THE PRESS WEDNESDAY, MAY 8, 1985. Who gains from GST?

Press, 8 May 1985, Page 20

THE PRESS WEDNESDAY, MAY 8, 1985. Who gains from GST?

The old question of who stands to gain is one that the Government must answer now in some detail. Opponents of the goods and services tax, many of them within the Labour Party, are sowing seeds of doubt in the public’s mind about the wisdom and fairness of the proposed tax. The Government has been able to avert rejection of its proposal by regional conferences of the party, but the contest between proponents of the tax and its detractors within the party has been close run. In wider forums,. outside the Labour Party’s direct influence, the arguments against the tax seem to be gaining ground. In large measure this is because the Government’s spokesmen have yet to provide substance to their generalised promises that the GST will enable direct reductions in income tax. By default, the Government had left the way clear for opponents of the tax to play on the fears of taxpayers that the introduction of the GST is likely to prove an additional burden of taxation, rather than a change in the way the same or a similar amount of tax is collected. Last week, the Minister of Finance, Mr Douglas, rejected speculation that some of the GST proceeds would be used to reduce the internal deficit.

This is well and good; and the implication is that all the revenue will be used to diminish the rate of income tax or to provide benefits to some. Still, supporters and opponents of the tax alike have been left in the dark as to the shape of reform favoured by the Government. Even the level at which the GST will be struck remains unsettled; the earlier talk of 8 per cent and 9 per cent calculations with which the public was softened-up for the introduction of the GST has given way to references to a GST of almost twice that amount. The lack of such information makes the Government’s desired consensus on the issue impossible, and makes debate on the merits of the proposal very difficult.

A simple and immediate example for almost every household is what will happen to the food bill. At a time when the consumers price index discloses rapidly increasing inflation, and the cost of food to be an important contributor to that inflation, the difference between a GST of, say, 10 per cent and a tax of 15 per cent will have a big impact on family budgets. Mr Douglas has given some

broad outlines of how reduced income tax and increased welfare benefits made possible by the revenue from the GST could benefit groups of income-earners. He has stopped short, however, of confirming which group or groups the Government intends to favour most.

Mr Douglas can hardly be expected to spell out his next Budget at this stage. This should not prevent him and his Cabinet colleagues being a little more precise than they have been in their statements about what is intended for GST. The annual conference of the Federation of Labour this week will consider a remit calling on the Government to abandon its GST proposals. The fate of the remit is unlikely to have any bearing on the introduction of the GST. A goods and services tax is the linchpin of the Government’s taxation policy and the Government shows no sign of bowing to union pressure on the matter. Nevertheless, wage demands will be bound to influence Government thinking on going further than merely compensating for the price increases from GST. If income tax relief and welfare benefits go far towards being a substitute for wage increases, the result will amount to a subsidy on wages. This may be socially just, particularly as an interim measure; but the Government will want to avoid being accused of replacing the production incentives of the past by consumption subsidies in the future on a large proportion of the workforce.

The real problem for the Government is that the sometimes vociferous criticism of the GST from within the union movement threatens to disrupt the next wage round. Unless Mr Douglas and his colleagues can convince the doubting Thomases that the GST will mean significant tax relief for most of the workforce, militant unions are likely to stick out for highly inflationary wage settlements simply to recover the ground that they fear the GST and other inflation will cost them. The scepticism of some union leaders is shared by many in the community. Government Ministers have had to pull out all the stops to persuade regional conferences of the Labour Party to go along with the GST in the meantime. No less an effort is needed to convince a wider audience of taxpayers that the GST will be translated into a bigger discretionary income for more than just a few.