Australian politics hung up on new taxes

By Belinda Goldsmith

CANBERRA (Reuters): For most people talk of tax reform usually stops a conversation as fast as the pursuit of trainspotting.

But Australian politicians can't stop delving into every nook and cranny of a wide-sweeping package of tax reforms due to take effect on July 1.

The reforms, touted as the biggest tax overhaul in Australian history, are a risky venture by the country's conservative coalition government, which is running neck and neck with the Labor opposition in current opinion polls.

For after 30 years of on-off debate, Australia is finally adopting a goods and services tax (GST) of 10 percent to replace a higher existing wholesale sales tax, while reducing income taxes and introducing a range of changes to business taxation.

The changes have caused widespread nervousness in the business community and remain largely misunderstood by the country's 19 million people -- despite the government's promise that no one will be worse off under the new tax system.

"It has to be expected with such an enormous change that there is going to be some nervousness," Prime Minister John Howard told reporters.

"It's risky, it's unpopular, it's bound to upset some people, but it's good for Australia and that's why we've done it," said Howard, whose government has a six-seat majority.

The lead-up to the tax overhaul has been full of public debate over the GST's impact on prices of individual items with beer, tampons, and caravan park sites key talking points.

This detailed nit-picking has done nothing to clear up the confusion over the changes or encourage the public to listen more closely to the facts about what will happen next month.

A recent survey by the Melbourne Institute found consumers remained baffled, with about 60 percent of 1,200 households questioned underestimating the compensation from income tax cuts and overestimating likely price rises from the GST.

"The ongoing uncertainty and misinformation among consumers...may reflect the lateness and inadequacy of the government's information campaign," the institute concluded.

To win public support and clarify the tax reforms, the Liberal/National Party government has embarked on a major advertising and promotion campaign.

But the A$431 million (US$260 million) campaign, has failed to hit the mark and just caused more controversy -- fueling negative sentiment among voters and cries from the opposition of using taxpayers' money for political campaigning.

Television ads set to the soundtrack of raspy British rocker Joe Cocker's song Unchain My Heart rather obscurely feature a number of Australians with chains falling off their bodies after the GST's launch.

"The GST ads are more in the propaganda area than showing what a difference the new tax will make to a person's life," said Warren Brown, a partner of Sydney advertising agency Brown Melhuish Fishlock. "It's a feel-good campaign for the government."

The government's hard-sell suffered a further blow when the national solicitor-general ruled it was illegal to use electoral roll details for a planned A$10 million mailout of a letter about the GST from Howard to every voter in the country.

The mailout must now be pulped and Labor has demanded that Howard's Liberal Party, and not the taxpayer, cover all costs.

The GST will increase prices on many goods and services, bar most foods and a narrow range of services, with exemptions a primary focus on the parliament floor and in the Australian media.

To counterbalance these charges, the government is cutting income taxes by A$12 billion and increasing payments to welfare recipients and old-age pensioners.

On the business front, over the next 12 months the government will cut the level of company tax to 30 percent from 36 percent and change the structure and rate of capital gains taxation to make Australia more attractive internationally.

Politically, the new tax regime is a hurdle that the government has to overcome before heading to the polls next year when its current three-year term expires on Nov. 9.

It has to smooth over the widening gaps between the coalition partners -- the Liberals and the rural-based National Party -- with the Nationals Members of Parliament under fire from voters over the GST.

The next tax regime has dented business and consumer confidence, casting a shadow over growth forecasts for the coming financial year. The government has estimated the GST will add 3.75 percent to inflation in the September quarter.

Several surveys released this month showed business jitters over the GST were fueling expectations of a deterioration in economic activity amid fresh evidence that many executives have failed to fully prepare for the new tax system.

The June quarter survey of NSW Manufacturing revealed profit expectations had dropped to their lowest in nine years as a result of the hesitancy and uncertainty surrounding the GST.

A survey by business information group Dun and Bradstreet found more than 50 percent of business executives were not fully prepared for the tax change.

The Australian Chamber of Commerce and Industry (ACCI)/Westpac quarterly survey of industrial trends found a sharp drop in business confidence in the second quarter of 2000 amid concerns about the GST and rising interest rates.

But despite the uncertainty and public unpopularity, many economists and business groups are in favor of the tax reforms. Even Labor has no plans to scrap the GST if it does win power.

The ACCI is a firm backer of the new system, which it said would make the economy more efficient, competitive and attractive to international players.

"The sharp decline in business confidence is disappointing but most likely represents a once-off sharp dip caused by short-term uncertainties associated with major domestic and global changes rather than an emerging downward trend," ACCI chief executive Mark Paterson said in a statement.