Source: The Conversation (Au and NZ)
When the Goods and Services Tax (GST) was introduced in 2000, it was a more than just tax reform. It was a renegotiation of how the Australian federation works.
The federal government agreed to pass all GST revenue to the states. In return, the states agreed to abolish a range of narrower and less efficient taxes, providing them with a better tax base to fund the many essential services they provide.
For a time, it worked. But a quarter of a century later, the GST is falling short of what it was designed to achieve.
It’s time to revisit the GST and the federal compact with the states. Our new Grattan Institute report, released today, shows how.
State budgets are in trouble
Across the country, state budgets are in poor shape.
State government debt has more than doubled between 2019 and 2025, and is still increasing.
Meanwhile, the states’ share of national debt is forecast to almost double within a decade, from 20% before the pandemic to about 38% by 2030.
And as interest rates continue to rise, the cost of servicing that debt is growing. States now spend more in interest payments than they do on housing, community amenities, and environmental protection combined.
Rapid spending growth – particularly in areas like health care and infrastructure investment – is clearly a large part of this story. As our research shows, states need stronger fiscal rules and independent budget offices to hold them to account. But expenditure control alone will not be enough to get state budgets back on track.
That’s because state revenues are also under pressure.
Transfers from the federal government account for more than 40% of total state government revenues. And many of the taxes that states do levy — such as stamp duty and mining royalties — are volatile, and won’t keep pace with future needs.
The GST was supposed to give states a more reliable source of revenue. But the GST revenues the states receive have fallen as a share of the economy over time, from 3.7% back in 2007 to 3.3% in 2025.
The gap has been plugged by federal grants for services such as health and education, which come with strings attached. Unsurprisingly, negotiations between the federal government and the states are becoming increasingly testy.
We make too little use of the GST
All taxes affect economic activity. But consumption taxes are among the most “efficient” taxes available to governments, meaning they change the incentives around work or investment less than many other taxes. And they tax people’s spending regardless of whether it is financed from wages, retirement savings or accumulated wealth.
That matters as our population ages. Personal income tax is currently the single largest source of revenue for Australian governments. Yet fewer than one in five Australians aged 70 and older pay any income tax, even as their share of the population is projected to increase substantially in coming decades.
Unless we adapt our tax system, we will be asking a shrinking pool of workers to carry more of Australia’s tax burden.
By contrast, Australia raises relatively little from the GST: only about 11% of total tax revenue, well below the average across OECD countries.
Partly that’s because, at 10%, our GST rate is among the lowest in the developed world.
But it’s also because GST isn’t applied to many areas of household consumption, such as education, rent, and healthcare. Only about 54% of household consumption is subject to GST, and that share is falling.
Australia has one of the lowest GST rates in the OECD
Many of these exemptions make little sense. For instance, GST exemptions that apply to only some foods mean frozen chips, bacon and cream are GST-free, but roasted nuts and some prepackaged salads are taxed. Many other countries, notably New Zealand, apply GST much more broadly.
The obvious objection is that taxing goods like food would hit low-income households hardest. But GST exemptions are a blunt and poorly targeted way to help these households. Even for those GST exemptions that apply to food, the poorest 40% of households receive only about one-third of the benefits.
A higher GST rate, a broader base and a fairer tax system
Australia could make better use of the GST. That’s why we propose that the federal government increase the GST rate from 10% to 15% and expand it to include all food.
Durenne Loris/Unsplash
This would raise about A$76 billion a year in additional revenue. But we propose to use much of this revenue to fund tax cuts and welfare reforms.
Under our package, $33 billion a year of the additional GST revenue would go toward personal income tax cuts — the largest for nearly 20 years.
And about $25 billion a year would go toward boosting Australia’s ailing welfare system. This would include a 20% increase to JobSeeker and Youth Allowance, a 50% increase to Rent Assistance, and an 8% increase to pensions.
As a result, the poorest 40% of households would on average be better off, while wealthier households would pay modestly more tax.
Putting the states on a solid footing
The rest of the extra GST should go to the states. They should use it to pay down debt today, and over time, to aid the transition away from inefficient taxes such as stamp duty.
And this reform could also provide the federal government with the off-ramp it needs to revise the state carve-up of GST revenue that favours Western Australia. This is what the Productivity Commission has recommended, since the 2018 deal is currently costing the federal budget about $6 billion per year.
No one likes paying more tax. But taxes fund the services – hospitals, roads, courts, mental health services – that enable the quality of life Australians enjoy.
By making better use of the GST, we can help secure that same quality of life for future Australians.
Read more:
One year isn’t enough – why the government needs to keep up the pace of economic reform
The Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute’s activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities as disclosed on its website.
Erin-Lea Brown does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
Original source: https://analysis1.mil-osi.com/2026/10/18/if-we-want-a-better-australia-we-need-to-raise-the-gst-and-cut-income-taxes/