SENATE GST INQUIRY: LABOR FINDINGS
Evidence presented to the committee
contradicted all of the major claims made by the Government. Some of the major
claims are detailed below.
|More jobs from GST||No
jobs from GST, job losses in majority of industry sectors|
system is broken||Tax system is not broken|
|Inflation only 1.9%||Inflation 4-5% when
|Higher GDP figure in ANTS||Treasury
admits this is an assumption only|
pass-on of indirect tax cuts to consumers ||Rejected by ACCC,
|GST is a simple tax||Accountants
admit that GST is complex|
Labor Senators do not necessarily
accept the emphasise placed on particular evidence in the general report
The scope of this first report of the
Select Committee on a New Tax System (ANTS) involves an examination of the economic
theories, assumptions, calculations, projections, estimates and modelling which
underpin the Government's proposed tax changes.
This package of changes
to the tax system (ANTS) involves the introduction of a new 10% GST, associated
indirect tax changes, income tax cuts and changed social security measures.
required reporting date for this first report means the committee has not had
the opportunity to fully evaluate all of the tax proposal measures announced by
the Government. Significant proposals have not yet been introduced into the Parliament
and consequently have not been closely examined by the committee. Examples include
the proposed Wine Equalisation Tax and the precise Commonwealth-State financial
These omissions are major and do not allow a complete report
on the full tax package at this stage. They complicate the task of reporting on
the macroeconomic effects of ANTS. The final report of the committee will address
these outstanding issues.
Is the Tax System Broken?
Government's publicly stated rationale for the ANTS package is that the current
taxation system is `broken' and consequently is in need of fundamental reform.
Whilst it is easy to make such claims, statements like that are meaningless.
In properly evaluating the current taxation system regard should be had
- The primary function of a tax system namely raising sufficient
revenue to meet public expenditure needs;
- The compliance and administrative
costs of the current arrangements;
- The economic efficiency of the current
- The equity of the current arrangements.
current system is providing adequate public revenues as the Commonwealth budget
is in a position of underlying surplus, and the State and Territory budgets are
in aggregate also in surplus.
As the evidence will demonstrate, the ANTS
package will reduce the equity of the tax system, increase the compliance and
administrative costs of the tax system and will yield negligible, if any, gains
to economic efficiency.
Labor has always acknowledged that any tax system
needs constant repair and maintenance to ensure:
- Tax avoidance is
minimised to the maximum possible extent;
- That emerging technologies
can be used to improve and simplify administration and compliance; and
industry development or other social objectives can be met, for example through
This position has been reinforced by the evidence
provided to the committee.
Evaluation of the Evidence
The ANTS documents contain no results of the estimated
macroeconomic effects of the tax reform proposals.
Both before and after
the election on 3 October 1998 the Prime Minister, the Treasurer and other Government
members constantly asserted that the ANTS package would increase economic growth
The committee's terms of reference required it to evaluate
the results of any modelling undertaken, and the advice provided, by the Treasury
which would substantiate these claims.
We were indeed surprised to hear
evidence from Treasury that they had not undertaken any macroeconomic modelling.
The only work commissioned by the Treasury was modelling undertaken by Mr Chris
Murphy of Econtech. This modelling involved the impacts of a revenue switch between
the Wholesale Sales Tax (WST) and a so-called realistic GST. This was not modelling
of the ANTS package and was not mentioned in the ANTS document.
consequently sought the quantitative advice generated by the Treasury to the Government
on the macroeconomic outcomes of ANTS. It was astonishing to be informed that
no such advice existed. In fact, Treasury revealed that the only macroeconomic
advice provided involved qualitative assessments, rather than
any detailed estimates of the effects on employment, unemployment and economic
growth. Treasury further revealed that the GDP figures used in calculating the
so-called growth dividend was simply an assumption .
Treasury essentially admitted that assumptions
are in fact best guesses. 
In view of this
evidence, the claims concerning the macroeconomic impacts of the ANTS package
were unsubstantiated. The committee resolved to undertake independent macroeconomic
modelling in order to test the assertions made in ANTS and to establish a foundation
of independent data from which the macroeconomic effects could be assessed.
committee was assisted in the choice of a suitable economic modeller by the expert
evidence provided by Professor Ken Wallis of the University of Warwick who is
the Director of the Macroeconomic Modelling Bureau of the Economic and Social
Research Council in the United Kingdom.
Professor Wallis, an international
economic modelling authority, advised the committee of suitably qualified Australian
economists in the field of macroeconomic modelling. Professor Wallis said
is a world famous group in Australia at Monash. The intellectual leader is Alan
Powell and Peter Dixon does it. 
On the basis of this independent evidence,
the high quality of Professor Dixon's initial submission and his competitive tender,
the committee resolved to commission Professor Dixon to model the ANTS package
under various scenarios. Professor Dixon's terms of reference appears in appendix
VII of this report.
The Monash Findings (Dixon)
modelling by Professor Dixon presented to the committee was released on 3 February
1999. It showed the Government's claims that the tax package is good for the economy
In evidence to the inquiry, Professor Dixon described the GST
as job destroying. 
The Monash modelling found:
to 100,000 jobs could be lost in the early years of the tax package if wages rise
in response to the higher cost of living from the GST;
- Any jobs that
are created in the early years will be due entirely to the fiscal stimulus associated
with the income tax cuts and not the GST;
- A delay of just one year in
passing on the full savings from reducing some indirect taxes will lead to an
estimated 15,000 job losses;
- Any economic efficiency gains from the tax
package will be negligible even under the most favourable assumptions;
package will cause a small decline in average Australian living standards;
- The existing tax system will collect revenue faster than growth in
GDP, so the need for a GST to meet Australia's future revenue needs has not been
proven by the Government.
These findings refute the Government's
claims about the supposed economic benefits of the GST. Professor Dixon's summary
of his results states,
We find, as in our December paper, that
the Government's proposed tax changes will have little effect on Australia's long-run
If wage earners refuse before-tax wage rates to
fall relative to the CPI, then the package will cause job losses in the short
run, despite the net reduction in taxation. Another short-run risk to employment
is that increases in indirect taxes may be passed on more quickly than reductions.
Finally we should emphasise that no consideration has been given in this report
to the costs of implementation, compliance, administration and rent-seeking. These
should be set against any benefits claimed for the package. 
In addition, Professor Dixon's report produced the only long-run estimates
of the revenue impacts of retaining the current tax system.
ANTS (eg P8) implies that a major change in indirect taxation
is necessary because, without increases in tax rates, the present array of indirect
taxes will raise insufficient revenue in relation to Australia's future public
sector requirements. However ANTS includes no explicit forecasts. We find no evidence
to support the ANTS proposition. 
Professor Dixon's evidence is that the taxation system is not broken.
receipt of this information Labor committee members sought advice from Treasury
through the Senate estimates hearings,  about the
results of formal long-term revenue modelling of the existing tax system undertaken
by them. This information was sought in order to compare Professor Dixon's estimates
with those of the Government.
Treasury revealed it had performed no such
forecasting. Accordingly, no advice has been provided to the Treasurer on which
his extravagant claims could reasonably be based. The absurdity of the Government's
claims were referred to by Professor Dixon when he stated:
at that ANTS document, looking for a substantive argument. `Ramshackle', `1930s',
`Botswana' - this is not economic argument. This is just some sort of lightweight
listened carefully to the Prime Minister and other senior members of the government
and I am still listening, still waiting for them to make their substantial arguments,
to explain to me why the present system is going to fall apart
The Murphy Critique
Mr Chris Murphy of Econtech was
retained by the committee to critique Professor Dixon's work.
appeared before the committee on 5 February 1999 and explained the results of
his earlier modelling of the ANTS package. (Note: This modelling does not include
the proposed business taxation changes contained within ANTS) 
On 29 January 1999 Mr Murphy received
Professor Dixon's report. He was then scheduled to deliver his critique and appear
before the committee on 12 February. As his critique was incomplete, his presentation
on Professors Dixon's report was rescheduled for 15 February 1999.
5pm on Friday 12 February the committee received a document from Mr Murphy which
did not include the last four sections of the final report.
did not receive a complete copy of the critique until Mr Murphy's presentation
had commenced on Monday morning 15 February. The failure to receive the critique
on time prevented adequate preparation for questioning and evaluation of the detail
of Mr Murphy's evidence.
This process also meant that Professor Dixon,
who received the Murphy critique very late on Sunday night, had very little time
to absorb and respond to the points made by Mr Murphy.
These problems were
further exacerbated by the unprecedented walkout by Coalition Senators, thus preventing
detailed questioning of Mr Murphy by Labor committee members.
The modelling undertaken by Mr Murphy was of the
long-term effects (5-10 years) and involved using the most favourable assumptions
to support ANTS.
The key assumption is that there will be no increases
in wages flowing from the introduction of a 10% GST. Mr Murphy maintained that
no wage consequences would arise as a result of the GST, even where price increases
considerably exceed the 1.9% inflation estimate contained in ANTS. His position
was not altered by evidence from the ACTU  and the Shops and Distributive Allied Employees
Association (SDAEA)-  that they would pursue wage
claims to maintain the living standards of their (predominantly low income) members.
The key finding of Mr Murphy's work, agreed to by Professor Dixon, was
that their respective results were consistent. Any economic gains, which only
arise from optimistic assumptions, were negligible.
Unlike Professor Dixon,
Mr Murphy did not model differing wage-response scenarios although he was commissioned
to do so, preferring instead to only consider the optimistic scenario contained
Estimated Change in Living Standards
model (known as MM303) estimated the total welfare gain (ie increased living standards)
from the ANTS package at $607m.
This represents a 40% reduction from the
$1 billion estimate provided by Mr Murphy prior to the election. This reduction
was not acknowledged in Mr Murphy's report and was only bought to public attention
after questioning by Labor members. Further exploration of this important revelation
was prevented by the walkout of Coalition Senators.
The claimed $607m welfare
gain represents only 0.2% (or 1/500th) of consumption expenditure, an insignificant
figure as confirmed to the committee by Professor Dixon. In fact this best case
scenario represents a minuscule 65c per person per week. Furthermore, even if
achieved, this would not be evenly distributed amongst all Australians.
members further note that this is the only figure expressed by Mr Murphy
in dollar terms as opposed to a proportionate measure. The method of presentation
is clearly designed to give the impression of significant benefits from the ANTS
Due to the limitations discussed previously, the committee cannot
provide detailed comments on many issues raised by Mr Murphy's evidence. Accordingly,
the committee will seek to explore these issues further and incorporate the conclusions
in the committee's final report.
We note Professor Dixon's observation
that Now, Chris (Murphy) talked about how he had a chat with the mining
council and that moved him from $1,000m to $600m. I suggest that he go and have
a chat with a few other industries. 
Evidence from the Treasury, Professor
Dixon and Mr Murphy confirms that the GST will not create any jobs. However, significant
job shifting between industries is predicted. Jobs will be lost in the services
sector, mainly in the tourism, agricultural and forestry, housing, personal and
other services and culture and recreational services.
See Chris Murphy's
paper p27, CHART 3.
As the chart shows, even under Mr Murphy's optimistic
assumptions, jobs are lost in 10 out of 17 industry sectors.
that all workers who lose their jobs because of the GST will find alternative
employment in other industries and/or other regions is not credible.
is unrealistic to assume that those who lose their jobs in the services sector
(eg tourism), will pick up work in the mining or manufacturing sectors. The absence
of any resources in the tax package for re-skilling or other retraining initiatives,
relocation assistance or regional development initiatives to assist dislocated
workers, their families or their communities demonstrates that this assumption
is totally implausible.
The committee notes that these real world considerations
are ignored by the long-term modelling undertaken by Mr Murphy. His report contrasts
the Monash model with his own MM303 model. As he states, The most important
way in which the Monash model extends the original ORANI model is by introducing
a time dimension. Instead of making the long-term assumption that capital stocks
and the labour market are in equilibrium, the Monash model aims to track the year-by-year
adjustment of capital stocks and wages towards equilibrium. Mr Murphy
continued, By showing estimates of the adjustment process, they may provide
a guide to the transitional costs in moving from the existing tax system to ANTS.
By contrast Mr Murphy admits that his
estimates how ANTS changes the shape of the economy in the
long run, but does not explicitly model the time path over which these changes
The committee considers
that any realistic assessment of the likely impacts of the GST must focus on the
plausible real world impacts, rather than the theoretical long-term results which
ignore the social and economic costs which will eventuate.
totally reject the justification for not considering the transitional costs of
ANTS provided by Mr Murphy Transitional costs are not one of the three
principles for the good design of a tax system
In addition, significant aggregate job
losses will occur if any wage increases occur in response to the inequity of the
The job losses will not be evenly distributed throughout Australia.
Queensland, Tasmania and the ACT will lose jobs. 
Tasmania, which already suffers from the
highest unemployment rate in Australia, will be particularly hard hit. The loss
of 1000 jobs, as predicted by Mr Murphy, will have a devastating effect on the
Given the geographical distribution of jobs, particularly
in the tourism and agricultural and forestry industries, other regional areas
of Australia will be similarly disadvantaged. No amount of so-called `compensation'
will be adequate to offset these severe regional impacts.
completely reject Mr Murphy's view that
the fact that employment
is marginally lower in some states is hardly even relevant in assessing whether
a policy is good or bad. 
report criticises Professor Dixon because he ..adopts the misplaced popularist
notion that there are winners and losers from ANTS. 
The committee is perplexed by this comment as Mr Murphy's own modelling identifies
47,000 job losses across various industry sectors ,
thereby demonstrating there are many losers from the ANTS package.
The ANTS document claims an inflation impact of 1.9%. This
is a misleading figure. Evidence provided to the committee by Treasury revealed
that the true Treasury estimate of the initial inflation effect of the GST is
3.1%. Even this figure significantly understates the real effect that will occur
in year one of the GST as it assume that all of the proposed indirect tax cuts
will be immediately and fully passed on to consumers.
The real inflation
effect in year one will be at least 4-5% based on the evidence provided to the
committee. No credible witness seriously argued that an immediate full pass-on
of all the indirect tax cuts will occur. The National Farmer's Federation (NFF)
response to the question as to whether its' members will pocket some of the gains
was typical of most industry comment. As Mr Donges of the NFF stated, Farmers
are no different to any other businessmen. If there is a possibility that they
can claim some of the profits in the system, then no doubt they will.
Treasury admitted that the pass-through
will not be immediate and will vary between industries.  Mr Murphy confirmed that the cost savings from
capital replacement will only flow through to consumers as the capital stock is
replaced over many years. As he said, With respect to capital business
inputs, as you point out, they will only realise the cost savings over time as
equipment is replaced.. 
The Road Transport Forum also agreed that
some of their members would seek to retain some cost savings.  In addition, Mr Claugton of the Australian Society
of CPA's stated I do think anyone could guarantee 100% pass on.
Mr Hank Spier of the ACCC, the expert
body that monitors actual business practices in the real world, testified that
he could not name one perfectly competitive industry. By contrast, Mr Spier was
able to name a litany of industries that have been involved in anti-competitive
behaviour.  This real world evidence refutes the absurd Government
assumption that all cost savings will be reflected in lower consumer prices immediately.
Indeed, Dr Ken Henry, chairman of the Treasury Taskforce that developed
ANTS, when asked whether some of the reduction in WST will be taken as profit
said, I am not saying that will not happen. 
The second reason why the inflation impact will be higher than officially
claimed arises because the economic models relied upon by the Government (PRISMOD,
MM303) also assume that there will be no compliance costs to business either in
establishment costs in preparing for the GST or for its ongoing administration.
The extent of the establishment costs is not estimated by the Government,
but will amount to several billion dollars. The $500m allocated by the Government
to offset this is manifestly inadequate.
In addition, the Government's
own Regulation Impact Statement on the GST legislation admits that the estimated
second-year GST compliance cost to business will be $2 billion. Canadian experience
suggests year two costs will be 25% lower than year one costs. 
This implies year one costs for Australian business of around $2.7 billion.
real world costs will either be passed onto consumers, thereby increasing the
estimated inflation effect, or they will reduce business margins leading to job
Another reason why the actual inflation outcome will be higher
than the Government's estimate is because the transitional provisions relating
to cars and trucks deny business a GST credit for vehicles purchased in year one.
Only half of the GST will be available as an input credit for purchases made in
year two. This means that much of the estimated reduction in transport costs will
not occur in the short term.
Furthermore, no inflationary impact was factored
in by Treasury arising from the fiscal stimulus provided by the package. 
Access Economics, has estimated that this effect will add around 0.5% to inflation
in year one. 
All the evidence provided
to the committee disproves the Government's claim that the inflation effect will
only be 1.9%. The real impact will be at least 4-5%.
Impact on National
The committee also notes evidence provided by Treasury
to the Senate Estimates committee on 11 Feb 1999 confirmed that no modelling of
the effect of ANTS on national savings has been undertaken. This continues the
disturbing trend and failure by the Government to adequately investigate the economic
effects of the tax package.
The Complexity of the GST
Australian Society of CPA's, indisputable expert in the area of taxation compliance
and administration, admitted Even a `simple' GST such as that in New
Zealand is relatively complex
- see the GST guide from New Zealand as an
conclude the proposed GST legislation before the committee has more items subject
to zero rating and input taxing and is consequently more complex than the New
Summary of Findings
Because of the tight
reporting timeframe, the committee was unable to thoroughly examine the underpinnings
of the economic theories, assumptions, calculations, projections, estimates and
modelling which relating to the Government's proposed taxation reforms.
well, Hansards of evidence given up to ten days before the deadline for this report
were not available at the time of writing. This has hampered a comprehensive tabulation
of all of the evidence and therefore the writing of this analysis and conclusions.
However, what is presented is properly substantiated.
The substantial evidence
provided to the committee leads to the inevitable conclusion that the Government's
claims concerning the tax package:
- Are not sustained by any research
undertaken by the Treasury;
- Have not been independently verified;
not take into account the real world transitional social and economic effects;
- Involve unrealistic assumptions about the competitiveness of the Australian
economy leading to the assumption that all proposed indirect tax reductions will
be immediately passed on to consumers;
- Assume no wage pressure in the
economy despite the true inflationary impact of the GST being at least 4-5% rather
than 1.9% contained in the ANTS document; and
- Are incorrect in claiming
no short-term job losses despite the evidence to the contrary from independent
Put simply these claims are not credible, and
have been shown to be so.
Senator Peter Cook Senator Stephen Conroy
Senator Nick Sherry
ALP ALP ALP
Treasury, Hansard, 17 Dec 98, P11
 Professor Wallis, Hansard, 7
Dec 98, P6
 Dixon, Hansard, 3 Feb 99 P527
Dixon Report to Select Committee, 25 Jan 1999, P24
 Senate Economics Legislation Committee,
11 Feb 99
 Dixon, Hansard, 3 Feb 99, P551
 Murphy, Hansard, % Feb 99 (Hansard
1st strike P16)
 ACTU, Hansard, 4 Feb 99,
 SDAEA, Hansard, 2 Feb 99, P394-413
 The Australian, 16 Feb 99, P2
Murphy critique, P9
Murphy critique P9
 Murphy Op.cit, Chart
5 P 32
 Murphy, Hansard, 5 Feb 99
Murphy critique P24
 Murphy Op.cit P27,28
 Donges, Hansard 28 Jan 99, P248
Treasury, Hansard 17 Dec 98, P66
Hansard, 5 Feb 99, (Hansard 1st strike P43)
Higginson, Hansard, 28 Jan 99, P349
Hansard, 3 Feb 99, P580
 Hansard of 11 Feb
99, as yet unavailable
 Treasury, Op.cit
17 Dec 98, P65.
 Treasury, Regulation Impact
 Treasury, Hansard, 28 Jan 1999,
 AAP Report, 22 Jan 99, 18.05PM
Submission No 205, P1