If government wants more of our money, it should first explain why the money it already receives is not enough.
By Jason Gay
Apparently, one of the answers to Australia’s Budget problems might be to increase the GST. Because when Australians are already dealing with higher mortgages, higher fuel prices, higher electricity bills and higher grocery prices, naturally the missing ingredient is making more things at the checkout more expensive.
The proposal currently attracting attention comes from the Grattan Institute. It has suggested increasing the GST from 10 to 15 per cent, broadening it to include things such as fresh food, then using much of the additional revenue for income tax cuts and increased welfare payments. It is a serious proposal and deserves a serious discussion. But I think we are starting at the wrong end of the problem.
Former Treasurer Peter Costello, one of the architects of the GST in the first place, has warned that simply increasing it without substantial reform elsewhere would be a bad idea. His concern is fairly straightforward: if government receives more revenue and simply spends more of it, we have not actually fixed anything. We have just given government a bigger bucket.
That is the part of this debate that interests me most. Before we ask Australians to put more money into the bucket, perhaps we should ask why there keeps being a hole in the bottom.
Australia’s federal government is currently spending at historically high levels. Commonwealth expenses are around 26.9 per cent of GDP, the highest level outside the pandemic period in about four decades. The 2026–27 Budget still forecasts a deficit of around $31 billion, with further deficits across the forward estimates.
And this is not happening during an Australian war, a pandemic, or a once-in-a-century national disaster. We are not borrowing hundreds of billions because Sydney has fallen into the Pacific. This is largely the ordinary business of government.
That should bother us more than it seems to.
Meanwhile, inflation rose to 4.3 per cent in September, while underlying trimmed mean inflation was 3.6 per cent. Both are above the Reserve Bank’s target range. Another interest-rate rise is now widely expected, and if the RBA lifts rates another quarter of a percentage point, the cash rate will hit 4.85 per cent, its highest level since 2008.
We know what happens next. Mortgage repayments rise, households have less money, people delay purchases, cancel dinners out, postpone renovations and generally spend less. That is quite literally part of how interest rates fight inflation. The Reserve Bank is trying to take demand out of the economy.
Which makes the debate about government spending impossible to ignore.
The Treasurer is right when he says government spending is not the only cause of inflation. Recent growth in demand has largely come from the private sector, and the Middle East conflict has pushed up fuel and energy prices. Inflation is a complicated problem with several causes.
But “not the only cause” is not the same thing as “doesn’t matter”. Government demand is still demand. If the Reserve Bank is deliberately squeezing households because too much money is chasing limited goods, services, workers and materials, then governments should be asking exactly the same question of themselves: do we really need to spend this?
That is what makes the GST conversation feel strangely timed.
Australians are being told inflation is too high and prices need to stop rising so quickly. One proposed solution is to increase a tax that is literally added to the price of things Australians buy. A higher GST would mechanically increase the price of affected goods and services when introduced.
That does not mean the broader reform is automatically bad. If a higher GST replaced other taxes, reduced deficits or was accompanied by meaningful structural reform, the longer-term effects could look quite different. The Grattan proposal is more sophisticated than simply saying, “Let’s whack another five per cent on everything”, because much of the extra revenue would be returned through lower income taxes and higher welfare payments.
But that raises an obvious question. If most of the money is going to be handed back out, how exactly does increasing the GST fix our spending problem? And if the extra revenue is instead retained by government, why should taxpayers be confident that a government already running deficits will suddenly become disciplined once we give it another source of revenue?
This is the bit I struggle with.
If somebody regularly spends more than they earn, my first instinct is not to increase their allowance. It is to ask what they are spending the existing allowance on.
Government is obviously more complicated than a household. The Commonwealth issues its own currency, governments operate across economic cycles, and borrowing can be perfectly sensible during emergencies and for certain long-lived investments. But complexity should not become an excuse for abandoning basic questions about priorities, affordability and restraint.
What can we afford? What can we stop doing? What deserves priority? Why is borrowing still required during relatively normal economic conditions?
There are also reasonable arguments for changing Australia’s tax mix. Economists have long argued that taxing consumption can be less damaging to economic activity than heavily taxing income. Australia’s GST rate is also relatively low compared with many developed economies. A serious reform package that lowers income taxes while changing consumption taxes deserves consideration.
But tax reform and Budget repair are not the same thing.
You can redesign the way government collects money without ever addressing the amount government spends. That is why Costello’s warning matters. If government raises an extra dollar and spends the extra dollar, there has been no Budget repair. We have simply moved another dollar from the citizen to the government.
Australia needs a harder conversation about the spending side of the ledger. Not because every government program is wasteful, not because Australia should suddenly slash hospitals, pensions or schools, and not because Labor uniquely invented government spending. Governments of both major parties have contributed to the fiscal position we are now in.
We need the conversation because financial limits force priorities. If government knows that revenue plus authorised borrowing is genuinely limited, every new proposal has to answer a harder question: what are we willing to give up to pay for this?
That is a much healthier question than asking how much more government can raise.
The average Australian is already doing plenty of heavy lifting. They are paying higher prices. Mortgage holders are paying higher interest rates. Renters are absorbing the flow-on effects of a tight housing market. And now we are discussing taking a larger percentage every time they spend money.
Perhaps before asking households for another contribution, government should demonstrate that it has imposed some meaningful limits upon itself.
Before increasing the GST, perhaps we should try something more radical: spend within the limits first.
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