13 ways to fill Budget Black Hole
Treasurer Chalmers has a $70 billion a year budget hole: we’ve found 13 ways to fill it
Kate Griffiths, Grattan Institute; Danielle Wood, Grattan Institute, and Iris Chan, Grattan Institute
No one likes spending cuts and tax hikes, but on our estimate the government will soon need more of them if they are going to make a dent in looming A$70 billion a year budget deficits.
A new Grattan Institute report, Back in Black? A menu of measures to repair the budget argues the present combination of low unemployment and high inflation makes this a good time to start to put things in order.
The sooner we do, the sooner we will be well-placed to respond to future economic shocks and avoid pushing costs onto future generations.
We were right to spend big when COVID hit
The massive government support unleashed during the 2020 and 2021 lockdowns was essential for supporting households and businesses and helped keep unemployment low and Australia’s 2020 recession mild.
It left us with government debt that, at 23% of GDP, set to climb to almost 32% by the end of the decade, is high by historical standards, but low by international standards.
Our real problem is a structural one of spending growing faster than revenues.
And it was building long before COVID.
Demands on government are set to grow
Costs are inexorably growing for three reasons.
The first is that our expectations are growing as we age and become more wealthy, pushing up spending on healthcare, disability care and aged care.
The second is that many of these services happen to be the hardest to mechanise, meaning there is little we can do to stop them costing more over time.
The third reason is geopolitical and climate developments. The huge AUKUS deal is just the latest manifestation of pressure to ramp up defence spending. Increases in the frequency and severity of natural disasters mean we have no choice but to spend more on emergencies than before.
Combined with higher interest rates that are pushing up the cost of servicing debt, these three forces are set to leave a persistent gap between government revenue and spending of about 2% of GDP according to Treasury calculations. That’s $50 billion per year in today’s dollars, each and every year.
Source: Treasury, October 2022 Budget, Chart 3.20
But even that grim forecast looks optimistic.
Grattan Institute estimates suggest the true structural gap exceeds $70 billion per year when extra, largely unavoidable, spending is taken into account – including on AUKUS, overdue wage rises for care workers, more realistic growth in hospital spending, and long-overdue increases in unemployment benefits.
See Figure 1.2 in Grattan report for a full explanation and sources.
And that’s just the next decade. In the longer term, the budget will come under extra pressure from slower productivity growth, Australia’s ageing population, and climate change.
Higher economic growth and productivity growth would reduce the enormity of the challenge, and Grattan Institute has put forward ideas about how to support this before.
But hoping we will be able to grow our way out of chronic budget deficits is not a prudent approach. While we should try to boost growth, by itself it is unlikely to get the nation’s finances onto a sustainable trajectory.
13 multibillion dollar ideas
The size of the problem, and the political difficulty of budget repair, mean both spending and revenue measures need to be on the table.
Spending cuts have been the focus of budget repair efforts for most of the past decade, so a lot of the low-hanging fruit has already been picked. But there are still savings to be had.
The biggest would come from greater discipline in decisions about what to spend on infrastructure and defence. Better decisions upfront based on economic – rather than political – considerations could save several billion each year.
Buying smaller, more regularly and “off the shelf” would reduce the risks and costs of mega-projects that have a history of massive cost overruns.
Our report identifies a further $15 billion a year of savings measures, including undoing Western Australia’s special GST funding deal, counting more of the family home in the age pension asset test, and improving hospital efficiency and purchasing in health.
But even with substantial spending cuts, tackling Australia’s budget challenge without compromising core services will require more revenue.
The biggest opportunity comes from plugging “leakages” in the income tax system. Tax breaks and minimisation opportunities are growing. Reining in superannuation tax concessions, reducing the capital gains tax discount, limiting negative gearing, and setting a minimum tax on trust distributions could collectively raise more than $20 billion a year.
Reworking the legislated Stage 3 tax cuts so they are less generous at the top end would save another $8 billion per year.
Lifting the age at which people could get access to their super from 60 to 65 and freezing compulsory super contributions at their present level (10.5% of salary) would save at least another $8 billion.
Other options include lifting the rate of goods and services tax (with a compensation package, and the Commonwealth and states sharing the net revenue), winding back fuel tax credits and beefing up the petroleum resource rent tax.
Ordering the whole menu at once would be a recipe for indigestion. But if Treasurer Jim Chalmers chooses just a few items on the menu, we will be well on the way to tackling Australia’s budget problem.
Kate Griffiths, Deputy Program Director, Grattan Institute; Danielle Wood, Chief executive officer, Grattan Institute, and Iris Chan, Fellow, Grattan Institute
This article is republished from The Conversation under a Creative Commons license. Read the original article.
Treasurer chooses words carefully as report recommends tax reform to fix budget hole
Facing a possible $70 billion deficit by the end of the decade, Jim Chalmers played coy about what economic moves the government may make.
Treasurer Jim Chalmers is choosing his words carefully a month out from the federal budget as a new report reveals Australia faces more than two decades of budget deficits unless the government overhauls spending and boosts revenue.
According to a pre-budget report released by the Grattan Institute on Wednesday, Australia’s structural deficit could blow out from official estimates of almost $50 billion each year to more than $70 billion a year (in today’s dollars) by the end of the decade.
The report, written by the think tank’s Danielle Wood, Kate Griffiths and Iris Chan, suggests that “the size of the problem” can’t be solved by “one side of the budget alone” and puts forward a smattering of options including redesigning controversial stage three tax cuts and slashing super tax concessions.
Speaking to ABC Radio National on Wednesday morning, Treasurer Jim Chalmers said the government had some “common ground” with what was put forward in the report, pointing to the government’s efforts to increase the tax rate on super balances above $3 million, and its appetite to make changes to the petroleum resource rent tax (PRRT).
Chalmers, however, wouldn’t be drawn into discussion over a redesign of the stage threes, which the government appears determined to deliver as promised, and declined to get into which recommendations the government would consider, and which it would rule out.
He instead turned attention instead to slated energy bill relief set to arrive as part of the government’s May budget.
“What we will try and do in this budget, just like we did in October, is find the best combination of trimming spending and redirecting it to areas which are more important to us, some sensible tax changes, whether it’s multinationals or superannuation, and spending restraint so that we can make our Budget as resilient as it can be,” Chalmers said.
On the revenue side, reducing or “better targeting” tax concessions on superannuation could save the government more than $11.5 billion each year, the report said, alongside a number of other cuts to income tax breaks, which raise as much as $20.8 billion in revenue every year.
Super tax concessions cost the budget about $45 billion a year, according to the report, and are projected to cost more than the age pension by 2036.
“These tax breaks predominantly benefit the top 20% of income earners, who are unlikely to qualify for an age pension. Without change, superannuation risks becoming a taxpayer-funded inheritance scheme,” the report’s authors said.
In February, the government announced that it would raise the tax on super balances above $3 million from 15% to 30% in a bid to make the super system fairer and raise more than $2 billion in revenue each year.
The Grattan report also suggests the government consider redesigning the stage three tax cuts so they are “less generous” to the nation’s top earners.
The cuts, which are the final phase of the former Morrison government’s tax plan, will do away with the 37% tax bracket altogether, lower the 32.5% bracket to a flat 30%, and raise the threshold for the top tax bracket from $180,001 to $200,001.
In effect, the cuts will see those with an annual income of $200,000 end up paying the same rate of tax as someone earning little more than the minimum wage.
The Grattan report suggests keeping the 37% tax bracket in order to “reduce their generosity at the top end”, as part of a broader sweep of income tax reform.
“It should start with plugging ‘leakages’ in the income tax system,” the report says, referring to costly tax breaks that are coming at a “growing cost to the budget”, which has been in deficit since the 2008-9 financial year.
Broader tax reform could include an increase to the GST “in conjunction with targeted increases in welfare and reductions in income taxes” that would increase revenue and broaden the tax base.
According to researchers at Grattan, reducing super tax concessions could emerge as one of the most politically challenging to push through. The stage threes, meanwhile, carry a softer political warning label.
Among the report’s cost-saving suggestions were cuts to “wasteful” spending on major defence and transport projects to pocket savings in the order of billions, along with winding up Western Australia’s GST arrangement and reducing spending on politicised grants and advertising.
It also suggests hemming in the National Disability Insurance Scheme, which is set to cost about $35 billion this year and expected to grow to as much as $100 billion each year by 2033.
More effectively tackling fraud and rolling out accreditation for professionals who help people get on to NDIS plans should be included in the government’s upcoming review, the think tank said, as well as scope for state governments to step up their support.
“The very high rates of young people accessing the NDIS — for example, 9% of boys aged five to seven are on the NDIS — is evidence of many flocking to the scheme who may be more cost-effectively supported outside it,” the report said.
Aged care has also seen major cost growth, which is expected to swell to at least 2.1% of GDP by 2061. If the Royal Commission recommendations are implemented in full, spending could grow to as much as 2.5% of GDP by 2061.
John Buckley @johnbuckley_
John Buckley penned this article as a reporter at Crikey. He previously covered national affairs and politics at VICE, and his reporting has appeared in The Sydney Morning Herald, The Age, and The Washington Post, among other publications.
