Calls grow to hike GST rate from 10% to 15%

The Grattan Institute’s Budget Reboot: How to fund Australia’s future report said the federal government should lift the GST rate from 10 per cent to 15 per cent as it would raise around $76 billion a year in additional tax revenue. It also urged the government to broaden the GST to cover all food.

“Australia needs better revenue sources to pay for essential services, and pay down our growing public debt. The best tool available is an expanded GST,” the report said.

“But any increase to the GST needs to overcome two challenges. First, increases to consumption taxes disproportionately impact low-income households. Second, while the GST is levied by the federal government, it is the states that get the benefits of any additional revenue.”

Its stated rationale for the recommendations is that it would shift the tax mix towards more efficient consumption tax, and provide a stable revenue source to fund future budget repair.

Moreover, a higher GST rate would bring Australia closer in line with peer economies, and simplify a “complex and poorly targeted set of exemptions”, the Grattan Institute said.

However, it noted that a 15 per cent rate would still be modest by international standards and below the OECD average.

The Grattan Institute said raising the rate would be relatively simple as it would not require governments to refine the GST base, which businesses collect the tax, or redesign the system of input tax credits.

“Existing compliance systems would remain in place. Businesses would simply collect more GST on taxable sales,” the report said.

While acknowledging that including food would bump up everyday costs for lower-income households because they spend a larger share of their budgets on food, targeted compensation would be a more economical way to protect those households than the current exemptions, the report said.

Raising the rate to 15 per cent on the current GST base would generate around $57 billion a year, while including all food would raise about $19 billion a year, according to the Grattan Institute.

The Grattan Institute’s report also argued that the GST is subject to a range of exemptions linked to food, healthcare, education, and other services, and as such, only covers about three-fifths of household consumption.

While the justification for these exemptions is typically that they protect low-income households, or encourage other socially valuable spending, the report dismissed these arguments, stating that neither of them “stack up”.

“GST exemptions are a blunt and poorly-targeted way to support low-income households, because they vary based on what people buy, not their capacity to pay,” the report said.

Benefits from GST exemptions trickle beyond the low-income households governments most want to support, and instead, more than half of the benefit goes to those in the top 40 per cent of household incomes.

While GST exemptions for food are also sometimes justified on public health grounds (particularly because fresh fruit and vegetables are GST-free), many less healthy products are also tax-free. The difference between taxed and untaxed goods is dependent on how a product is produced, classified, and sold, rather than its health impacts.

The report noted that current GST exemptions for food cost twice as much as governments spend on public health.

“Where products create substantial health costs, governments should target those harms directly through taxes and regulations. Together, these policies could mean healthier Australians, as well as healthier budgets,” the report said.

The Grattan Institute recommended that out of the revenue raised through the increased GST rate, $58 billion should be spent on income tax cuts, and a boost to welfare payments for low-income households.

“The remainder should go to the states, enabling them to shore up their budgets and better fund their own much-needed economic reforms,” the report said.

It recommended that the revenue should be used to fund a “tax-and-transfer” reform package, including boosting working-age welfare payments such as JobSeeker and Youth Allowance by 20 per cent, and the rate of Commonwealth Rent Assistance by 50 per cent, along with boosting pension and family payments.

It also suggested that the government plan for further tax reforms over time that would expand the GST base to cover health and education expenditure, to support further state and federal tax reform.

Importantly, the report underscored that removing state stamp duty, such as those paid on property transfers and insurance, should be high on the priority list. Instead, it re-emphasised the need to shift to broad-based land tax but noted that land tax accrues gradually compared to stamp duty, which raises revenue up-front. But it said a larger GST would help fill this temporary gap.

The Grattan Institute said its GST reform package would boost state budgets by $12 billion a year, which would be sufficient to around halve the aggregate budget deficit state governments are forecasting over the coming years.