‘What’s your solution?’ - Grattan Institute

Australia has a budget problem it needs to confront.

Budget season is almost upon us. You can expect some short-term good news: a shrinking deficit from a stronger than anticipated economy and a massive overshooting of Treasury’s assumptions on commodity prices. But the Treasurer and the public should look beyond the sugar hit. Because beneath the happy dividends of current economic and commodity price cycles, Australia has a fiscal problem.

Like other wealthy nations, as we get richer we are demanding more and better services. Better care for our elderly in the aged care system. New and improved health interventions. Supports for our previously overlooked citizens with a significant disability. Greater defence capability.

It’s been a slow burn, but these choices have collectively expanded the size of government. Federal government spending is expected to average more than 27 per cent of GDP over the next decade. This compares to less than 25 per cent over the three decades before Covid. And government revenues are not keeping pace.

The resulting gap is the structural budget deficit. This is projected to be about 2 per cent of GDP, or about $50bn a year in today’s dollars, by the end of 2020s.

Most people would agree we need to reduce the structural deficit over time. But as we move from the generalities of fiscal responsibility to the specifics of what government’s should do, support tends to fall away. Because taking serious action involves making hard choices.

Grattan Institute’s latest report, Back in black?, doesn’t shy away from the specifics. It presents a “menu of options” for both spending cuts and revenue increases that would make a meaningful dent in the deficit. We focus on the big (worth at least $1bn a year to the bottom line) and prioritise policies that don’t drag too much on economic activity (indeed some would even improve it!) or hit the most economically vulnerable.

On spending, the single best thing governments could do is to stop making bad infrastructure and defence procurement decisions. Rushed and politically motivated decisions, particularly those with no or massively optimistic business cases, have cost the country tens of billions of dollars over the past decade.

Our report puts forward another $15bn a year in potential savings measures, including undoing the WA GST deal, counting more of the family home in the Age Pension asset test, and pushing for greater efficiencies in the health system.

Over time, changes will also be needed to sustain the fast-growing NDIS, but we leave the specifics to the government review already under way.

The biggest opportunity on the revenue side comes from winding back tax concessions that are not serving a policy purpose. Better targeting of superannuation tax concessions, reducing the Capital Gains Tax discount, limiting negative gearing, and taxing distributions from private trusts at a minimum rate of 30 per cent would collectively raise more than $20bn a year.

Other options on our menu include redesigning (but not abandoning) the Stage 3 tax cuts, increasing the GST, improving the design of the petroleum resource rent tax, and reducing the size of the fuel tax credit for businesses.

These all come with a degree of political difficulty because they would produce some losers. Many people will wish for easier answers. But we show that some perennial favourites – like cutting the federal public service, cracking down on welfare cheats, or boosting taxes on multinationals – are unlikely to yield much more in budget dividends.

The other common riposte is that we should grow our way out of the problem. And it’s true that stronger growth would reduce the enormity of the challenge. Governments should do what they can to boost productivity and national income. There is no shortage of suggestions in Grattan’s work, not to mention the Productivity Commission’s recent 1,000-page review.

But Australia cannot rely on growth alone. Much of the impetus for long-term growth is outside the direct control of governments. And for two decades there has been precious little appetite for tackling the things that would make the biggest difference. Even if we can seriously shift the dial – say upping our productivity growth from the 1.2 per cent average of the past two decades to its 1.5 per cent longer-term average – that would still not be enough to overcome the longer-term budget challenges.

So we are back to hard choices. We don’t expect governments to do everything on our list, but if they are serious about budget repair, they will need to tackle at least some things of this magnitude.

And to those rushing to reject them all out of hand we ask: ‘What’s your solution?’ Because the sooner we move on from generalities and superficially easy answers, the sooner we can start genuinely tackling the problem.

While you’re here…

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Danielle Wood – CEO