OECD urges Australia to increase GST and lower income tax

Australia should move away from heavy taxation of incomes towards higher taxation on goods and services to accelerate economic recovery from the pandemic, the OECD recommends.

The Organisation for Economic Co-operation and Development’s 2021 economic survey of Australia, released yesterday, found Australia withstood the economic downturn of the pandemic better than other comparable economies — but it could face a sluggish recovery if a range of measures are not adopted.

The survey recommends a raft of changes including overhauling the tax system, boosting R&D funding and using education to address skills shortages in the labour market.

A major recommendation of the survey is for the federal government to increase goods and services tax (GST) once the recovery is underway.

The OECD argues that increasing the GST rate or broadening the base of goods and services taxed would allow the government to lower personal income tax, retirement tax concessions and capital gains tax discounts.

“Compared with other OECD countries, the consumption tax rate is relatively low and a much larger share of consumption goods are GST-free or GST-exempt in Australia,” the survey states.

The OECD argues that increasing the share of GST in the tax mix is necessary because it would provide federal and state governments with revenue that’s unaffected by an ageing population.

Elinor Kasapidis, senior manager tax policy at CPA Australia, has for some time called for a broadening of the GST base and potential increase of the current 10% rate for some time. 

“We believe that the GST system, as it stands now, is complex and it’s not aligned with many similar overseas countries,” Kasapidis tells SmartCompany.

Kasapidis says overhauling GST is a difficult task for the federal government to manage, particularly given an election will be held early next year.

“Elections can be won and lost on tax issues and now may not be the right time for a government to go into an election on GST,” Kasapidis says.

Treasurer Josh Frydenberg acknowledged the OECD’s survey on Wednesday, saying it highlights the government’s well-coordinated response to the pandemic.

In a statement, Frydenberg said the OECD recognised Australia’s fiscal response to the pandemic was swift and helped stabilise the economy.

However, Frydenberg did not indicate when the government would act on the survey’s new recommendations. 

The OECD’s 2021 economic survey is the first survey focused on Australia that the organisation has released since former finance minister Mathias Cormann became secretary general in June.