State finances and industries that compete with imports would be a lot healthier now if John Howard had not decided to exclude exports from paying the GST. The Howard justification was based on simplistic claims that the GST export concession would make our exports more competitive. However, the reality is more complex because general export subsidies like the GST concession encourage offsetting increases in the value of the currency. This post argues that we would be better off if the GST export concession was removed?
The GST was set up to provide a growing source of revenue to the Australian states. The ABS reported that the GST represented 12% ($50 billion) of the total Australian tax take of $415 billion for 2012/13. In addition, the World Bank estimated that Australia’s exported good and services were 20% of GDP for 2013. (vs imported goods and services of 21%.) On the basis of these figures the states would have shared additional revenue of over $12.5 billion for 1012/13 if John Howard had chose not to exclude exports from the GST.
At the time, the exclusion was justified as a way of making our exports more competitive. However, in reality, any large, general subsidy on exports like the GST exclusion is likely to spur a compensating rise in the value of the $Aus. In the end, it is debatable what benefit, if any the GST exclusion made to our export industry.
The GST was imposed on imports with the idea that this would neutralize any impact on industries that have to compete with imports. This would have worked if the GST export exclusion had had no effect on the value of the $Aus. However, imposing the GST on imports is not sufficient when the GST exclusion is driving up the value of the $Aus.
It is not unreasonable to suggest that, if the GST export exclusion was removed:
- State finances would be a lot healthier than they are now.
- The value of the $Aus would drop.
- Australian industries that compete with imports would be more competitive.
- Industries like the minerals export industry would make a fairer contribution to tax revenue.
It is debatable whether, in the end, getting rid of the tax exclusion would have any real effect on export competitiveness.
The GST issue is part of a broader debate on State finances. What is wrong with Qld state finances at the moment includes:
1. Not enough revenue.
2. The failure of the GST to deliver projected revenue – coupled with a lack of action to increase GST revenue by the sort of suggestions made in this post or a simple increase in the GST.
3. Too much of state income comes from the Commonwealth with strings attached. This adds enormously to paperwork, endless negotiation etc.
3. Things like public transport charges being much higher than the cost of using an already owned car.
4. Highly regressive revenue sources such as public transport fares.
The Greens have identified $88 billion worth of potential budget sayings that don’t make life worse for those at the bottom of the pile.
A tax on exports other than minerals? That would be the best way to export the exporting businesses themselves, including mine.
Bilb: What assumptions are you making about the effect of a GST on all exports on the value of the $Aus? How much would the $Aus have to move down to offset the impact of a 10% GST on exports?
I am often struck by claims that we would become more competitive if only wages were lower etc. etc. when the reality is that fluctuations in the value of the $Aus are far more important.
It is not all that long ago that the $Aus dropped below 50 cents US.
Value of the $A, exactly right, JohnD, but that is not driven principally by the performance of the Australian economy, it is more a matter of the $global security flux. Applying a GST to exports would have the effect of valuing up the $A 10% from the receiving importer’s perspective.
Australia’s fiscal problem, if it in fact has one rather than an politically imagined one, is insufficient “energy” in the ecnomy. The best solution to this is in commiting to a broad distributed energy system with a significant Australian component in the product value. That local content would be in the thermal part of pv solar thermal. The only part that government needs to take is in mandating the financing of such systems.ie requiring banks to mortgage fund the addition energy systems to existing properties. The majority of the energy generated would be required to be used within the property or near locality. The advantage of this would be in stimulating local production on various levels, improving standard of living through reduced household costs (reduced energy bills), and reducing Australia’s CO2 emissions as well.
The other mechanism that I believe should be used is a levy on all imported goods and services. This would be a levy varying between 0 and 6 percent in proportional concert with unemployment. Such a levy would have the effect of adjusting Australia’s labour competitiveness and with the proceeds being plowed into small business development and product market development would be self adjusting.
Bilb:
This is only true if putting the GST on exports leads to no change in the value of the currency and the export is 100% Australian made. (If less than 100% the imports will have already had to pay the GST on entry.
Levies on imports will tend to drive the currency up to compensate and consequently make things more difficult for exporters.
You are right, the value of the currency depends a range of factors some of which we cant control. However, having the reserve bank set interest rates well above the OECD average certainly doesn’t help.