Carbon tax not the same as GST – INSIDE the beltway of Canberra, Julia Gillard keeps trying to draw parallels between the carbon tax and the Howard government’s goods and services tax. There are similarities with the GST episode but also some key differences.
Most important, John Howard did not implement the GST without first putting it to the Australian people. This was against the background of his statement in 1995 that there would “never, ever” be a GST. In 1997, he announced a review of the taxation system as the principal component of a second-term reform agenda.
Tax reform could not credibly have excluded the GST, which was to replace the ramshackle indirect tax system. Both the Australian Chamber of Commerce and Industry and the Australian Council of Social Services lobbied the government to revisit the issue of tax reform, including the indirect tax system.
Gillard failed to prepare the ground for a change of policy. She mugged the public after the election. In the last week of the 2010 election campaign, the Prime Minister ruled out a carbon tax if she were to be re-elected. She was forced by the Greens after the election to accept a carbon tax as the price of staying in power.
Just as she had trouble explaining why she toppled Kevin Rudd, Gillard could barely acknowledge her broken promise. This added to the impression from the election that the real Julia is evasive and tricky.
Gillard and Greg Combet, the Climate Change Minister, have also fumbled their response to Tony Abbott’s unequivocal promise to repeal the carbon tax. Combet asserts that if the Coalition wins the next election, Labor will not support the repeal of the carbon tax in the Senate notwithstanding the electors’ choice. The message is clear, vote for the Coalition in the Senate if you want the tax repealed. The government sounds arrogant and out of touch.
In 1993, Paul Keating took the opposite tack. He warned that if John Hewson was elected, Labor would not oppose the GST in the Senate.
The Coalition won the 1998 election by the skin of its teeth, thanks to the quality of its marginal seat members, but Howard faced trenchant opposition from the Labor Party under Kim Beazley.
Being forced to rely upon independents and minor parties to get the GST passed proved a blessing for the Coalition. The final tax package was probably more publicly acceptable if less economically rigorous.
Howard spoke to Meg Lees, the leader of the Australian Democrats, who was prepared to negotiate. Lees could see the need for a new growth tax and the accompanying reductions in personal taxation.
She had her priorities, too, and did the deal in return for increased social spending and environmental protection.
Ultimately the Democrats fractured but Lees and her Treasury spokesman, Andrew Murray, should be remembered for their political courage in playing such a constructive role in difficult circumstances.
The introduction of the GST in July 2000 went relatively smoothly. Howard visited supermarkets in his electorate and consumers seemed relatively relaxed. Consumers also benefited from tax cuts across the board, which were topped up by reducing the budget surplus.
By contrast, Labor’s carbon tax does not provide across-the-board tax cuts. There is a focus on low-income earners and those who qualify for family tax payments. Other voters slightly up the income scale and also feeling the cost of living squeeze do not get any relief.
The GST exercise was purely focused on tax reform. This government is selling tax reform in the context of dealing with an environmental externality – reducing the growth in greenhouse gas emissions.
No wonder voters are confused. The government is trying to have it both ways. It plays down the cost of living impact while trumpeting the impact of the new tax on Australia’s carbon footprint to assuage its Green backers. The industry assistance package and bailouts of aluminium smelters such as Alcoa in Victoria underline that jobs are affected and the tax will have a bigger effect than feared.
The GST is a tax on final consumption whereas the carbon tax is a tax on producers that will cascade through the production system. With the GST, firms were able to claim tax credits on their inputs. The carbon tax is a reverse tariff that discriminates against exports and import-competing goods and services.
Businesses have already factored the impact of the tax on their operations and investment plans so expect a steady stream of stories about adverse economic impacts. Importantly, the voters’ mood has been soured by the series of swingeing increases in electricity prices in recent years to finance network investment.
The increase in power prices slated for July 1 this year will include a component, on average about half for consumers in NSW, for the carbon tax.
Ministers have been out there emphasising that the tax is not responsible for all the coming increase in power prices. That only draws attention to the government’s contribution to rising electricity prices.
There is an analogy here with the GST. The greatest electoral headache caused by the GST was the impact on petrol prices. The then government reduced the fuel excise to offset impacts of the GST but not by the full amount. The difference was 1.5c a litre.
The Treasury modelling had assumed that indirect cost reductions brought about by the new tax system would make up the difference and leave fuel prices broadly unchanged. However, fuel prices went up.
The voters did not appreciate those subtleties, notwithstanding their personal tax cuts. The agitation over petrol prices took off in the latter part of 2000. The government held the line into 2001 until it was reeling from state election losses in Western Australia and Queensland and facing a tough by-election in the safe federal Liberal seat of Ryan.
The government changed course by reducing fuel excise by 1.5c, abolished indexation and apologised to boot.
The lesson was that voters focused on what the government could change and they would not be satisfied until the government listened. It is the same today with the carbon tax. Abbott has crafted a climate change response that picks up those cost-of-living concerns and public anger with broken promises. That is why he is winning.
Arthur Sinodinos is a Liberal senator for NSW.