The Turnbull government has released economic modelling showing that increasing the goods and services tax and returning all the proceeds in compensation and personal tax cuts would not improve economic growth at all, as it defends its decision to abandon the idea.



The Treasury modelling calculated a 0% increase in economic growth from increasing the GST from 10% to 15%, broadening it to cover water and sewerage and funding $30bn worth of tax cuts weighted towards middle and high-income earners. The calculations included the cost of the increase in inflation-indexed welfare and pension payments from the one-off increase in inflation caused by the higher GST.

The government did not release the exact tax cuts that were modelled, nor did it release modelling of different scenarios including using some of the money to pay for company tax cuts – which are understood to have shown a small positive impact on economic growth.

But at the same time as it explains the abandonment of “big bang” tax cuts, the government is also trying to keep alive the case for gradual personal tax cuts by releasing separate modelling showing the cost of so-called “bracket creep” – the silent tax increases caused by wage earners moving into higher tax brackets as their pay increases with inflation.

According to a redacted version of a February 1 Treasury ministerial brief on the issue, bracket creep could cost 0.35% of gross domestic product in economic growth over the next four years.

But it warns that this modelling is “indicative at best and care should be taken with its use”.

“This is not an alternative benchmark for the estimates of the economic effects of a tax mix switch provided last week,” it cautions.

It reaches the figure by modelling the economic cost of higher tax rates and subtracting the extra economic activity from the government spending the additional money.

But it also notes “government spending has broader objectives than lifting economic activity. For example, providing an appropriate level of public services such as healthcare has a positive effect on living standards and this is not captured in the modelling.”

While a company tax rate cut might deliver a better economic growth dividend, it is clear that substantial personal tax cuts are needed to meet the government’s benchmark that any tax changes have to be fair.

The modelling also showed that a GST increase flowing to households only via the inflation-adjusted impact on government family, welfare or pension payments would leave 91% of households in the lowest quintile (fifth) of earnings worse off. Half of all households would be worse off.

It includes separate modelling by two private firms – Independent Economics and KPMG – which found the GST/personal tax cuts switch could increase growth by 0.18% and 0.3%.

Last weekend the prime minister confirmed a GST hike to pay for personal tax cuts was off the government’s immediate agenda – and that its new tax plans would be unveiled in the May budget.

“The issue with any changes to the tax system, particularly a really big one like increasing the GST, is that you have to be satisfied that it is actually going to deliver an improvement in GDP growth. In other words, it’s got to drive jobs and growth,” Turnbull told the ABC’s Insiders program. “Unless you can be satisfied that it’s going to do that, and that it’s going to be fair, of course, which is equally important, then you wouldn’t do it.

“I remain to be convinced or be persuaded that a tax mix switch of that kind would actually give us the economic benefit that you’d want in order to do such a big thing.”

The treasurer, Scott Morrison, said he was still intent on delivering tax cuts in the longer term and suggesting ditching the GST option in the pre-election tax package was not his idea.

“You have got to be practical in this business and you have got to make decisions as a team, which I fully support,” he said. “The prime minister leads that team. As he said, the first amongst equals.”

The uncertainty over the government’s tax policy also caused state premiers and chief ministers to cancel a special meeting to discuss tax reform until the Turnbull government gives them some idea of what they should be talking about.