6
Dec
2015

A progressive GST package that supports economic growth and helps the budget

by John Daley


Extending the goods and services tax to cover many of the categories currently exempt could raise $17 billion a year, while increasing the rate to 15 per cent would generate about $27 billion, according to a new Grattan Institute report.

A GST reform package finds that raising more GST revenue, either through a higher rate or applying it to more goods and services, is preferable to most other means of raising revenue, including higher income taxes.

Current governments face many challenges, such as funding growing healthcare costs, reducing deficits, and cutting inefficient taxes. A broader or higher GST could fund any of these initiatives – although not all of them.

‘Broadening the GST base to include fresh food, health and education would be more efficient, and would reduce compliance costs,’ says Grattan Institute CEO John Daley.

‘But if the politics of taxing those categories proves too fraught, then raising the rate of the GST would be a satisfactory second best.’ The report works through the implications of a reform package that increases the rate to 15 per cent.

A well-designed GST package could lead to a tax and welfare system more progressive than at present. Higher welfare payments and targeted tax cuts would make low and middle-income households on average better off.

Drawing on new household-level modelling, the report shows that spending about 30 per cent of the additional revenue on welfare – increasing the base rate of pensions and allowances by about five per cent – would leave two-thirds of low-income households better off overall.

Committing a further 30 per cent of additional revenue to income tax cuts would allow the government to shave 2 to 2.5 percentage points off the bottom two tax rates. With the welfare increases, these cuts would fully offset the GST increase for households earning up to $100,000 a year.

These measures would leave $11 billion of additional revenue that could help the states address the looming hospital funding gap, fund tax cuts that promote economic growth or reduce Commonwealth budget deficits.

But not everyone can be fully compensated, says Mr Daley.

‘Government budgets are in deficit, and promising “no losers” will be a sure-fire way to erode the revenue benefits from the package.’

Read the report

For further enquiries: John Daley, CEO
T. +61 (0)3 8344 3637 E. media@grattan.edu.au