Friday, January 30, 2009

Why not halve the rate of GST?

It'd cost, say $24 billion

One of the most senior members of the Reserve Bank board has declared the government's $8.7 billion December stimulus package ineffective and proposed instead halving the rate of GST.

Professor Warwick McKibbin of the Australian National University, a leading economic modeler and a member of the Reserve Bank board since 2001 has told The Age he would recommend slashing the Goods and Services Tax from 10 per cent to 5 per cent and holding it there for a year.

"The December stimulus payments didn't have much impact, the spending wasn't directed at the right things," he said. "The next package needs to be much more clearly focused."

"We know that when the GST was introduced people increased their spending ahead of time and then cut it afterwards."

"The trick would be to get people to bring their spending forward again but to get income tax cuts coming in the future so that they don't cut their spending too much when the GST goes up"...

Professor McKibben has also endorsed big increases in infrastructure spending, as well as the personal income tax cuts that would help maintain spending as the GST rate returned to 10 per cent.

He said that as a member of the Reserve Bank board he was unable to talk about monetary policy.

The Reserve Bank of New Zealand yesterday slashed its official cash rate by a further 1.50 percentage points to a new record low of 3.50 per cent.

The ANZ said it expected Australia's Reserve Bank to roughly halve its cash rate from 4.25 per cent to an all-time low of 2.50 per cent this year, beginning with a cut of 0.75 points at its meeting next Tuesday.

Professor McKibbin said he believed it would be possible to cut the GST rate even though by law such a change had to be approved by each of the states.

"The state governments are set to get a pay off in Commonwealth infrastructure spending, right? So on the one hand you would be taking away a fair chunk of their revenue, but on the other hand you would be handing them money."

"It would be a trade-off. There's no reason why you couldn't get around the politics of it, although it is certainbly not what the state premiers are thinking of."