Page 10 - FWP Wealth Adviser newsletter - July 2025: Issue 116

ISSUE 108
MARCH 2025

A GST increase would directly raise the price of most paper, its timing could hardly be worse for Australian house-
goods and services, from clothing and appliances to dining holds already struggling with rising costs.
out and entertainment. Even with exemptions for fresh
food, health, and education, the vast majority of household Economic Impact: What a GST Increase Means for Australia
spending would be affected. For a typical Australian family, The consequences of a GST increase would ripple far
this could mean hundreds or even thousands of dollars in beyond individual households. Consumer spending, which
additional costs each year. drives much of Australia’s economic activity, would almost
certainly take a hit as families cut back on discretionary
No Real Escape for Households purchases.
Morningstar Australia highlights that “Australians should
view tax changes as part of a broader wealth management Impact on Consumer Spending
strategy,” but in the case of a GST hike, there is little that The GST is a tax on consumption, and higher prices
most households can do. The increase is a blunt instrument, inevitably mean less spending power for households. As
affecting nearly all goods and services. For those already the Grattan Institute warns, while a higher GST can improve
feeling the pinch, this would simply mean higher prices and fiscal health, it also risks dampening economic growth if in-
less room in the weekly budget. troduced at the wrong time. Businesses,
Unlike targeted taxes or means-test- particularly in retail and hospitality,
ed levies, the GST applies to almost The regressive nature could see reduced demand as higher
everyone, regardless of income or of the GST means prices bite.
circumstances. While governments that lower-income Australia’s economy is heavily reliant
may promise compensation for low-in- on consumer spending, which accounts
come earners, the reality is that many households, who spend for around 60% of GDP. When house-
Australians will see their purchasing a larger proportion holds are forced to tighten their belts,
power eroded. the effects are felt across the economy—
of their income on from small businesses and local shops
Impact on Vulnerable Groups consumption, are to large retailers and service providers.
The regressive nature of the GST hit hardest. As The
means that lower-income households, Sectoral Impacts
who spend a larger proportion of their Conversation notes, Some sectors would be hit harder
income on consumption, are hit hard- “GST increases tend than others. Retailers, cafes, restau-
est. As The Conversation notes, “GST in- to hit lower-income rants, and tourism operators are
creases tend to hit lower-income groups especially vulnerable to changes in
hardest, making targeted compensation groups hardest, making consumer sentiment. If a GST increase
essential.” However, experience from targeted compensation coincides with other economic head-
previous reforms suggests that compen- winds, such as rising interest rates or
sation is often imperfect, and may not essential.” global uncertainty, the risk of a broader
fully offset the increased cost of living. slowdown grows.
Pensioners, single parents, and ABC News highlights that “Practical
those on fixed incomes are particularly vulnerable. For examples of how a GST hike would impact different income
these groups, even a modest increase in the GST can mean groups, with commentary from economists and social policy
difficult choices between essentials like food, utilities, and experts,” point to the likelihood of reduced discretionary
healthcare. spending. This, in turn, could lead to job losses or reduced
hours in affected industries.
Timing and Economic Confidence
The timing of a GST increase is critical. Introducing Business Confidence and Investment
a higher consumption tax during a period of weak wage Higher consumption taxes can also affect business
growth and high inflation risks undermining consumer con- confidence and investment. If businesses anticipate weaker
fidence and slowing the recovery. As Australian Financial demand, they may delay hiring or investment decisions.
Review notes, “Financial resilience is essential in the face This can create a negative feedback loop, with lower spend-
of policy shifts and economic shocks,” but resilience has its ing leading to slower growth and fewer job opportunities.
limits when policy changes are both broad and inescapable. As Firstlinks notes, “the current tax structure penalises
In summary, while a GST increase may make sense on additional effort, with high marginal tax rates kicking in at

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