Overview

Australia’s goods and services tax (GST), originally promoted as a ‘growth tax’, has not kept up with economic growth over the last twenty years …

Since 2000, total GST revenue has increased by 130 per cent while gross domestic product (GDP) increased by 180 per cent, with the result that the GST-to-GDP ratio has declined from 4.0 per cent in 2003–04 to 3.3 per cent in 2018–19. This represents lower revenue in the order of $9 billion in 2018–19 had the ratio remained constant at average levels prior to the Global Financial Crisis.  

…with four key trends contributing to this decline in GST relative to the size of the economy.

Specifically, these relate to unequal price growth, the way household consumption is measured when calculating economic activity, demographic trends, and the composition of the economy.

Prices of GST-free goods and services have grown stronger than prices of those that are taxed.

Trends in the prices of goods and services have had more influence on GST collections than trends in the quantities of goods and services purchased. In particular, the appreciation of the Australian dollar since the early 2000s has resulted in significantly lower (or even negative) price growth for a number of goods and services subject to GST, such as recreation, clothing and vehicles.

Household consumption—particularly rent and education—is treated differently when calculating GDP than it is for tax purposes.

Certain technical assumptions are made to capture rent and education in the National Accounts (or GDP calculation) to reflect their contribution to household spending, which is appropriate. Some of this reflects actual spending by individuals, and some relates to assumed spending (for example, the amount of ‘rent’ paid by an owner occupier). This is important because the share of household spending on dwelling rent has increased steadily over 50 years due to rising land values.  This has inevitably resulted in the GST-taxable components of household spending falling.

Surprisingly perhaps, growth in the proportion of GST-free spending is driven by younger generations rather than an ageing population.

GST-free spending by households in the 65 years and over category is relatively high compared to other households, but this proportion has remained broadly constant since the GST was introduced.  On the other hand, younger generations are allocating a growing proportion of their spending on items not subject to GST, particularly rent, health and education.

Household consumption has contributed less to economic activity in recent decades due to the mining boom and increased household savings.

Over the first decade of the GST, the value of household consumption doubled while mining exports tripled. During the second decade, mining exports remained strong and households in aggregate increased their savings rate by around 8 per cent of their income, thereby reducing their consumption.

GST is likely to continue to grow at a slower rate than GDP.

If current trends continue, the GST-to-GDP ratio is likely to continue to decline further, reaching 3.2 per cent in 2030–31, equivalent to a shortfall of up to $24 billion compared to the early 2000s. While any falls in revenue flow directly through to state budgets, there may be an associated pressure on the Commonwealth to provide greater transfer payments to the states.

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