The GST Talk Is Back. Here's Who Actually Pays For It.

Tax reform is having a moment in Canberra again. The OECD (The Organisation for Economic Co-operation and Development) wants Australia to broaden the GST base and consider lifting the rate. Former Treasury boss Ken Henry has said he'd look at doing the same. And Treasurer Jim Chalmers — long known as a GST sceptic — has stopped short of ruling it out for discussion, even as he insists income tax cuts are the priority.

Nothing is locked in. But when a government is running budget deficits and facing OECD pressure to find more revenue, "not ruled out" tends to become "under active consideration" fairly quickly. It's worth understanding what a higher GST would actually mean before it moves any further up the agenda.

The maths that make GST attractive to Treasury

From a pure budget-repair perspective, GST is efficient. It's broad-based, hard to avoid, and doesn't distort work or investment decisions the way income tax does. Australia's GST take is also low by international standards, around 12.5% of total tax revenue, compared to an OECD average closer to 21%. That gap is exactly why it keeps coming up whenever the budget position tightens.

Why it hits harder than the numbers suggest

Here's the problem: GST is a flat tax on consumption, but consumption isn't flat across income levels. Lower-income households spend a much larger share of what they earn, often close to all of it, on everyday goods and services. Higher-income households save and invest more of theirs. So a rate rise takes a bigger bite out of a low-income budget than a high-income one, even though everyone pays the same percentage at the till. That's the technical definition of a regressive tax, and it's the core reason GST increases have been politically radioactive for 25 years.

For a government that positions itself as representing working Australians, that's an uncomfortable trade-off; unless the compensation measures are genuinely well targeted, which historically has been the hard part to get right.

The inflation timing problem

There's also a mechanical issue. A GST increase is inflationary by definition, it's a one-off price-level shock across almost everything people buy. Coming at a time when cost-of-living pressure is already the dominant political issue, and with the RBA watching inflation data closely to decide on rates, a GST rise risks working against the very relief households are being promised elsewhere. Timing this kind of reform against an inflation backdrop is genuinely difficult to get right.

Who I'd expect to feel it first

- FIFO and shift workers; high take-home pay doesn't always mean high savings buffers when rosters change, and everyday spending doesn't scale down easily.

- Retirees and pre-retirees on fixed or drawdown incomes; no capacity to "earn more" to offset higher living costs, and account-based pension drawdowns don't automatically adjust for a tax change.

- Lower and middle-income households generally; the group any compensation package would need to get right, and the group most exposed if it doesn't.

Where I land

I'm not against tax reform, the current system leans too heavily on income tax and everyone in this profession knows it. But raising a regressive tax during a cost-of-living crisis, without a fully worked-through compensation mechanism, isn't reform, it's just moving the pain around. If this does progress, the design of the offsetting measures will matter more than the headline rate.

The other side of the argument

To be fair to the reform camp: GST increases paired with meaningful income tax cuts and targeted welfare compensation have worked in other countries without the regressive impact fully landing on low-income households; New Zealand's 2010 increase is often cited as a relatively well-managed example. And a broader, higher GST could, in theory, fund a lower and simpler personal income tax system that leaves most people better off. Whether Australia's political system can design and deliver that compensation cleanly is really the open question, not whether the economic theory holds.

Funded Futures Financial Services Socials