Why Australia needs a six-month GST holiday

Why this recession will be different, and what can be done to help.

chadstone shopping centre

Isaac Gross, Monash University

Treasurer Josh Frydenberg has spent billions trying to save us from recession. The winding down of JobKeeper scheduled for September means he’ll have to spend billions more.

Many of the stimulus measures talked about are focused on the traditional targets of infrastructure and residential construction.

But this recession is different to previous ones. It has wrought most of its damage to restaurants, retail, entertainment and the holiday industry.

These service sector industries employ the lion’s share of the Australians at risk.

No matter how much traditional stimulus we offer, very few baristas or chefs are going to be able to find work building high-speed rail lines.

The COVID recession requires a different response.

A GST holiday would fight the recession we’ve got
One that would work would be a GST holiday.

Instantly, and for the next six months, all goods and services covered by the 10 per cent tax would become more affordable.

The concession would be timely, targeted and would generate the maximum economic bang for the government’s buck.

It would be targeted because the GST doesn’t cover many of the goods people are already buying such as fresh food and medicines.

What it does cover is extra, less essential, spending on things such as clothes, tourism and restaurants – the exact kind of spending we need to stimulate.

Cutting income tax or cash splashes wouldn’t deliver as big a bang for the buck – much of the bonus would be saved, or spent in sectors that don’t require stimulus.

However, the only way to get the GST discount would be to buy goods and services, many of them produced by workers who will need support.

It’d be direct money where it is needed
The benefit would also be progressive. Calculations by Peter Varela, an economist at the Australian National University, suggest that the poorest households pay the highest share of their income in GST.

Removing it would eliminate this burden, if temporarily, helping the poorest households the most.

Making it temporary would encourage Australians to spend right now.

A GST holiday that only lasted only six months would force households to consider bringing forward planned future purchases to the present, when they are needed, in the same way as the government’s six month extension of the instant asset write-off is meant to for businesses.

It’s been done elsewhere
The idea was considered by Australia’s treasury during the global financial crisis. Britain’s treasury did it, cutting its GST (called value added tax) from 17.5 per cent to 15 per cent for a year in a measure judged a success.

Britain is reported to be planning to do it again.

Germany has already done it. It has cut its value added tax from m 19 per cent to 16 per cent until the end of the year.

Australia baulked at the idea during the global financial crisis because it was considered too difficult to get the premiers to agree to it.

But it mightn’t be as difficult now. The COVID-19 response has generated a new surge in cooperation between state and federal leaders for the good of the nation.

A fly in the ointment would be who paid for it. The six-month holiday might cost $35 billion. While the states traditionally receive the GST revenue, in this instance the bill for the cut should be paid by the federal government.

It’s the federal government that is responsible for managing the national economy. State budgets, already hard hit, shouldn’t be further damaged.

Over to you Treasurer Frydenberg. Your economic statement is due on 23 July. The budget is due on 6 October. You could do worse than emulate Germany and the United Kingdom.The Conversation

Isaac Gross, Lecturer in Economics, Monash University

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

Would you support a six-month GST holiday? What steps do you think the government should be taking to prepare for this recession? 

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    COMMENTS

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    Horace Cope
    7th Jul 2020
    3:10pm
    "Would you support a six-month GST holiday? What steps do you think the government should be taking to prepare for this recession? "

    No, I wouldn't support a 6 month GST holiday, especially as the proposal is to penalise the federal government and not the states. The federal government already has committed additional funds to help with unemployment which will take years to recoup and the last thing that is needed is more debt. Remember, it's mainly the taxpayers debt as government income is from collecting taxes and any further increase in debt may mean that higher taxes may be levied.

    The recession was partly caused by the pandemic, something that no government anywhere in the world has budgeted for so it follows that taking steps to allow for the recession was not forecast. If you mean what should a government do to counteract the recession, the first thing is to get the economy moving again. Apart from Victoria, the other states and territories appear to be moving forward cautiously and, so far, it seems to be working quite well. Once the economy is getting back on track and unemployment drops will be the time to take the next step. The next step should be to review how Australia has fared post pandemic and base any decisions on that review. I believe that it's too soon to start with any advice from an academic from some university who more than likely has been employed throughout the pandemic.
    MarkAdel
    7th Jul 2020
    9:47pm
    Is this a left wing joke.
    When I buy things, I don’t say to myself “gee, I wish the GST wasn’t on it”.
    I just buy it. Move on people.
    P$cript
    7th Jul 2020
    11:10pm
    It appears that you have as much understanding as the economic Liberal wizkids, None!
    MarkAdel
    7th Jul 2020
    11:30pm
    Yes, very understanding, thanks for the compliment.
    The Government has done an exceptional job.
    I thought you were a Labor stooge.
    My apologies.
    Janus
    8th Jul 2020
    8:31am
    I don't pretend to be an economist, or even an accountant, but i suspect this is another "Engineer Approach". Engineers are fantastic at solving problems, designing ways to overcome difficulties. They are often lousy at getting to the root of the problem, or preventing or avoiding it. Cutting out the boil without dealing with the dietary deficiency that caused it.

    A fix that ensures that people have more money to spend might feel good, but all it means right now that we buy more Chinese, indian, Indonesian, Malaysian or American goods, and leave out the ailing manufacturing industry. It looks good if we spend the money, but it is no help in the long term.

    Same a building a road, a bridge or some other capital infrastructure. At the end of it, we have people who earnt (and maybe spent) money, and a bridge, and then what? Nobody knows anything more than when they started, and capital that is often outmoded and outdated before it is finished.

    Now might be the time to invest in universities and Technical Colleges, in improving services, in getting the unemployed off the streets with free education. More teachers, nurses, doctors, researchers, but also better, properly trained tradesfolk. Now is our chance. We coul deven clean up our filthy polluting outdated power system, fix up our degraded environment, and actually do some things that might benefit ourselve in the longer term.

    Dream on.....
    Robyn
    8th Jul 2020
    2:52pm
    I thought the initiative being considered currently is to increase the GST to help the recession. The only time I notice paying GST is with work done by tradesmen and they have been working through the pandemic.
    Youngagain
    8th Jul 2020
    8:19pm
    I think the idea might have merit. It would stimulate spending on non-essential items, as the price of the item should reduce. The building industry, for example, could offer services at a considerably lower cost. Holidays and restaurant dinners would cost less, thus encouraging more spending in areas that really need a boost. As the article notes, it would be helpful to lower income earners, who are hit harder by the GST because they have to spend a greater portion of their income. The question the proposal raises is how this would impact the capacity of governments to meet their obligations, since I believe the state governments need GST revenue to meet their commitments.
    P$cript
    9th Jul 2020
    11:04pm
    The GST should be stopped permanently and replaced by a debit tax of 0.5%. The amount raised would enable many other taxes to be dropped or at least reduced. The result would give everyone an effective pay rise and shift the load off the low income to those which tend to buy higher value products


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