Broaden GST and cut industry subsidies: OECD

Australia’s robust economy makes it the “Iron Man” of the developed world but the government should hike the GST rate and apply it more broadly, according to a new OECD report released today.

“Tax reforms, including a lower corporate tax rate, a broader resource rent tax and more efficient state taxes would facilitate ongoing structural adjustments,” the report said, describing Australia’s 10% GST rate as “low in international comparison.”

“There are also some significant tax expenditures that could be reduced or eliminated, such as exemptions from GST, including on fresh food, medical services and school supplies.”

The report described the carbon tax and plans to move to an emissions trading scheme as the best option to reduce greenhouse gas emissions but urged more effective water pricing and an end to irrigation subsidies.

“Australia’s long period of uninterrupted economic growth makes it the Iron Man among the OECD countries,” OECD Secretary-General Angel Gurría said in a statement released with the report card.

“The rise of Asia has driven Australian natural resource exports and is providing enormous new opportunities for the agriculture, education and tourism sectors, but it has also imposed significant challenges and strains. The strong Australian dollar resulting from the mining boom is imposing considerable structural changes on the economy.”

The report put expected GDP growth at 3.75% in 2012 and about 3% annually over the 2013-14 period.

A cut to agriculture, energy and automotive manufacturing subsidies could help fund a reduction in the corporate tax rate, the report said, calling for flexibility on the issue of the government’s promised budgetary surplus.

“In case of a sharper-than-expected cyclical weakening, the central bank should loosen further and the fiscal automatic stabilisers should be allowed to work, even if this postpones the return to budgetary surplus,” the report said.

Treasurer Wayne Swan said the report “shows once again that our economy stands tall amongst its peers, with 21 consecutive years of growth, robust economic fundamentals and a positive outlook in the face of acute global challenges.”

Professor Flavio Menezes, Head of the School of Economics at the University of Queensland, said the report does not contain many new ideas.

“Some of the proposed ideas are already part of the policy debate, such as more efficient water pricing and harmonising regulation,” he said.

“Others are not so clear cut and there is no consensus about, such as creating a wealth fund with the mining royalties or reducing the corporate tax rate. There are other options that might be better policy options, such as introducing an allowance for corporate equity instead of reducing the corporate tax rate.”

George Argyrous, senior lecturer in political economy at the University of New South Wales said now was not the right time to make the cuts called for in the OECD report.

“All it would do is risk generating more unemployment, further weakening the manufacturing sectors at a time when mining might not be as strong and able to pick up the slack,” he said.

He described the government’s vow to remain in surplus as “not economically viable.”

Professor John Quiggin from the University of Queensland’s School of Economics welcomed the report’s call for flexibility on the budget surplus.

“In matters like this, the OECD can safely be taken to reflect the views of the Australian Treasury. This report gives the government the cover it needs to abandon the irresponsible and damaging promise of a return to surplus ahead of the original 2009 schedule,” he said.

“An announcement to this effect would be the best Christmas present the economy could receive.”

Additional reporting by Sally Zou.

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