Page 11 - FWP Wealth Adviser newsletter - July 2025: Issue 116

ISSUE 116
JULY 2025

relatively modest income levels. This discourages produc- Political Calculations
tivity and incentivises tax minimisation strategies.” While a For governments, the GST offers a relatively efficient
higher GST could, in theory, allow for lower income taxes and and hard-to-avoid source of revenue. While raising income
greater efficiency, the transition period could be challenging. or company taxes is politically fraught, and often seen as
a disincentive to work or invest, the GST is less visible and
Distributional Effects and Compensation more broadly spread across the population.
One of the main arguments against a GST increase is its As Firstlinks observes, “Tax reform is once again a central
regressive impact. As discussed earlier, lower-income house- topic in Australia, with proposals to raise the Goods and
holds bear a disproportionate burden, as they spend a larger Services Tax (GST) from its current 10% to 15% gaining
share of their income on goods and services subject to GST. renewed attention.” The inevitability of this debate reflects
Governments often promise compensation packages to deeper structural challenges in the Australian economy.
offset these effects, such as increased welfare payments
or tax credits. However, as The Conversation and Grattan The Role of States and the Federation
Institute both point out, the effectiveness of these measures The GST is unique in that it is collected by the federal
is mixed. Some households may fall through the cracks, government but distributed to the states. This creates a
while others may receive less compensation than the actual complex web of negotiations and incentives. States are often
increase in their cost of living. keen to see GST revenue grow, as it funds essential services
like health, education, and infrastruc-
Long-Term Economic Effects ture. However, they are also wary of the
In the long run, a higher GST could In the long run, a political backlash that can accompany
help stabilise government finances and tax increases.
reduce reliance on more distortionary higher GST could help As The Conversation notes, “achiev-
taxes. This, in turn, could support stabilise government ing consensus among states and the
investment and productivity growth. finances and reduce federal government remains a signifi-
However, the short- to medium-term cant challenge.” Past attempts at GST
effects are likely to include slower con- reliance on more reform have faltered on this very point,
sumer spending, increased inequality, distortionary taxes. with states reluctant to shoulder the
and potential social unrest. blame for higher taxes.
The Australian Financial Review This, in turn, could
notes, “Financial resilience is essential support investment Public Perception and Trust
in the face of policy shifts and economic and productivity One of the biggest challenges for
shocks,” but for many Australians, re- any government considering a GST
silience is already being tested by rising growth. increase is managing public perception
costs and stagnant wages. and maintaining trust. Australians are
understandably wary of tax increases,
International Comparisons especially at a time when many are
It is worth noting that Australia’s GST rate is relatively struggling to make ends meet.
low by international standards. Many OECD countries have ABC News emphasises “the importance of clear govern-
VAT or GST rates of 15% or higher. However, these systems ment communication to maintain public trust.” Without
often have broader bases and more generous compensation transparency about the reasons for reform, the intended use
mechanisms. Simply raising the rate without addressing of additional revenue, and the measures in place to protect
exemptions and support measures may not deliver the vulnerable Australians, any proposal is likely to face signifi-
intended benefits. cant opposition.
The Political Reality: The Inevitable Return of the Debate
Why We Shouldn’t Be Surprised Ultimately, the debate over the GST is not going away. As
Given all these factors, it is perhaps unsurprising that fiscal pressures mount and other options become less viable,
politicians are once again considering a GST increase. The the GST will continue to be a focus for policymakers. The
warning signs have been there for years: an ageing popula- challenge is to ensure that any changes are implemented in
tion, rising health and social security costs, and a shrinking a way that is fair, transparent, and mindful of the broader
tax base. economic context.

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