Report

Balancing budgets: tough choices we need

24 Nov 2013
Description

This report argues that a reform package could add about $37 billion a year to Australian government budgets and help to tackle Australia’s growing budget crisis.

Overview

Australian governments must make tough choices to balance their budgets. They face a decade of deficits, the result of big ticket spending initiatives, rising health costs, pressure on welfare budgets and an inevitable fall in the terms of trade. Collectively these could lead to deficits of 4 per cent of GDP, or $60 billion in today’s terms, within a decade.

Tough choices cannot be put off indefinitely. Deficits impose heavy costs on the next generation in terms of debt and high interest payments. Government budgets cannot simply grow out of trouble, and the next decade may well be economically more difficult than the last.

History shows that governments that successfully repair their budgets make the public case for reform, and start early on the hard work of cutting expenditure and raising taxes. They design a package of measures that share the burden of reform fairly across the community.

This report surveys all realistic proposals that could contribute $2 billion a year or more to government budgets. It puts a priority on reforms that are big enough to make a difference but do not have unacceptable economic and social effects.

One reform package could add $37 billion a year to the federal budget. It would broaden the GST to include fresh food and private spending on health and education; raise the age of access to superannuation and the Age Pension; remove the exemption for owner-occupied housing from the assets test for the Age Pension; and limit tax concessions on superannuation contributions. The burden of these changes would be spread across rich and poor, workers and retirees. While all these reforms are unlikely to occur at once, it will be hard to close the looming budget gap without tackling any of them.

Structural reform of benefits and tax exemptions for older Australians offer many of the best opportunities for budget reform. They are the least-well targeted parts of our tax and welfare system, with some benefits going to people that don’t need them.

Substantial budget repair almost always involves tax reform. Increasing fuel excise in line with inflation would raise significant revenue, although it hits those with low incomes particularly hard. Higher rates of existing taxes could raise large revenues. Raising the GST and municipal rates would slow economic growth less than other tax increases.

Plausible reductions in spending on transport infrastructure, industry support, school class sizes, higher education subsidies, pharmaceuticals, health services, and defence could collectively improve budget positions by $23 billion per year. But the execution risks are high – there would be unacceptable economic and social effects unless the cuts were executed unusually well. By contrast, the oft-cited cuts to the public service and ‘middle class welfare’ can do relatively little to improve budget balances.

Sustainable budgets depend on governments making tough choices. None will be politically easy, but making some of them is vital to Australia’s prosperity.

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2013
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