In an address to the Sydney Institute on Wed 2.4.2014, Secretary to the Treasury Dr Martin Parkinson spoke about Australia’s current fiscal position and what might be done to address it. He noted that Australia has relatively high reliance on direct taxes as a proportion of revenue raised when compared to other OECD countries.

Dr Parkinson said 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.

However, Dr Parkinson said that, without conscious change, “Australia’s tax mix will move in the opposite direction as personal income tax increases through fiscal drag”. He said Australia 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”. 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, he said. “It is hard to argue that this is either desirable or sustainable.”

In the Secretary’s view, given the pressure to return fiscal drag and to reduce the burden of corporate income tax, “it will be a challenge to maintain the current levels of revenue over the medium-term, let alone the increases required to achieve the budget projections”.

In the past, tax reform has largely been pursued through broadening tax bases as an offset for lowering tax rates, Dr Parkinson said. However, he said a key challenge for the upcoming White Paper on Taxation will be to consider the mix of taxes, “including whether there is a role for a greater contribution from indirect taxes”.