But this recession is different to 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 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 value added tax) from 17.5% to 15% for a year in a measure judged a success.
Australia baulked 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.
- ^ September (theconversation.com)
- ^ infrastructure (theconversation.com)
- ^ residential construction (theconversation.com)
- ^ The charts that show coronavirus pushing up to a quarter of the workforce out of work (theconversation.com)
- ^ poorest households (taxpolicy.crawford.anu.edu.au)
- ^ instant asset write-off (ministers.treasury.gov.au)
- ^ judged a success (www.ifs.org.uk)
- ^ again (www.theguardian.com)
- ^ done it (www.theguardian.com)
- ^ Cutting unemployment will require an extra $70 to $90 billion in stimulus. Here’s why (theconversation.com)
- ^ July 23 (ministers.treasury.gov.au)
- ^ October 6 (ministers.treasury.gov.au)
Authors: Isaac Gross, Lecturer in Economics, Monash University