GST unnecessary: Keating

The AFR has some excellent coverage of Paul Keating today – especially option C at the 1985 tax summit.

The tax summit was held that year after months of preparation and a white paper on May 12 had recommended “option c” – a trade off that would see marginal tax rates cut and a broad-based consumption tax introduced.

Yet as Keating bitterly notes, option C was hijacked by an unholy alliance between business, unions and the welfare lobby.

“The tax summit was an abortive event, not withstanding the massive amount of work that went into it.

“It was a failure because the Business Council under Bob White said the Business Council doesn’t agree with options a, b or c. The welfare sector opposed a one level only retail consumption tax with massive compensation. And the ACTU rejected the lot as well – though they probably would have accepted a consumption tax if the Business Council and the welfare lobby gave some ground.”

Despite this loss Keating still hoped to prevail in cabinet where he had some support. Then education minister Susan Ryan said he lectured them long into the night. “He was at his best, he would explain the complex things, he’d be dramatic, he’d draw graphs and diagrams about what would happen. He educated us about tax, how it worked and why it had to be reformed,” she says.

Despite his efforts, Keating lost. On August 12 cabinet decided not to pursue the tax …

Of course Keating then went on the destroy John Hewson at the 1993 election campaigning against a broad-based consumption tax. So what’s the story? It turns out that Keating thought a consumption tax to be unnecessary (emphasis added).

In an interview with the Financial Review to mark the public release of confidential cabinet papers from 1984 and 1985, Mr Keating also aired his frustration about the “abortive” 1985 tax summit and argued Australia did not need the GST eventually introduced by the Howard government.
…
Referring to the 1985 tax summit, Mr Keating said that after the failure to proceed with “option C” – a broad-based consumption tax that was scuttled by opposition from the ACTU, business, the welfare lobby and eventually prime minister Hawke – he spent five years as treasurer cutting government spending back to the point where the tax was no longer necessary.

“When that [the consumption tax] was refused I then got back to the long-hand route of cutting outlays over five years back to the level of GDP that obtained before the Whitlam government came to office,’’ he said.

Well done that man. You can see the effect of that in the Expenditure as a percentage of GDP data.

Although I don’t think it is fair to say that expenditure was back to pre-Whitlam era levels. Nonetheless Keating should be given credit for that.

At the same time, however, it isn’t fair to dismiss the eventual introduction of the GST as being “just a tax change” as Keating does. The GST wasn’t just a new tax on top of existing taxes – it saw the abolition of many highly inefficient state-based taxes. If anything the GST tax reform was timid – more state-based taxes should have gotten the chop. It is correct to argue that the Howard government was too timid in the area of tax reform generally, but the GST was a serious reform.

More importantly we should recognise Keating’s contribution – when he couldn’t raise new taxes, he cut spending. If only more politicians followed that example we’d have much less public debt.