Australia needs a big-bang tax reform package - including raising the GST, cutting income taxes, and boosting welfare payments - to fund a better future, says a new Grattan Institute report.
The report, Budget reboot: How to fund Australia's future, warns that Australia urgently needs an overhaul of the federal and state budgets.
Over the past two decades, Australia's national public debt as a share of the economy has increased almost five-fold.
'Outside of the COVID pandemic, the last time Australian governments owed this much, the country was still paying off debt from a world war,' says report lead author and Grattan Institute CEO Aruna Sathanapally.
And spending pressures will only build over the decades ahead. An ageing population will drive healthcare spending higher, and more frequent and severe natural disasters caused by climate change will present mounting bills for all governments.
Australia's current tax system can't meet this fiscal challenge.
Without reform, taxes on wages and salaries will be left to do the heavy lifting for the federal Budget, and state governments will increasingly be reliant on tied grants from the federal government to make ends meet. Servicing debt will crowd out other spending, leaving budgets ill-prepared for the next recession or global crisis.
Spending restraint by all governments is essential, but on its own won't be enough to build the fiscal foundations Australia needs.
A larger GST would help make budgets more resilient by funding a shift in the tax mix from personal income towards consumption.
First, the special GST deal the federal government struck with Western Australia in 2018 - which costs the federal government billions of dollars each year - should be scrapped.
Then, the federal government should raise the GST from 10 per cent to 15 per cent and expand it to include all food. This would raise about $76 billion a year.
Of these funds, about $58 billion should be spent on cutting income taxes for low- and middle-income earners, and boosting welfare payments for the poor.
The personal income tax cuts would be the largest for nearly 20 years.
JobSeeker and Youth Allowance should be increased by 20 per cent, Rent Assistance by 50 per cent, the Parenting Payment by 20 per cent, and the Age Pension by about 8 per cent, to offset the impacts of a higher GST.
The rest of the extra GST revenue each year should go to the states, and they should use it to shore up their budgets and cut inefficient taxes such as stamp duty.
Under the Grattan Institute reform package, a low-income single-parent family who rents would pay about $79 in extra GST each week but get $202 in higher welfare payments and a $27 income-tax cut, leaving them about $150 a week better off.
By contrast, a higher-income working family would pay about $262 a week in extra GST and get a $100 income tax cut, leaving them paying $162 a week more in tax.
'There are no easy paths back to budget sustainability. But with smarter spending decisions and a tax system that raises sufficient revenue to care for our ageing population, both current and future generations can be better off,' says Dr Sathanapally. 'Reform on this game-changing scale is challenging, but the prize is worth it: a more secure future for Australia's finances, and for all Australians.'
