View from The Hill

View from The Hill

If Turnbull really wants to make a difference on tax, he must dig deep into his political capital

John Howard took a big political risk to introduce the GST - will Malcolm Turnbull be bold enough to campaign on increasing it? AAP/Dean Lewins

Cabinet Secretary Arthur Sinodinos made some obvious but fundamental points when talking on Sunday about Malcolm Turnbull and tax reform.

“If you’re someone like Malcolm, I think if you want to do something substantial you’ve got to do it quickly and upfront and you’ve got to do it when you’re in a capacity to maximise the use of your political capital to sell a story to the Australian people,” he said.

The government had to convince people why changes were required, make sure the reform was fair, get the electorate’s consent and keep faith with it. “If you want to put something big to the Australian people, it’s best to do it from a position of authority and when you get it, keep your promises,” he told Sky.

A big question is whether Turnbull will be willing to go for the full reform monty, proposing an increase of the GST to, say, 15% – which would yield a very substantial lump of money and put the tax system in long-term better shape – or whether, assessing the political landscape, he will eventually opt for something more cautious.

The Turnbull government would have much more chance of being able to pull off a robust tax-mix switch than the Abbott government would have had. Nevertheless, it would be a politically hazardous exercise.

A Turnbull pitch to get more revenue from the GST would bookend John Howard’s campaign to introduce it.

There would be similarities and differences. Howard was long committed to a broad-based tax and understood that it was necessary to modernise the Australian tax system. But he broke a promise to take it up – mitigated by putting his plan to an election. Howard also used tax reform to revive his leadership.

Turnbull knows a switch in the tax mix is overdue. If he decides to run with the change, he too would go to the people before its adoption. But where Howard had been struggling during his first term Turnbull – presuming his fortunes don’t slump between now and next year – would be dipping into a large reservoir of unspent personal political capital.

It would be easier and cleaner for him to propose an increase in the GST than a broadening to fresh food, health or education, which are exempt from the tax. The scare campaigns against those – especially fresh food - would be a nightmare to counter.

Deloitte Access Economics, in its Mythbusting Tax Reform report released in September, modelled an increase in the GST to 15%, plus broadening the base to include imported digital products and services and low-value imports (this base broadening has now been agreed by state and federal governments).

This would raise an extra A$152 billion over four years, nearly all from the GST increase, which would boost the amount of revenue raised from the GST by about half.

Deloitte suggests some $16 billion of this would be needed to compensate low-income earners via higher pensions and benefits, with a further $21 billion for compensation via personal tax cuts. The rest would be available for additional income tax cuts and, potentially, funds for the states for health and education.

There would be various issues. For example, premiers Mike Baird and Jay Weatherill have insisted that health services should have first call on the revenue from any GST increase (and Weatherill isn’t keen on putting up the GST anyway). But the main line coming from the federal government is that overall taxation shouldn’t go up which, other things being equal, it would if a portion of this money went to state spending rather than being used for tax cuts. One suggestion is that some money to the states could be cast as payments for competition reforms.

To meet the fairness argument, the GST change would need to be accompanied by other measures, including a cutback to the generous superannuation concession for higher income earners. A package would also have to see an attempt to address problem state taxes.

As Sinodinos pointed out, the states would have to be at least neutral in their attitude to a change in the GST for it to be a goer – but the Victorian and Queensland Labor governments are strongly opposed.

The government’s proposing a GST hike would be a lifeline for Bill Shorten. Howard went into the 1998 campaign with a big majority and came out with a small one and a minority of the popular vote.

Nevertheless Howard did carry the day, and Shorten is performing poorly.

Turnbull has a while to make up his mind on how bold he wants to be on tax. Final decisions would presumably wait until the new year.

Meanwhile a couple of major items before Christmas will test how the government is travelling in terms of policy.

One is the mid-year budget update in December that will not only show the state of the financial books but, if past practice is a guide, contain some decisions.

The other is the innovation statement, which will be the first real indication of whether Turnbull can go beyond the fine words and deliver the gritty substance. He has talked so much about the importance of innovation that the statement cannot afford to fall short of the expectations raised. And the expectations from here on need to be carefully managed, given that money is tight.

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