Australia’s federal budget deficit has shrunk dramatically since the pandemic crisis, but once the favourable temporary influences pass a structural deficit is expected to persist.

Among the many issues this structural problem raises for discussion, this paper examines past, current and projected levels of government expenditure and revenue. It argues that the structural problem arises from expenditure being well above past averages, not from revenue being below past averages — in fact, revenue is projected to be above average and personal income tax bracket creep is the key driver of this result.

This suggests that the first place for the government to search for a remedy for the structural problem should be expenditure reform, not additional revenue from tax increases. Expenditure policy should subject existing and new spending to close scrutiny to remove low priority spending and reform programs in order to strengthen their effectiveness and efficiency with a clear focus on better outcomes with less expenditure — or at least less growth of expenditure than is currently projected. This approach would leave tax reform to focus on restructuring the tax system for better alignment with criteria of economic efficiency, incentive, fairness, simplicity and sustainability.