Tackling the budget challenge requires unpopular measures

The overwrought and unconstructive coverage during the past three weeks of a report I released in April about government taxing and spending is a case in point.

The Grattan Institute report, Back in Black?, outlined a problem I haven’t seen anyone dispute: Australia has a long-term budget challenge.

Spending on the National Disability Insurance Scheme, defence, the Medicare Benefits Schedule and aged care are all expected to grow strongly across the next decade. Government spending is projected to average 26.4 per cent of gross domestic product across this period, compared with less than 25 per cent across the three decades before Covid-19.

Revenues have not kept up. Structural budget deficits this decade are projected to average 0.6 per cent of GDP, or about $12bn a year in today’s dollars. These estimates systematically underestimate the scale of the challenge through making optimistic assumptions on containing spending growth.

The latest Intergenerational Report reminds us the ageing population and the fallout from climate change will see this challenge grow during the next 40 years. The implications of not taking policy action are clear: we ask future generations to pay much higher taxes than we have ever had to pay.

I have made the case for the best part of the past decade that asking today’s young people – already hit with the challenges of unaffordable housing and the impacts of the changing climate – to pick up the tab for today’s spending is deeply unfair.

Again, I have never seen anyone disagree with this.

But admiring the problem is of course the easy part. The Back in Black? report was focused on practical policy solutions.

There are ultimately three levers governments can pull to address long-term budget challenges: they can make economic reforms to “grow the pie”, they can increase taxes and they can reduce spending.

Pursuing policies to boost growth is critical. Much of Grattan Institute’s work has focused on policy change to grow the pie. But, as we show in Back in Black?, higher growth cannot be relied on alone to close the budget gap. Given the scale of the challenge, governments will need to find ways to also reduce spending and boost revenue.

This is the hard part. No one likes lower spending or higher taxes, but the report puts forward a menu of “least bad” options to reduce spending and boost revenue without too much drag on economic growth.

We list seven options for reducing spending and eight for increasing tax collections. The menu includes some options that are politically challenging, such as including more of the family home in the Age Pension asset test above a threshold, winding back the West Australian GST deal, and better targeting superannuation tax breaks.

Inheritance taxes to fund income tax reductions are also included on a longer list of “bolder options”, recognising the high degree of political difficulty. Other options include better processes for infrastructure and defence procurement, making hospitals more efficient, better taxation of fossil fuels and constraining the cost growth in the NDIS.

The report is presented as a menu because it is designed to start the conversation about which changes might be sensibly pursued and in what order. Clearly no government would take on all of them. But it will be difficult for Australia to make serious progress on structural budget repair without tackling any of them.

The Back in Black? report also issues a challenge. We ask those who reject out of hand the policy ideas we put forward: What’s your solution? It’s not a challenge that any of the commentators hyperventilating about these “radical” proposals have seen fit to take up.

Although many love calling for tax reform or spending restraint, they are invariably quiet about the specifics of these proposals.

Policy change in the national interest has never been easy. But it is made harder by public commentary that blithely pretends there are no difficult trade-offs required. And while budget issues are unlikely to be on the agenda in my future role as chairwoman of the Productivity Commission, I look forward to continuing the PC’s proud tradition of giving independent and sometimes tough policy recommendations to government on ways to tackle Australia’s economic, social and environmental challenges.

Government has enough people lining up to earnestly outline the challenges Australia faces. People willing to stick their neck out with constructive solutions are in much shorter supply.