The federal government needs to cut spending and raise taxes to rein in Australia’s structural budget deficit, according to a new Grattan Institute report.
The pre-budget report, Back in black? A menu of measures to repair the budget, shows that Australia is on track for 25 years of deficits – teenagers who started high school this year have never seen a budget surplus and probably won’t until they are through university.
The structural deficit is expected to be about 2 per cent of GDP, or nearly $50 billion every year, by the end of the decade.
And without action, the problem will get worse because population ageing means more spending on health and aged care, and climate change means more natural disasters such as bushfires and floods.
Continually adding to national debt by running sizeable deficits reduces the government’s room to respond to future economic shocks and pushes the cost of today’s spending onto future generations.
We should not fall into the trap of thinking we can simply grow our way out of debt. Governments should pursue policies to boost growth, but that alone is unlikely to put the nation’s finances on a sustainable trajectory.
And the size of the problem means it won’t be solved on one side of the budget alone. The report puts forward a menu of policy options to both reduce spending and boost revenue.
Menu items to reduce spending include:
- Cutting wasteful spending on major defence and transport projects (which would save several billion dollars a year)
- Undoing WA’s special deal on the GST (about $5 billion a year)
- Counting more of the family home in the aged pension assets test (about $4 billion a year)
- Trimming spending on hospitals, pathology, and pharmaceuticals (about $2 billion a year)
- Reducing spending on politicised grants and advertising ($1 billion to $2 billion a year)
- Abolishing the Family Tax Benefit part B for couples (about $1.3 billion a year)
- Abolishing the Business Innovation and Investment Program visa (about $1 billion a year)
Menu items to boost revenue include:
- Better targeting tax concessions on superannuation (saving more than $11.5 billion a year once fully implemented)
- Redesigning the so-called Stage 3 tax cuts so they are less generous to the highest income-earners (about $8 billion a year)
- Gradually raising the age at which people can use their super, from 60 to 65 (more than $7 billion a year)
- Raising the GST from 10 per cent to 15 per cent, with compensation for vulnerable households, and 50 per cent of the net revenue shared with the states (about $6 billion a year)
- Winding back fuel tax credits for businesses (about $4 billion a year)
- Redesigning the Petroleum Resource Rent Tax (at least $3 billion a year)
The government should also consider bolder revenue-raising options such as realigning company tax rates and introducing a carbon tax and an inheritance tax.
And the government will have to rein in cost growth in aged care and on the NDIS, or those programs will become unsustainable.
‘None of these options are easy, but if the government is serious about budget repair it will need to embrace at least some of them,’ says report lead author and Grattan Institute CEO Danielle Wood.
‘And to those who rush to reject these policies out of hand, I say: What’s your solution?’
For further enquiries email media@grattan.edu.au