Fiscal challenges for Australia

by John Daley, Danielle Wood

01.07.2015 report

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Australia is set for more than a decade of deficits between 2008 and 2019, with Commonwealth net debt projected to peak at 18 per cent of GDP in 2017, higher than any year since the mid-1990s.

But the reality may be even worse than projections, according to a new Grattan Institute working paper.

Fiscal challenges for Australia, first in a series of Grattan working papers on Australia’s weakening fiscal position and some of the revenue measures to address it, finds that both Coalition and Labor Governments have been relying on bracket creep and favourable economic conditions to deliver a more or less balanced budget.

But their short- and medium-term projections have all contained highly optimistic assumptions about revenue growth and spending restraint.

For six years budget outcomes have been worse than projections, and for six years the Commonwealth has run headline deficits, five of them larger than two per cent of GDP.

However, hoping for the best is not a budget management strategy: it simply justifies putting off hard decisions, and shifts the costs and risks of budget repair onto future generations.

Grattan research shows that each $40 billion dollar deficit increases the lifetime tax burden for households headed by a person aged 25 to 34 by $10,000.

Deficits are not likely to improve as the falling terms of trade and lower nominal economic growth drag on revenues at the same time as the Government needs to fund substantial new policy initiatives.

State government budgets are also under pressure from growing interest bills on borrowing to fund infrastructure, the rising costs of health and education, and the Commonwealth’s decision to no longer contribute to real increases in spending per person in these two areas from 2017-18.

Given the size of the task, Commonwealth and state governments will not be able to repair their budgets without both cutting costs and boosting revenues.

That’s not an appealing prospect for politicians, but sustainable budgets require tough choices and brave leaders willing to make them. A vital first step is to face up to the scale of the problem.

Coming papers in the Budget Repair series will show how budget deficits could be reduced through changes to property taxes, the GST, superannuation tax concessions, and capital gains tax and negative gearing arrangements.

Download the working paper

Download the chart data