GST: the reform that divided a nation
John Howard and Peter Costello still stronglybelieve they did the right thing, 10 years after pushing through theGST.
JohnKehoeSeniorWriter
Updated Jun30, 2010 – 7.08am,first published at 12.09am
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ohn Howardfamously declared in 1995 that “never ever" would a goods andservices tax be introduced if he became prime minister.
Howard had good reason to distance himself from the GST. It hadproved to be a poisoned chalice for Liberal leader John Hewson , wholargely lost the 1993 election because he promised to introduce one.
But soon after being elected to government, Howard and his treasurer,Peter Costello, realised something was wrong. The indirect tax systemwasn’t working.
AFR
AFR
Services, which weren’t subject to the wholesale sales tax, werebecoming a more important part of the economy. Goods liketelevisions, radios and perfume were regarded as “luxury"items and taxed at different rates, for no apparent reason.
Too much of the government’s revenue was coming from corporate andpersonal taxes.
After the 1997 budget Howard and Costello entered into a pact, according to both men. They agreed not to rule out a GST in their second term.
“I felt we needed to put it back on the agenda because taxation reform was something that couldn’t go seriously forward without tackling the fundamental imbalance in our tax system," Howard tells
The Australian Financial Review in an interview to mark the 10-year anniversary of the GST.
In political language, anything not ruled out meant it was on the table, as Howard and Costello were acutely aware. This was underlined by senior minister Michael Wooldridge in a cabinet meeting.
“If your wife ever asks if you’re having an affair, there are two answers," Wooldridge said during a discussion on the tax. “One is ‘no’ and the other is anything else. If you say anything else it’s taken as yes."
By this time, business groups, particularly Graeme Samuel of the Australian Chamber of Commerce and Industry, were pushing for changes to the tax system.
Samuel had formed an alliance with Robert Fitzgerald of the Australian Council of Social Services to push for reform of the tax system.
Treasury secretary Ted Evans and his deputy, Ken Henry , were working behind the scenes with such groups – without seeking formal permission from the Howard government – to build momentum for a GST.
They faced a big problem: Australian political history was littered with failed attempts to introduce a single tax on most goods and services levied at the point of purchase.
As treasurer in the Fraser government, Howard was rebuffed in 1981 when he proposed a broad-based indirect tax. In 1985, Paul Keating was forced to back down on a 12.5 per cent retail sales tax. In 1993, John Hewson was infamously defeated by an unpopular Labor government after promising to introduce a 15 per cent GST.
To propose a tax with such a poisonous history, Howard would have to show political bravery and commit a significant policy U-turn. “I didn’t have any problem in relation to what I previously said because we were putting it on the line in an election," Howard says.
With the Coalition government on the back foot over an industrial dispute on the waterfront, the sacking of five senior ministers, a bush revolt over tougher gun laws and the rise of One Nation, a circuit-breaker was needed to rebuild the Howard administration’s standing.
Howard’s chief of staff, Arthur Sinodinos , says the GST was viewed by the prime minister as “unfinished business".
“It was very much Howard’s idea in the sense that it was one of the pieces of unfinished economic reform as he saw it," Sinodinos says.
“Having discharged our election commitments, by 1997 Howard felt we needed one big new thing to do for the second half of the term and it was at that stage he decided it should be a GST."
A secretive Treasury taskforce, headed by Henry, was set up to work on a GST plan in an office at the corner of National Circuit and Brisbane Avenue in Canberra. In May 1997, to the surprise of some senior ministers and many of his own staff, Howard flagged on Sunday morning television the government was considering a GST.
“I remember the morning going to Arthur [Sinodinos] and saying, ‘What’s going on?’" recalls one Howard adviser. “He said, ‘We’ve gone into the jungle, and dragged out a 500 kilogram gorilla, put it in a cage, sailed it back to Australia and let it run loose on the streets of Australia’."
A poll shortly afterwards showed about 60 per cent of people thought they would be worse off under a GST. However, the same poll showed about 60 per cent of voters thought the country would be better off with a GST. Hence, Howard could campaign at the 1998 election on a national interest platform because people felt that even if they would be worse off, the country would be in better shape.
“The biggest single lesson to me, and it was vindication of a long-held belief, is that the Australian public will accept major reform and the GST was a huge economic reform," Howard says. “If people disapproved of my change of mind then they had a perfect right to vote us out, and they almost did."
He called a meeting of all premiers to discuss federal-state financial relations. A tax review was established in August 1997 to prepare options including “a broad-based indirect tax to replace some or all of the existing indirect taxes".
Over the next 12 months Howard and Costello put together the details of the
A New Tax System package.
The policy included a 10 per cent GST, the abolition of wholesale sales tax, pension increases and personal income tax cuts and the abolition of state taxes, including financial institutions duty, debits tax, bed taxes, stamp duties on shares, leases, mortgages and cheques.
To reassure voters the government would not increase the GST rate without notice, the government decided the legislation would require any change to the 10 per cent rate to have the unanimous support of the states.
“It may not have been legally binding, but it was politically binding," one insider says.
At the last minute, there was a hitch. Howard raised the prospect of cutting the GST rate to 8 per cent. “At the very end Howard tried to cut the rate and that was probably the most testing time," Costello says. “If we had, we wouldn’t have been able to cut income tax. That was the most testing time for me. I nearly exploded."
The 10 per cent rate was eventually settled on and Howard and Costello announced “
Tax reform: not a new tax, a new tax system".
Around this time, Costello held a 13-hour cabinet meeting to explain the GST to his colleagues. He said the GST would apply to accountant, lawyer and doctors’ fees, concert tickets and golf fees.
The then secretary of the Prime Minister’s Department, Max Moore-Wilton , piped up that it wouldn’t affect him, because he had a golf membership. “There will be GST on golf memberships," Costello replied.
In the cabinet meetings, Treasury’s Henry explained the distributional effects of the GST across all income groups, taking into account things like tax cuts and pension increases. The modelling was used to assure ministers that taxpayers would not be worse off.
Petrol prices were politically sensitive, so the excise rate was cut to offset the GST to ensure pump prices “need not rise".
Despite this reassurance, the Labor Party, many social welfare groups, unions and churches stridently opposed the GST during the 1998 election. The Queensland minister for energy, Tony McGrady , said electricity price rises would force people to take cold showers and that “cold baked beans for lunch, cold fish and chips for dinner would become part of the Australian staple diet".
The Professional Hairdressers Association claimed people would not be able to afford haircuts and without assistance, baldness would increase.
Clive Hamilton of the left-wing Australian Institute said “65 more people will die each year" due to increased air pollution and traffic accidents, because the changes included cuts to diesel fuel excise.
Costello was submitted to daily tax exams on radio, answering questions on how the GST would apply to glasses of beer, gambling winnings, insurance and holiday homes.
“Of course the Labor party would organise so-called independent callers to call in with their hardest GST question," Costello says.
“It was a matter of getting every single GST question right every single day because the moment I got one wrong it would be like Hewson and the birthday cake"
Hewson, on the cusp of dethroning prime minister Paul Keating at the 1993 election, infamously came unstuck when he struggled to explain how a GST would affect the price of a birthday cake.
Despite all the dire warnings about how the world would end if the GST came in, Howard and Costello narrowly won the 1998 election against Kim Beazley, who got more votes. “I thought we were over the line in 1998, when we won the election on the GST," Costello says.
But he was wrong. The Senate cross-benches were determined to submit the tax to a rigorous analysis. Four Senate committees examined the legislation. The Senate debate was the second longest in history behind the Communist Party Dissolution Bill.
When independent Tasmanian senator Brian Harradine , whose vote was crucial to secure the passage of the legislation, infamously uttered on May 14, 1999, “I cannot" be party to imposing an indiscriminate tax on his children and grandchildren, Costello was furious.
“I’d met all of Harradine’s demands and I had full expectation he was going to vote for it," Costello says.
Howard, who had learnt to become more pragmatic since his earlier days in politics, was more relaxed. He took a phone call from Harradine while at the Waterfront Plaza in Brisbane. According to one observer, Howard remained remarkably calm, politely telling the Tasmanian senator he was disappointed.
“I knew once Harradine said that he couldn’t, if we were to have it we had to strike a deal with the Democrats and that one of the elements of that deal would be the exclusion of food," Howard recalls. “There was no way they were going to give way on that."
Howard and Costello played “good cop, bad cop" in their negotiations with the Democrats.
Costello was fiercely resistant to excluding fresh food, mindful of the extra complexity it would cause for business and enormous difficulty it would pose for him in explaining if some items, such as a cooked chicken, would be exempt from or subject to GST.
He was also mindful of Hewson’s birthday cake gaffe and argued the tax should apply to as many items as possible.
“ Meg Lees would say I was much more difficult but you’ve got to remember I’d drawn the policy, I’d won the election and now Meg appeared afterwards and wanted all these amendments," Costello says.
The then commissioner of taxation, Michael Carmody , said in a speech in March 1999 that “any attempt to draw a line around food will lead to costly disputation and greatly increased costs for the community in administering the GST".
Mitch Hooke , then head of the Food and Grocery Council (now head of the Minerals Council), claimed the Democrats were “social engineering" and “trying to tell us how and what we should eat on the basis of what they deem to be nutritious and healthy".
Negotiations between Costello and the Australian Democrats leader, Lees, reached a stalemate. Lees and two advisers stormed out of a meeting with Costello and started drafting a press release saying they would oppose the GST legislation.
Howard intervened. Lees and four of her Democrats colleagues agreed to vote with the government for the historic passage of GST.
Two dissident senators from the minor party, Natasha Stott Despoja and Andrew Bartlett, voted against it.
A young, ambitious Labor politician named Kevin Rudd claimed it was “a day of fundamental injustice". “It will be recorded as the day when the social compact that has governed this nation for the last 100 years was torn up," Rudd said.
Even after the legislation was passed, the Howard government faced difficulties in the lead-up to the July 1, 2000, start date.
The Labor Party’s campaign against the tax continued. The opposition promised to “roll back" the GST if it was returned to government. The angry talkback radio calls persisted. KPMG partner and head of the government’s GST advisory board, Chris Jordan, recalls he fielded complex questions on radio and in town hall meetings about international transactions, intellectual property, patents and property units. “It became a little bit of a game and some were caught out," Jordan says. “There were people who were tracked down ringing from political offices in Parliament House in Canberra."
The Howard government’s relationship with business was also severely tested.
Assistant treasurer Joe Hockey candidly admitted some prices could rise above 10 per cent, contradicting a promise by Howard.
The Hockey admission, true in a limited number of cases because of the GST’s interaction with other taxes and compliance costs, was leapt on by Labor and the press.
Paranoid over a fear campaign in the run-up to the 2001 election and the experience of the Canadian government – which was virtually wiped out after introducing a value-added tax – the government leaned on the Australian Competition and Consumer Commission to warn businesses against raising prices by more than 10 per cent.
Business complained the rule was unfair and that the ACCC chairman Allan Fels , armed with $50 million of extra funding for GST compliance activity, was squeezing their profit margins.
The government had empowered Fels with new GST price exploitation laws ostensibly to give the competition regulator new powers to prosecute firms for “unjustified" price rises.
Although legal experts raised doubts about the robustness of the laws, the accompanying $10 million fines and “name and shame" capabilities were an effective deterrent.
“I had noticed in conversations with Howard government ministers they were extremely aware of the pricing issues," Fels says. “There was a tendency by each business industry association to talk up the extent of price rises. They were trying to influence expectations in an upward direction."
The pricing issue was particularly complex, given some goods and services would apply the 10 per cent GST, some like fresh food would be exempt, while a range of wholesale sales taxes and other imposts would be abolished.
In a bid to deter unjustified price rises, 8 million pamphlets were delivered to letterboxes explaining the recommended price changes of 200 goods.
Even before the tax took effect, David Jones and Video Ezy were slapped with price exploitation notices by the ACCC for allegedly using the GST as an excuse to prematurely increase prices. Video Ezy admitted to making false and misleading claims to customers. The David Jones investigation was eventually dropped.
This threw up controversial and unproven allegations from Labor senator Stephen Conroy that the retailer was let off because its chairman, Dick Warburton , was a member of the Reserve Bank of Australia board and a friend of Costello’s.
Warburton had just been appointed chairman of the government’s new Board of Taxation, whose formation Conroy, as the shadow assistant treasurer, had strongly opposed.
Warburton told the
AFR last week, Conroy’s allegation was “completely untrue" and he never had a discussion with Costello about it. “I was chairman of the company, I wasn’t personally involved and was at arm’s length," Warburton says.
These companies were not the only ones to have a run-in over the GST’s introduction. The government pressured Woolworths to remove dual price ticketing (pre- and post-GST), but the company stood firm.
Brewers mounted attacks on how the GST increased the cost of draught beer, because barmen and barmaids had to charge 10 per cent for the service of pulling a beer.
Caravan park owners and their long-term residents vented fury at paying the GST, protests which almost cost minister Larry Anthony his seat of Richmond in NSW at the 2001 election. Anthony’s electorate had one of the highest permanent caravan park populations in the country – more than 6000. People who stayed in accommodation like hotels, holiday homes and caravan parks paid GST but residential renters did not. The Treasury department proposed a compromise of a reduced 5 per cent GST rate for caravan parks, but residents still complained.
Another dispute centred on whether retailers should set GST-enhanced prices in dollar terms or percentage terms.
In the draft rules set by the ACCC, percentage terms were chosen. But business was outraged, arguing they would foot the cost of some of the GST.
As the late Fred Brenchley explained in
Allan Fels: A Portrait of Power, the issue was important. For example, if an item was originally sold for $6, with $5 costs and $1 as the profit margin, but the elimination of wholesale sales tax reduced production costs by 50¢ to $4.50, what should be the new price?
If the initial profit margin was expressed as a percentage, 20 per cent, the new price should be $5.40. But if expressed as a dollar margin – $1 – it would be $5.50. Multiplied by millions of sales across the economy, the difference to profits would be huge. The ACCC eventually agreed to dollar margins, so businesses did not bear the burden of the GST.
There were benefits for large businesses too, which were able to earn interest on millions of dollars in GST collections for a month before giving the money to the Tax Office.
On Saturday July 1, 2000, the prices of about 3 billion products changed overnight. Retailers Coles and Woolworths changed the prices of about 50 million products. The transition went remarkably smoothly, with Howard and Costello visiting shopping centres. Fels conducted live television crosses from shops warning businesses against unjustified price rises.
In the inner sanctums of the government, Treasury and the Reserve Bank, the tax’s introduction was closely monitored for its impact on inflation.
The Reserve Bank was concerned about “second-round inflation effects" from the tax, if unions and workers sought large pay rises to offset it.
The spike in prices was a one-off, as $36 billion of income tax cuts over three years tempered wage demands. Inflation jumped 3.7 per cent in the September quarter, then quickly returned to the Reserve Bank’s 2 to 3 per cent target range.
The inflation fight was helped by a drop-off in activity after the Sydney Olympic Games and slowing in the world economy because of the dotcom sharemarket crash.
Two million businesses registered for an Australian business number, double the original estimate.
Despite complaints from business at the time about the burden of collecting tax revenue for the government and the complexity of business activity statements (which were later simplified), Howard and Costello are adamant the tax improved business administration.
“We drew a lot of businesses out of the black economy," Costello says. “It actually required companies to get accounting assistance and I think there was a big business improvement."
The GST advisory board’s Jordan says accountants detected problems earlier because businesses were forced to look at their accounts quarterly.
“Instead of throwing everything into a shoebox and taking it to an accountant some months after year-end and finding out how you went, your accountants could say your stock levels are too high, your liquidity is ordinary," Jordan says.
Not everyone agrees the compromised GST was the Holy Grail of tax reform.
Hewson says an opportunity for more fundamental reform was missed. “It was an important part of tax reform, but unfortunately the Howard government only did part of what was required," Hewson says.
“The base was not broad enough, the rate was not high enough because you could have abolished payroll tax and stamp duties, and they didn’t restructure personal tax very much."
A decade on, Howard and Costello are satisfied. “It’s something that had to be done and no treasurer had been able to do before me," Costello says. “Howard and Keating had been unable to do it."
Howard says he’s “very proud" of the landmark economic reform. “It’s gone very well and become a fully integrated part of our tax system. I haven’t heard a complaint about the GST for years."
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