Page 9 - FWP Wealth Adviser newsletter - July 2025: Issue 116

ISSUE 116
JULY 2025

Australia’s population is ageing rapidly, with the proportion of Australians over
65 projected to rise significantly over the coming decades. This demographic shift

puts enormous pressure on government budgets, as older Australians typically
require more health and social services, while contributing less in income tax.

reform is back on the agenda, but achieving consensus paired with welfare adjustments, can improve fairness and
among states and the federal government remains a signif- fiscal health.” The reality is that governments are running
icant challenge.” Yet, the pressure is mounting: the current out of easy options for raising revenue, and the GST—broad-
tax system is heavily reliant on income taxes, which are based and relatively efficient—is an obvious target.
vulnerable to bracket creep and can discourage productivity. Across the political spectrum, there is a growing recogni-
tion that Australia’s tax system needs reform. While there is
Budget Pressures and Demographic Change little enthusiasm for higher income taxes, and corporate tax
Australia’s population is ageing rapidly, with the pro- reform is fraught with international complications, the GST
portion of Australians over 65 projected to rise significantly stands out as a lever that can be pulled domestically. The
over the coming decades. This demographic shift puts enor- debate has returned not because politicians want to raise
mous pressure on government budgets, as older Australians taxes, but because the alternatives are even less palatable.
typically require more health and social services, while
contributing less in income tax. According to the Grattan State and Federal Dynamics
Institute, “A higher GST, paired with welfare adjustments, It’s important to note that the GST is collected by the
can improve fairness and fiscal health.” In other words, as federal government but distributed to the states, mak-
the tax base narrows and expenditure rises, governments ing any change a matter of complex negotiation. As The
are forced to look for new, more stable sources of revenue. Conversation points out, “achieving consensus among states
The Henry Tax Review, more than a decade ago, fore- and the federal government remains a significant challenge.”
shadowed the need for a broader and more sustainable tax States have a vested interest in seeing GST revenue grow,
base. However, political sensitivities and reluctance to touch but are often wary of the political fallout from supporting an
the GST have delayed the conversation. Now, with fiscal increase.
pressures intensifying, the debate has returned with a sense
of urgency. The Timing Problem:
Adding to the Cost-of-Living Crisis
The Shrinking Role of GST While the rationale for a GST increase may be clear from
When the GST was introduced in 2000, it was expected to a budgetary perspective, the timing could hardly be worse
provide a robust and growing stream of revenue. However, for Australian households. The country is already in the grip
over the past two decades, its share of total tax revenue has of a cost-of-living crisis, with inflation pushing up prices for
stagnated. This is partly because of the exemptions built essentials and wages struggling to keep pace.
into the system (such as fresh food, health, and education),
and partly because of shifts in consumer spending patterns Inflation and Household Budgets
towards untaxed or lower-taxed goods and services. Australia’s inflation rate has surged in recent years,
As Firstlinks puts it, “the current tax structure penalises driven by a combination of global supply shocks, strong
additional effort, with high marginal tax rates kicking in at demand, and rising costs for housing, energy, and food. For
relatively modest income levels. This discourages produc- many households, real wages have stagnated or even de-
tivity and incentivises tax minimisation strategies.” The clined, making it harder to keep up with everyday expenses.
GST, by contrast, is broad-based and relatively hard to avoid, As ABC News reports, “Practical examples of how a GST
making it an attractive option for governments seeking to hike would impact different income groups, with commen-
shore up their finances. tary from economists and social policy experts,” make it
clear that any increase in consumption tax will flow directly
Political Inevitability through to household budgets. Unlike income tax, which
Politicians’ renewed interest in the GST is, in many ways, can be adjusted for progressivity, the GST is paid at the
inevitable. As the Grattan Institute points out, “A higher GST, checkout—there is no escaping its reach.

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