Australia Needs a 6-month GST Holiday
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Australia Needs a 6-month GST Holiday

By Isaac Gross
Lecturer in Economics, Monash University

Australia Needs a 6-month GST Holiday

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 from previous ones. It has wrought most of its damage to restaurants, retail, entertainment, and the holiday industry.

These service sector industries employ the lions 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% 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 a 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 a value-added tax) from 17.5% to 15% 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% to 16% until the end of the year.

Australia balked 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 A$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 July 23. The budget is due on October 6. You could do worse than emulate Germany and the United Kingdom.

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

About the Author:

Isaac Gross, PH.D., is a lecturer in economics at Monash University. He has a D.Phil., and an M.Phil. from Oxford University in Economics. From 2011 to 2013, he worked as an economist for the Reserve Bank of Australia.

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DISCLAIMER: The views expressed in this insight piece are those of the author and do not necessarily reflect the official policy or position of the IndraStra Global.