Cut the GST

Ages ago I suggested we think about a temporary cut in the GST to provide an economic stimulus. The UK did a similar thing but I was still called crazy for suggesting it here. And so I was delighted to read the front page of The Age today:

In the latest proposal to revive the economy, Reserve Bank board member and Australian National University economist Warwick McKibbin has suggested slashing the GST from 10 to 5 per cent until February next year.

“The December stimulus payments didn’t have much impact,” Professor McKibbin said. “The spending wasn’t directed at the right things.

“We know that when the GST was introduced, people increased their spending ahead of time and then cut it afterwards. The trick would be to get people to bring their spending forward again but to get income tax cuts coming in the future so that they don’t cut their spending too much when the GST goes up.”

Unlike myself, Warwick really knows about such things. As the days go by, it starts to look better and better.

6 thoughts on “Cut the GST”

  1. Any idea of “cost” (in terms of foregone tax revenue) for the Federal government?

    It does strike me as a bit of a “no brainer”, with the added bonus of being much less  discriminatory than the previous stimulus attempt (speaking as  non-parent, non-pensioner who would have loved $1500 to spend on CDs, an iPhone, wine and some fancy microbrews)

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  2. Problem is I don’t think it will work!! See my blog. I’m not sure that price falls will induce consumers to spend more in the current environment. If the tax cut is temporary it may have the right impact, as consumers would know that prices would rise in future. But what if you announce a cut to the GST for 12 months. People just defer spending until the 12 months is almost up, and then spend. If the economy has not recovered in 12 months, it would be mad to raise the GST…so you defer the tax cuts, and consumers defer spending. Japan’s period of deflation in the 1990s provides some lessons on how this works – and also how difficult the current environment might get.  Consumers are very unlikely to spend more in the current uncertain global and local environment.

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  3. Sure would keep small-town accountants and MYOB in business! What an admin nightmare.

    Couldn’t we cut payroll taxes instead?

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  4. All this will do is increase consumption leading to February ’10, then we’ll get the equalling lack of consumption after that time.

    Borrow now, pay later.  People spend on what they percieve as their permenant income, not temporary. 

    A perminent reduction would make a difference.  Very unlikely however.

    We have repeated examples of temporary stimulus failing.  Why do we have to keep making the same mistake? 

    Tax revenues are already in the middle of a freefall after tripping of a cliff.  

    Is decreasing income (tax less) whilst  spending more the prevailing theory of the times?  There’s only one place where that theory can head to.

    The private sector tried it, now the governments are having their turn.

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