Academic journal article The Economic and Labour Relations Review : ELRR

Fightback in Perspective: What Difference Would It Make?

Academic journal article The Economic and Labour Relations Review : ELRR

Fightback in Perspective: What Difference Would It Make?

Article excerpt

1. Introduction

The Opposition's policy manifesto, Fightback, contains many things that will be implemented whoever wins the next election. For example, both Fightback and the Government's response, One Nation, propose cuts in income tax rates, a single aviation market in Australia and New Zealand, a national power grid and so on. However, Fightback also contains proposals which are radically different from anything in current Government policy or in the extensions to that policy contained in One Nation. This article aims to assess the effects of implementing the Fightback proposals rather than continuing and modifying present policy in the way set out in One Nation. Not all effects will be considered. The proposals in the alternative manifestos will have different social effects--as symbolised in part by the titles chosen, Fightback as opposed to One Nation. This article will largely ignore these social effects and concentrate on the economic consequences if Fightback is implemented rather than the Government's proposals.

There are four major areas in which Fightback proposals are strikingly different from those in One Nation. These are:

1. the introduction of a goods and services tax, and associated changes in the tax mix and social welfare payments;

2. superannuation arrangements and other tax laws and regulations that affect savings;

3. labour market law and institutions, and

4. privatisation.

The first three of these will be discussed. Privatisation may have significant social effects, but the desired economic consequences can be just as readily be achieved through requiring public enterprises to place an emphasis on efficiency and profit making while remaining in public ownership. Selling public enterprises may, in the year the sale is made, reduce the recorded public sector borrowing requirement, but it does nothing to change the flow of funds coming on to the market to finance investment in physical assets in the private sector.

2 GST and the Tax Mix

Much of the discussion about the introduction of the Goods and Services Tax (GST) focuses on replacing income tax by a GST. For example, perhaps the academic article on Fightback most widely quoted in the media is Murphy 1992, which deals solely with this change in the tax mix. However, as Freebairn sets out in his article in this symposium, of the tax rate of 15 per cent proposed for the GST, only 3 percentage points are to produce revenue to offset income tax cuts. 5.2 percentage points are needed to replace the present wholesale sales tax, 3.7 percentage points to replace the petroleum products excise and 3.2 percentage points to replace the State payroll taxes (1). Providing revenue to offset income tax cuts is thus the smallest of the four uses to which GST revenue will be put, and abolishing the wholesale sales tax the largest.

Almost all economists would welcome the replacement of the wholesale sales tax by a GST. Again as Freebairn spells out in detail, the wholesale sales tax is narrowly based, has a rate structure which falls heavily on a few goods--particularly housing, furnishings and appliances and transport equipment--and raises less revenue from taxes on sales of consumption goods than from taxes on business inputs, including those used by exporters. The very variable tax rates on different business inputs distort relative input costs and reduce efficiency. As a result, replacing the wholesale sales tax with a GST would probably increase GDP by about 1 per cent. (2) If the tax mix change was restricted to abolishing the wholesale sales tax and replacing it with a GST, any inflationary impact would be very small. Finally, though this is more contentious, the switch would probably reduce both litigation and tax evasion.

There is a downside. The switch would undoubtedly increase compliance costs for small businesses and put them at some competitive disadvantage compared to large businesses. …

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