Fiscal challenges for Australia

1 Jul 2015

Australia is set for more than a decade of deficits between 2008 and 2019, but the reality may be even worse than projections, argues this report.


Grattan Institute’s 2013 report, Balancing budgets: tough choices we need, concluded that without structural reforms Australian Governments could face a decade of deficits. Subsequent events suggest this may have been optimistic.

The Commonwealth Government has run deficits for six years, largely due to a rapid increase in net spending on older households. The costs of repaying these deficits will fall primarily on younger households.

The next ten years are likely to be even more difficult. Falling terms of trade and lower nominal economic growth will drag on revenues at the same time the Commonwealth Government intends to fund substantial new policy initiatives.

The Commonwealth Government is yet to respond to the scale of its budget challenges. In office, both major political parties have hoped that bracket creep and favourable economic conditions would deliver a surplus. Hope is the key word: over the last six years, outcomes have consistently been worse than these projections. The latest short- and medium-term projections rely on optimistic assumptions about organic revenue growth and spending restraint. If any of them fail to materialise, the burden on younger generations will increase.

The biggest worry is that budget projections assume that growth will return to “trend”. The International Monetary Fund recently joined a growing group of economists who believe that long-run economic growth in developed countries was trending lower even before the financial crisis, and future expectations should be lower again.

State budgets are also under pressure. Spending in health and education and other vital areas is growing faster than GDP. States’ revenues are threatened because the Commonwealth has alleviated some of its own budget pressures by substantially reducing promised transfers to state governments for hospitals and schools. Recent state government budgets provide no insight into how they will respond to the looming funding gap.

Hoping for the best is not a budget management strategy: it simply shifts the costs and risk of budget repair onto future generations. More active policy measures to achieve budget repair are required. While containing spending will be important, both the politics of budget repair and the sheer size of the budget gap mean that governments will not be able to restore budgets to balance without also boosting revenues.

In a series of papers over the next two months, the Grattan Institute will set out four priority reforms for repairing Commonwealth and state government revenues. Our proposed policies – reducing superannuation tax concessions, changing capital gains tax and negative gearing, broadening the GST, and introducing a broad-based property levy – would all materially increase government revenue with limited collateral damage to the economy and the most vulnerable in our society.

These changes are politically difficult, particularly as governments do not have the money to “buy” reform. But if they are serious about tackling the looming budget gap governments will need to tackle some of them. Sustainable budgets depend on tough choices, not hope. Making these choices will be vital so that future generations do not have to foot the bill for today’s inaction.

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