The Goods and Services Tax (GST) is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia. Revenue from the GST was supposed to grow over time, so that state and territory governments would have a reliable income source to help them fund the important services they provide long into the future. But it has failed to live up to that goal. The reality is that GST revenue has failed to keep up with national income (Gross Domestic Product) and this has meant that the states have found it increasingly difficult to fund the important services they are responsible for.

If GST revenue had grown at the same rate as national income, then the states would have received an additional $231 billion in revenue over the 23 years from the introduction of the GST in 2000-01 to 2023-24. This includes $22 billion in lost revenue in 2023-24 alone.

The anaemic growth of GST revenue in the last two decades has been caused, in large part, by rising inequality in Australia. Slow wage growth for low-income earners, coupled with rapidly rising rents, has constrained consumer spending in Australia and, inevitably, constrained the growth of GST. Similarly, the more rapid increase in the incomes of high-income Australians means that expenditure on GST-free items — like private school fees, private health insurance and overseas holidays — has grown, and this has also cut into the amount of GST revenue that could be provided to the states.

Broadening the GST to include private school fees and private health insurance would generate $1.8 billion per year, overwhelmingly from high income households. In contrast, any attempt to simply increase the GST rate above 10 percent would exacerbate the inequality already caused by the exclusion of so many goods and services preferred by the highest income households.

A simple solution to the impact of rising inequality on the decline in GST growth would be for the Commonwealth to collect new taxes to add to the pool of revenue the Commonwealth provides to the states. This could include new taxes on wealth, sugar, or a simple royalty on gas exports from commonwealth water that are currently given away royalty-free. Alternatively, the Commonwealth could end tax concessions such as the Fuel Tax Credits Scheme, which currently costs about $11 billion per year. The additional revenue could be allocated to the states and used to better fund public schools, hospitals, and other essential services.