The GST is a great indicator for consumers and the general economy. It’s paid on the final consumption of goods and services (bar those excluded under the deal struck between John Howard and the Democrats all those years ago).
As the population and wages grow, the GST should rise at a steady enough clip to help the states and territories cover their increasing costs.
But the drop in confidence among consumers, the slowdown in wages and the increase in debt being carried by many households is now showing up in GST revenues to the detriment of the states.
In the 2018-19 budget, Scott Morrison’s last as treasurer, the states and territories were told the GST pool would be $67.3 billion that year before rising to almost $70 billion this year and then reach $73.5 billion in 2020-21.
This year, with Josh Frydenberg in charge, the GST pool numbers were very different. There was about $2 billion less to share among the states and territories in 2018-19.
For 2019-20, the GST pool was written down by $2.6 billion. Next financial year the write-down was $3.5 billion. Between the 2018-19 budget and its successor in April this year, GST revenues have been downgraded by a total $11 billion. Some analysts are tipping that when Frydenberg releases the mid-year budget update next month he will have to write down GST revenues by another $8 billion.
The reason for the write downs are in the federal budget numbers around household spending and wages growth. Morrison was tipping household consumption to go up by 2.75 per cent last year then step up to 3 per cent through 2019-20. Wages were also expected to lift, growing by 2.75 per cent in 2018-19 and then a stellar 3.25 per cent this year.
Frydenberg could not be as confident. Household consumption was marked down (by a sizeable half percentage point through 2018-19) while wages were not in a bull’s roar of what Treasury had expected.
For the current year, the government has forecast wages to grow by 2.75 per cent. In the September quarter wages grew by 0.5 per cent.
That means to get to the budget forecast the next three quarters have to average 0.75 per cent. The last time there was a quarter of wages growth at that level was March 2014, just ahead of Joe Hockey’s horror budget of that year.
Treasury believes consumption has been affected by the housing market (particularly Sydney and Melbourne). That’s why there have been cheers around the monthly figures showing strong increases in prices on the back of the RBA’s sharp cuts in official interest rates.
But the monthly GST collection figures point to continued weakness. Across September and October, the government collected just under $10.5 billion in GST. It was almost $600 million down on the same period last year and roughly in line with 2017.
That’s despite the country having 800,000 more residents today than in 2017. Over the same period an extra 650,000 people have a paying job.
The GST revenue is lower even as the government’s tax refunds – almost $24.2 billion – have hit bank accounts around the country over the past four months. And its down despite a sharp fall in official interest rates.
Ratings agency S&P Global has warned pressure is growing on state and territory budgets because of what GST collections are showing. “While the Commonwealth continues to project increases in GST distributions, the entitlement pool size is exposed to erosion,” it noted.
The states are taking on more debt to deal with their growing populations, exposing themselves to any increase in borrowing costs. S&P also reckons recent efforts by states to keep a lid on spending will be “difficult to maintain”.
Together, this means it’s not just Morrison and Frydenberg facing budget pressures in the months ahead.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.