Reform of the GST could deliver Australia a revenue boost of between $14 billion and $40 billion, boosting productivity and economic growth and enabling the abolition of less efficient taxes, as the country recovers from the economic impact of COVID-19.
A new report by PwC – How GST reform can help reboot prosperity for Australia – considers four different reform scenarios for the current GST regime. They include an increase in the rate of GST from 10 per cent to 12.5 per cent and broadening its base to cover previously exempt items.
Even prior to COVID-19, Australia’s tax system was ill‑equipped to support a growing economy, due to a number of structural factors including an over-reliance on personal and corporate taxes, the PwC report says.
An efficient tax system will be necessary for long term economic recovery and budget repair once the impacts on the economy of the pandemic have eased and reform of consumption tax is a clear option for investigation.
While discussion of changes to the GST has been contentious to date, the new analysis by PwC finds that reform can be possible without adversely impacting overall equity within the community. The analysis also highlights the importance of confirming and safeguarding compensation arrangements before reform occurs to maintain community confidence in the reform process.
The four scenarios considered are:
- broadening the GST base to cover five currently GST-exempt main categories – water and sewerage, childcare, health, education and food;
- increasing the rate to 12.5 per cent, without broadening the base;
- broadening the GST base and increasing the rate to 12.5 per cent; and
- a tiered system to base current exemption items at 5 per cent, and increasing the rate on the current base to 12.5 per cent.
The scenarios modelled by PwC show revenue gains of $14 billion by increasing the rate to 12.5 per cent but retaining the five main exemptions, through to $40 billion by increasing the rate to 12.5 per cent and broadening the base of goods and services covered.
PwC Chief Economist, Jeremy Thorpe, said the GST was under-performing for Australia.
“GST collections in 2018-19 as a proportion of all Commonwealth taxation revenue were at their lowest level since its introduction in 2001.
“Australia’s GST collections have also not kept pace with the overall rate of growth in the economy, in part because people are spending a higher proportion of their income on areas that are currently exempt, including housing, health care and education.
“Our GST rate of 10 per cent is one of the lowest among developed economies, and even at 12.5 per cent, would still be well below the OECD average of 19.3 per cent,” Mr Thorpe said.
“In a properly structured reform package, GST expansion should lead to higher economic growth. A revenue-neutral switch from less efficient taxes (principally income taxes) to consumption taxes can increase GDP, while a 1 per cent tax switch can generate somewhere in the order of 0.25 per cent to 1 per cent in extra GDP in the long run.
“The full effect on economic growth will depend significantly on how GST reform is incorporated as part of a package of reform,” Mr Thorpe said.
PwC Tax Partner Paul Abbey said: “The reality is that meaningful tax reform, including state and territory taxes, can only be achieved by tackling either the GST rate or its exemptions.
“GST reform could help reduce our reliance on personal income tax, which is currently more than twice the OECD average, and can create opportunities to reform damaging state taxes.
“A critical issue in GST reform is how changes to the rate and exemptions will affect different economic groups in the community. Our modelling has found that reform without negatively impacting the overall equity can be pursued.
“Compensation measures can be complicated to design and community confidence in compensation is vital to securing support for reform.
“Our paper recognises that GST reform will have an impact on households, and it will be important to ensure that the burden of any tax changes does not fall excessively on low income households and that those most in need are protected,” Mr Abbey said.