He proposed that the states’ tax – the GST – should be increased from 10 per cent to 15 per cent, but that the Commonwealth should take the extra 5 per cent, after compensating low income earners.
In exchange, the Commonwealth would give each state a fixed share of the personal income tax receipts that it receives, the initial amount, presumably, matching the initial gain in revenue received by the Commonwealth from its share of the GST levied in each state.
Weatherill believes that the states’ capacity to fund “basic” public services will improve, because he also believes that personal income tax will rise faster as a share of national output than the GST.
“If current arrangements continue, governments across the country simply will not draw in sufficient revenue to fund the services they are expected to provide,” he said.
This so-called tax plan is purely about boosting funding for the State Government, not about boosting the state’s economy. Indeed, elementary economic analysis shows that this tax plan will have an adverse impact on the South Australian economy – possibly severely adverse.
It is a measure of the desperate financial straits that the South Australian Government has got itself into that it is willing to propose a measure which can only worsen the state’s economic situation and reduce jobs.
This so-called tax plan is purely about boosting funding for the State Government, not about boosting the State’s economy.
Most South Australian prices will rise by 5 per cent as a result of the GST increase. There are some exemptions to the GST, of course, but let’s keep this simple. If prices rise by 5 per cent, sales by businesses must rise by 5 per cent or the revenues they receive must fall.
Because demand curves slope backwards, most businesses will suffer sales revenue losses as their prices rise, thanks to the tax increase. Weatherill implicitly concedes this by demanding compensation for the 5 per cent increase in prices for low income earners. Clearly the message is that consumers will not be able to afford to buy as much as they did before the GST increase.
What is going to drive South Australian businesses’ sales revenue up by 5 per cent so that their production can continue at the same real rate as before the GST increase?
Hence, the economic effect of the GST increase will be to reduce businesses’ sales volumes, production and employment in South Australia.
How will the South Australian Government disguise the negative impact of the GST on jobs in this state? Presumably, by claiming that the job losses and higher unemployment are caused by something else, for example by the Holden shut-down, the ship-building “valley of death” problem or an insufficient share of the future submarine work going to South Australia.
The “basic” public services that need to be funded are surely not the entire activity of the public sector. So why can’t “non-basic” public services be cut so as to be able to redirect their funding to support the “basic” public services.
The truth is that the Weatherill Government is extravagant. The new Royal Adelaide Hospital at $2.3 billion is a cool $0.5 billion over budget already, and counting. It is said to be the third most expensive building ever constructed anywhere in the world.
The Torrens-to-Tonsley road project west of the CBD is extraordinarily expensive. The O-Bahn tunnel project is a lavish solution to a small, non-urgent, commuting problem.
Why are so many people needed in Flinders Street and other CBD locations to supervise the work of our schools and hospitals? Why aren’t the schools and hospitals given targets to meet, and their own boards, who should be made responsible for meeting their targets?
We have a State Strategic Plan which has many feel-good targets, but no government strategies of any consequence to see that the targets are achieved – and to take action if they are not.
The purpose of the Economic Development Board is said to be to maximise the value of emerging economic opportunities for South Australia, so that the state is recognised as the most competitive place in Australia in which to invest and grow a business.
It is described as an independent advisory body to the Government on economic development issues in South Australia. Its purposes include advising the Government on what is needed to maximise economic development, and identifying what needs fixing, changing or improving; and championing processes that make South Australia the most competitive place to do business.
After 13 years of operation, one would have to say that its “advising” and “championing of processes” has not been crowned with a great deal of recent tangible success in terms of state economic outcomes.
As I have tried to show in my recent columns, the answers to South Australia’s lack of economic and jobs growth are known: smaller government, lower taxes, less business regulation and freer labour markets.
These policies not only encourage start-ups and new industries, they also help existing businesses to expand by cutting their costs, and making it more profitable to invest.
A better tax plan than the Weatherill Plan would be to ask the Commonwealth to cut income tax, company tax and capital gains tax, particularly for start-up and small businesses for incomes earned and capital invested in South Australia, and to reduce the Commonwealth grants going to the South Australian Government by an offsetting amount.
This cut to South Australian Government revenues would be met by cutting State Government activities whose costs exceed their benefits to the community. Do we really need so many ministerial advisors in addition to the large numbers of public servants ostensibly also advising government ministers? Do we really need very expensive hospitals, roads and tunnels that we cannot really afford and could do without?
There is a whiff of Keynesian spending policy aimed at bolstering our economy, when our real problem is bringing about economic structural change to eliminate the structural weaknesses in our economy that the Arthur D. Little Report canvassed accurately for the Bannon Government a quarter of a century ago.
This lower tax/reduced government spending plan puts money back into the hands of South Australia’s citizens and businesses, especially start-ups and small businesses. As a result consumer spending and business investment in South Australia would increase.
Consumer spending increases because South Australians’ real incomes have increased. For the same aggregate spending they are getting greater value – things and services that they want rather than government services they do not value.
More people would be employed producing goods and services that people valued at more than it cost to produce. The state would grow faster, jobs would increase and unemployment would fall.
Richard Blandy is an Adjunct Professor of Economics in the Business School at the University of South Australia.
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