It appears inevitable that sooner or later the GST rate in Australia will increase, despite the current disjointed and highly politicised tax debate.
When this happens, who will be hit the hardest? Which social-economic group will lose the most when the GST rate gets hiked to 15 per cent?
The Australian Council of Social Services recently made a claim that the change would have the biggest impact on low and modest income earners. However, they have used an incomplete model, distorting their findings.
Under ACOSS modelling, an increase to 15 per cent would mean people in the lowest 20 per cent income bracket will have their spending power diminished by seven per cent.
What ACOSS didn’t say was that the Prime Minister has already undertook to compensate lower income households, and it would be political suicide not to do so.
But, if the lowest paid Australians won’t be hit, who will be?
Obviously, any increase in GST, and potentially broadening of its base, will result in more tax being collected. If the tax derived from low income earners gets returned to them via a compensation mechanism, it follows that everyone else will will be out of pocket. But, by how much?
If the extra revenue leads to the reduction of company taxes (as hinted by the Prime Minister) this would result in higher financial returns for most companies, and increases in dividends. The first would benefit the entire economy but the latter would specifically benefit shareholders.
This shows us what ACOSS got wrong – it will be the middle income earners who will be hit the hardest. Not only will they pay extra GST without compensation, but they usually don’t own shares either.
The fallout of this will be a reduction in discretionary spending within the middle class stratum – a crucial element propelling the specialty retail sector. This means that we can expect specialty retailers to take a knock.
Without prompt strategic action, many retailers will find themselves in a tricky position when the GST squeeze arrives. Suggested preparations include improvements of internal processes, strengthening of merchandise offer, and elimination of business rituals and financial waste.
The above foundational reinforcements must be underpinned by smart investments in IT, to achieve solid outcomes without big capital commitments. For example, real-time unified eCommerce has become essential to grow customer reach and revenue.
As usual in such trying circumstances, the weakest businesses will collapse, but the good ones will flourish. Forewarned is forearmed.