GST windfall inspires more spending

Has the GST been a success?

It has now been five years since the GST was introduced as the principal part of Australia's New Tax System.

While neither level of government, federal or state, deigns to officially claim the tax as its own, the tax is having a profound impact on state finances, economic reform and the taxpayer -- and it's not all positive.

When the tax was first introduced the expectation was that it would be revenue neutral -- that it would raise no more money than the taxes it replaced.

Such was the pessimism, at least officially, among the states that, in exchange for supporting the reforms, they insisted the Commonwealth insure them against a loss of revenue.

This has turned out to be one of the great deals of modern politics.  Not only have the states received large and growing revenue windfalls from the GST but they have done so while assuming none of the risks or the responsibilities for raising it.

Over the last five years GST tax receipts have grown by an average of 9 per cent a year, which is substantially higher than the rate forecast under the new tax system.

For the first couple of years the Commonwealth absorbed the above average revenue growth.  However, since 2002-03, GST receipts have exceeded the Commonwealth's guarantee minimal payments, delivering a windfall to the states of nearly $4.5 billion to date.

All states have shared in the windfall, though Queensland has benefited to a disproportionate degree.

Despite being forced this year by the Commonwealth to agree to eliminate a number of additional stamp duties on capital transactions, the GST is expected to generate a revenue gain to the states of $9 billion over the next five years.

Almost without exception the states have spent the windfall -- primarily on additional staffing -- rather than cutting taxes.

While some states such as Victoria have trimmed tax rates, this has been little more than giving back a bit of bracket creep.  Other states, such as Queensland, have markedly increased their taxing effort.

In short, the GST has not been revenue neutral but rather has led to an increase in the overall tax burden.

The GST windfall has also reduced the pressure on the states to undertake reform.  It has given the states a large additional stream of revenue which, in turn, has allowed them to throw money at problems rather than doing things smarter or better, which is what the states are doing.

Aside from reforms driven by the national competition policy process, reform at the state level has all but stopped particularly in Queensland.

The problem lies not with the GST as such or its ability to generate revenue, but the states' lack of accountability for it.

While the states receive the GST revenue in full, the Commonwealth is responsible for raising the tax.

The proceeds of the GST come to the states in the form of grants and are treated by them as a revenue source over which they have no responsibility.

Accordingly the states treat GST receipts as funds to spend on more staff rather than, as was the initial purpose, on reducing taxes.

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