunted “tax reform” is going to yield any economic benefits, but now that, if not off the table, is balancing precariously on the edge.

All of this reflects a deep confusion at the heart of the government’s management of the tax debate: what exactly is the purpose of reform? Morrison insists it’s about “growth and jobs”, not revenue — indeed, Morrison maintains that the government doesn’t have a revenue problem and that the Coalition is the party of fiscal discipline and lower taxes. That’s despite Morrison facing yet another big revenue write-down next Tuesday in the Mid Year Economic and Fiscal Outlook and, given his admission that the government has been spending over 26% of GDP this year rather than the forecast 25.9%, yet another deficit blowout. The states need more revenue, most economists think the government needs more revenue — even Morrison himself has flagged that superannuation tax concessions are likely to be targeted to reduce their impact on revenue — but the Treasurer steadfastly maintains tax reform is not linked to fixing the government’s revenue problems.

The result: a confused debate by participants with — as Morrison now acknowledges — diverging aims that has handed Labor the basis for a scare campaign but is unlikely to lead to any improvements in the increasingly creaky and flawed GST. It’s not very different to how the Abbott government conducted “debates” — start by shooting yourself in the foot, leave a trail of blood everywhere for an extended period and then belatedly staunch the wound with nothing accomplished.

The Turnbull government was supposed to be better than this — led as it was by a man who understood that reform started with explaining to voters what the problem was that needed fixing, before discussion turned to the pros and cons of various fixes. At this late stage in the tax debate, it’s still not clear what, exactly, the problem is that the government believes needs fixing, especially given that the most obvious problem to the public — our revenue problem — doesn’t officially exist.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey