Understanding and monitoring the underlying changes in GST revenue is of significant importance to jurisdictions such as Victoria, which receive a significant proportion of state revenue through GST grants. The onset of the COVID-19 pandemic caused significant disruptions to household consumption, which contributed to volatile movements in GST revenue. This paper has applied the new methodology and analysed trends in GST revenue over two distinct periods – before and after the onset of the pandemic.
Over the period since the introduction of the GST in July 2000 and before the onset of the COVID-19 pandemic in March 2020, the share of household consumption subject to GST has declined steadily. This was found to be driven largely by strong growth in expenditure on essential items, compared to discretionary spending, and on services, compared to goods. Both essential items and services are largely considered exempt from GST, thereby contributing to the declining share of household consumption subject to GST.
The individual consumption categories supporting this trend were headlined by strong growth (relative to other consumption categories over this period) in rent, education, and health. Some consumption categories that are mostly subject to GST, such as utilities and alcohol, experienced strong growth before the onset of the COVID-19 pandemic. However, their impact on the share of household consumption subject to GST was insignificant given their relatively small share of total household consumption.
The onset of the COVID-19 pandemic caused significant changes to household consumption, most notably in travel, tourism and recreational in-person activities. This led to significant declines in discretionary and services-based consumption during the initial phase of the COVID-19 pandemic when necessary public health restrictions were enforced across the country. These changing consumption patterns caused a sharp fall in the share of household consumption subject to GST.
As border restrictions and public health measures began to ease, a wave of discretionary spending followed, supported by large savings buffers accumulated during the COVID-19 pandemic. This is reflected in above trend growth in spending on hotels and restaurants, clothing and footwear, recreation and culture (25 per cent). This ultimately led to an increase in the share of household consumption subject to GST for one of the few times since the introduction of the GST.
Despite gains in the share of household consumption subject to GST, this share is beginning to wane as cost-of-living pressures on households intensify. Real household consumption subject to GST has declined over the last four quarters to December 2023. This has been driven by a pullback in goods and discretionary-based consumption, which are predominately subject to GST.
The share of household consumption subject to GST is expected to continue slowing in the near term as households moderate spending on discretionary items amidst cost-of-living pressures. The longer-term outlook for GST revenue raised through household consumption is more uncertain. It will depend on whether some of the structural changes in consumption patterns that emerged from the COVID-19 pandemic persist, such as reduced travel expenditure due to some workers working fewer office days.
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