There are two ways to balance a budget.
1. Cut government spending
2. Raise more revenue through taxes.
Let us suppose that over time a government aims to balance its budget. That is it spends as much as it raises so there is no net addition to the national debt.
This does not mean that in each financial year the government will balance its budget. It actually means in years of low economic activity they will borrow (to boost the level of national output) and in the years at the top of the economic cycle they will run a surplus to repay debt. The result is a balanced budget over the economic cycle.
The problem for Australia is that they are borrowing in most years, resulting in a budget deficit over the economic cycle (known as a structural budget deficit). Although as the chart below shows Australia has no real debt problem compared to other nations.
Australia does not tax its citizens much either when compared to other developed countries (26.5% of GDP compared to an OECD average of 34.1% in 2012). It also has a fantastically complicated tax system which sees most people getting tax rebates each year.
A solution is to expand the tax base by taxing more things and doing this in a simple, non-refundable way. That is by taxing spending, not income. In Australia this is done by using the Goods and Services Tax (GST).
There are two ways the GST can raise more money.
1. Put the rate up from 10%.
2. Extend the range of goods and services GST is applied to.
The advantages of GST are that it is pretty difficult to avoid, so raises a lot on money and is simple to administer.
The disadvantage is that it is a regressive tax. The poor pay a higher proportion of their income in GST than the rich. It is not as easy to compensate the poorer households for this (while it is easy for income tax) and so it adversely affects the goal of a equity in the distribution of income.
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