"The fact is, an increase in the GST is not tax reform, it is tax penury - there is nothing reformist about it," he writes. Former Prime Minister Paul Keating in his offices in Potts Point. Credit:Nic Walker Mr Keating's comments are a slap-down to the Turnbull Government, which is eyeing the estimated $33 billion in new revenue each year for multiple purposes, including electorally popular tax cuts in its election platform. But they will also cause some heartache for Labor leader Bill Shorten, who has taken a never-ever approach to GST expansion despite pressure from some in his party, including South Australian Premier Jay Weatherill. Mr Keating, a former Labor prime minister and long-time treasurer under Bob Hawke, is regarded in Labor circles as an economic policy reformer without peer. He describes the widely speculated 50 per cent rise to 15 cents in the dollar as a "flat, bang-you-over-the-head tax", which changes nothing, and alters no behaviour other than to put the tax weight on to the wrong people. But unlike Labor federally, and the position being put by Mr Weatherill and other premiers, Mr Keating believes the object of fiscal policy now must be to reduce spending dramatically, declaring the world had "trimmed" Australia's income and its spending must comply.

"The big falls in commodity prices mean that Australia's income has been cut. Malcolm Turnbull was right in 2005 when he said Australia's tax system enabled tax avoidance. Credit:Rob Homer "We cannot pretend we can go on spending as though nothing has happened. "The world has trimmed us down – we now have to trim ourselves down, trim our spending and not accommodate more of it by ever more taxation." However, he leaves room for a GST perhaps as high as 12 per cent if additional revenue is directed to hospitals exclusively, or "hypothecated".

"If say, an extra one or even two percentage points of GST were levied, purely and simply to fund public hospitals and was hypothecated to that sole purpose, one could at least defend such an increase," Mr Keating wrote exclusively for Fairfax Media on Wednesday. While Mr Keating, a one-time advocate of a broad-based 12.5 per cent consumption tax in 1985 in his famous "option C" reform package, acknowledged the health funding shortfall or "fiscal cliff" facing the states, he believes simply increasing the GST to cover Canberra's structural revenue deficit ignores the fact that overall spending is too high. "Premiers such as Mike Baird and Jay Weatherill have argued that the cuts to health funding in the 2014 Hockey budget and still afoot, will pull down health provision in the public hospital system – and they are right," he said, describing the condition and availability of public hospitals as "an important part of the social contract". "But the remedy might be to hypothecate a modest increase in the GST to hospitals – and only to hospitals, with back-up agreements between the Commonwealth and the states to guarantee the expenditure. At least people would know where the money is going and why." But as Treasurer Scott Morrison and Prime Minister Malcolm Turnbull draw comfort from Mr Keating's differences with Mr Shorten, they will note his main argument offers no support for a significantly bigger GST nor for a lower top-income bracket and company tax rates.

"Were the public to agree to now give the political system such a load of money, the political system will simply go and spend it ... to simply give the Commonwealth cabinet; any cabinet, another $30 billion to spend at its discretion, is fiscal folly in the extreme," Mr Keating said. "And worse to spend it reducing the company tax rate and the top marginal rate. The tax debate is occurring in an atmosphere charged with election speculation with Mr Turnbull telling MPs the option of an early double-dissolution election remains in play. But while the government moved on Tuesday to add another trigger to the one it already has in place for a snap poll, by re-introducing a rejected bill to create the building and construction watchdog, the ABCC, in reality, the chances of a double dissolution remain low, even leaving aside the apparent confusion over tax reform in which Mr Morrison is only now embarking on direct departmental consultation with backbench Coalition MPs. As well as numerous logistical and funding arguments against an early poll, the absence of proposed Senate voting reforms means even more micro-parties and independents would be elected in a full Senate election. The Prime Minister's comments are thus being seen more as sabre-rattling than genuine intent.

Mr Turnbull assured colleagues in Canberra on Tuesday that the government has decided on nothing so far but several MPs and ministers have revealed they expect the Cabinet to eventually settle on a package that does include a significant GST rise, to make up for a lower company tax rate of 25 cents, and lower income tax rates to return bracket creep increases as inflation put earnings into higher marginal rates. It is expected that some of the money raised would also be available for compensation to address the disproportionately high impact of a GST rise on the lowest paid. Other options for reform are the so-called tax expenditures: the tens of billions of dollars foregone in tax breaks, which effectively subsidise superannuation, investment properties through negative gearing, and capital gains tax concessions. In a speech to the National Press Club on Wednesday, the Minister for Small Business and Assistant Treasurer, Kelly O'Dwyer, will announce plans to introduce new flexibilities into the superannuation sector over the next 12 months. With James Massola