Widening the GST net and boosting workforce participation by women and older people could grow GDP by $70 billion within a decade, according to a report by independent think-tank the Grattan Institute.
The report, Game Changers: Economic Reform Priorities for Australia, says that the GST, which currently excludes 40% of consumption, should be expanded to include education, health and fresh food. Removing the exemptions would increase GDP by $20 billion per year. The increase in revenue would be used to finance cuts to income and corporate taxes.
“If Australian governments are serious about growth, they need to reform the tax mix and increase workforce participation for women and older Australians,” said the author of the report, Grattan Institute CEO John Daley. “Together those three things can grow GDP by $70 billion within the decade. Nothing else is big enough to change the game.”
The report says that stretching the GST to all non-residential consumption would increase revenue by about $31 billion. This money would then be available to reduce corporate taxes from 30% to 23%, slash income taxes, and increase welfare payments by about $3 billion.
“GST-free sectors - fresh food, health and education - are growing faster than the rest of the Australian economy, so that GST revenues are growing slower than nominal GDP,” the report says. “This squeezes state budgets, which rely on GST income. To keep pace with voter expectations for health, education and public transport, state governments are then tempted to increase more inefficient taxes.”
Only 67% of women aged 15-64 are currently in paid work, compared with 78% of men, the report says. While 55% of employed women work full time, 85% of employed men do, with the remainder working part time. These rates are substantially lower than in many other OECD countries, such as Sweden, Denmark, Norway, Austria, France, Germany, Canada and Britain.
“Removing disincentives for women to enter the paid workforce would increase the size of the Australian economy by about $25 billion per year,” Mr Daley said.
Although female workforce participation has increased substantially in Australia - particularly among older workers, as a result of improved health, higher levels of education, and partners also working later in life - participation by 35-44 year olds has not changed since 1990.
“If Australian women did as much paid work as women in Canada – implying an extra 6% of women in the workforce — Australia’s GDP would be about $25 billion higher,” Mr Daley said.
“Female workforce participation can only change significantly if more mothers have jobs … Reducing high effective tax rates and the net cost of childcare are the principal means for changing the number of Australian women with children in the paid workforce.”
Modelling by the institute shows that for a couple where both partners earn $70,000 and they use long day care for two children, the second earner takes home just 20 cents in each dollar.
The report also recommends giving older Australians a disincentive to retire. While the institute welcomes the move by the Rudd government to lift the retirement age from 65 to 67 by 2023, it suggests the shift is not enough to cope with the forecast increase in life expectancy.
By raising workplace participation to the level reported in New Zealand, where 15% more 55-64 year-olds work despite a far less generous pension policy, the government would lift Australia’s GDP by about $34 billion by 2022.
Mr Daley said he was concerned a third of superannuation accounts were being spent before people reached the current pension age. “Raising the age at which workers can access their superannuation to the pension age would also increase older age workforce participation,” he said.
“Many workers retire before reaching the pension age and start using their superannuation. According to the Henry Review, approximately a third of superannuation savings are withdrawn before the age of 65.”
Although a handful of issues, such as industrial relations reform, innovation and infrastructure investment, received the most attention, “our research shows that compared to the game-changers, the growth potential of reform in those areas is either unknown or surprisingly small.
"Governments can’t do everything at once, and they shouldn’t try. When governments take on too many reforms at once, they tend to succeed with small reforms, but mishandle the big ones. Prioritisation is essential. Governments need to concentrate their effort on reforms that can make the biggest difference.
"Of course social reforms that impact on equity and the environment are important,” Mr Daley said. “But the only way we can reduce poverty and pay for all the programs and services that improve peoples’ lives is by growing the economy.”