A revenue debate has been sparked after Federal Treasury boss Martin Parkinson called for a rise in the GST and said “hard decisions” must be made about the upcoming federal budget.

Just weeks out from Treasurer Joe Hockey’s first budget, Dr Parkinson told a conference at the Sydney Institute that government revenues could not “magically” return to the levels seen prior to the 2008-2009 global financial crisis.

Dr Parkinson said GST should be applied to more areas of expenditure, such as health care and also suggested fuel excise should be indexed – something former prime minister John Howard froze indefinitely in 2001.

He said without changes, government revenue would increasingly rely on personal income tax, which is less efficient than consumption-based taxes.

“We will move even further in this direction if, as we anticipate, the relative share of total indirect taxes, including GST, continues its long-term decline,” he said.

“Contributing to this decline is the non-indexation of fuel excise, unlike other excise rates, and a rising proportion of consumption outside the GST net, for example, in increased health expenditure. It is hard to argue that this is either desirable or sustainable.

“Continued increases in the personal income tax burden will hit lower and middle income earners with higher marginal and average tax rates. This will have adverse labour force participation impacts, while sharpening incentives for tax minimisation by higher income earners,” Dr Parkinson said.

Prime Minister Tony Abbott, who has ordered a review of Australia’s tax system, promised last year that there would be no increase to GST under a Coalition Government.

But Dr Parkinson said the White Paper on tax would need to consider “whether there is a role for a greater contribution from indirect taxes”, such as GST.

“Any meaningful tax reform is also likely to require changes to the proportion of tax collected by different levels of government in Australia, with consequences for the imbalance between state government spending and taxing, as well as for transfers between the states,” he said.

“That’s why the Government has placed so much emphasis on the Tax White Paper and the White Paper on the Federation being developed in a highly integrated fashion, and with a close eye on previous reviews.”

Dr Parkinson said Australia’s reliance on direct and indirect taxes, as well as income taxes, has “changed little since the 1950s”.

“Research consistently says that reduced reliance on income taxes and increased reliance on other, more efficient sources of revenue, including indirect taxes, can support higher growth and higher living standards by increasing workforce participation and lifting productivity,” he said.

“Such a shift in Australia’s tax mix could also be achieved by lowering income taxes – offset by lowering spending – and leaving other taxes unchanged.”

Don’t rely on growth

Dr Parkinson said it was widely known that the National Disability Insurance Scheme will cost the Commonwealth about $64.5 billion over the next decade, but less understood were the strong growth in health and pension payments over the same timeframe.

He said Australia’s productivity growth had also seen a marked deterioration since around the turn of the century and was now negative.

To improve Australia’s competitiveness it must improve its productivity growth performance through investing in skills and infrastructure, as well as firms and employees being free from unnecessary regulatory burdens, he said.

“Competing on the global stage does not mean driving down wages or trading off our standard of living. Far from it,” he said.

However, Australia, like other countries, would face pressure to reduce the company tax rate to maintain competitiveness.

Dr Parkinson to stay in the job

Mr Abbott announced on the day he was sworn in last year that Dr Parkinson would be leaving his role after the May budget.

However, Treasurer Joe Hockey was keen for Dr Parkinson to continue in the job.

The ABC has been told Mr Abbott has agreed to Mr Hockey’s request and asked Dr Parkinson to remain as Treasury head until after the G20 meetings in November.

-with ABC and AAP