What’s wrong with GST?

By Grace Ormsby

July 09 2020
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Australia’s tax system was ill-equipped to support a growing economy even before the COVID-19 crisis hit, which is why Australia’s GST system is in need of a complete overhaul, a consultancy firm has said.

The analysis is contained in a new report from consultancy giant PwC, How GST reform can help reboot prosperity for Australia, which flagged a number of structural factors, including an over-reliance on personal and corporate taxes, as contributing to Australia’s economic woes.

It argued that a more efficient tax system will be necessary for long-term economic recovery and budget repair “once the impacts on the economy of the pandemic have eased and reform of consumption tax is a clear option for investigation”.

According to the firm’s chief economist, Jeremy Thorpe, GST is “underperforming” in Australia.

He flagged that GST collections in 2018-19 as a proportion of all Commonwealth taxation revenue were at their lowest level since the levy was first introduced in 2001.

“Australia’s GST collections have also not kept pace with the overall rate of growth in the economy, in part because people are spending a higher proportion of their income on areas that are currently exempt, including housing, healthcare and education,” he added.

He then noted that “our GST rate of 10 per cent is one of the lowest among developed economies, and even at 12.5 per cent, would still be well below the OECD average of 19.3 per cent”.

In a properly structured reform package, Mr Thorpe said, “GST expansion should lead to higher economic growth.”

A revenue-neutral switch from less efficient taxes (principally income taxes) to consumption taxes can increase GDP, while a 1 per cent tax switch can generate somewhere in the order of 0.25 per cent to 1 per cent in extra GDP in the long run, the economist explained.

Also weighing in was PwC tax partner Paul Abbey, who considered that “the reality is that meaningful tax reform, including state and territory taxes, can only be achieved by tackling either the GST rate or its exemptions”.

He argued that GST reform could help reduce Australia’s reliance on personal income tax, “which is currently more than twice the OECD average”.

Acknowledging that discussions around GST changes have been “contentious to date”, PwC argued that reform can be possible without adversely impacting the overall equity of Australian communities.

The PwC report considered a number of scenarios as to how the GST system could be overhauled:

A broadening of the GST base to cover five currently GST-exempt main categories – water and sewerage, childcare, health, education and food;
An increase of the rate to 12.5 per cent without broadening the base;
A broadening of the GST base and an increase of the GST rate to 12.5 per cent; and
A tiered system to base current exemption items at 5 per cent, and increasing the rate on the current base to 12.5 per cent.

After modelling each scenario, PwC showed how revenue gains of $14 billion could be made by increasing the rate to 12.5 per cent but retaining the five main exemptions.

A revenue improvement of $40 billion could occur where the GST rate rises to 12.5 per cent and is coupled with a broadening of the base of goods and services covered.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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