Australia had no net debt in 2006 but now has $548.6 billion of it thanks to the stimulus measures needed in the global financial crisis and the pandemic. At 21.6 per cent of GDP, this is lower than other advanced economies but the largest in Australian budget figures that go back to 1970. Politicians have been assuring voters for a decade that this will be kept under control, only to see actual debt levels deepen.
In gross terms, the debt is due to surpass $1 trillion in two years’ time. By that year, the interest bill will be $26 billion, more than the commonwealth spends on schools. Those who argue for new spending with no regard to the bottom line are making the case for even bigger interest payments. The structural deficit needs fixing – and the sooner the better.
How to fix it? Experts and advocates have four broad options.
The first is to assume the problem away – and it is not as unrealistic as it seems. Treasury has used very conservative assumptions about future tax revenue and could surprise with a surplus next year, but a lot depends on commodity prices and, in turn, the war in Ukraine. Independent economist Chris Richardson says the underlying challenge is not as great as it looks in this week’s budget papers.
“Six months ago we were told that fixing this would take the life of your firstborn, but now we’re told – and I believe I’m quoting Bart Simpson – it’s no problemo,” says Richardson, with his usual flair for mixing economics and pop culture. This does not mean the government can sit back and relax because Richardson believes specific parts of the budget need urgent work to maintain a social compact with Australians on tax and spending. The point is that another surge of tax revenue may deliver the surpluses anyway.
Richardson says the structural deficit is on track to go the way of the dodo. When he replaces the Treasury forecasts for commodity prices with figures from the industry department, he calculates revenue would be $14 billion higher next year, enough to produce a surplus. (He’s not alone: Wood at the Grattan Institute has called the previous Treasury assumptions “comically conservative”). It looks like Chalmers and his top economic advisers are keeping the numbers low in the hope they can surprise on the upside.
”Treasury is rightly worried that a chunk of the good news is temporary,” says Richardson. “I think it is less temporary than they think, but they are being deliberately conservative. So Treasury is hiding money from everybody – from other departments, from other cabinet ministers, from Australians. They believe that if we know about it, we’ll spend it, and they’re probably right.“
The second option is to scrap the stage three tax cuts, which were passed by the last government with Labor’s support and are due to cost $21.5 billion in their first year when they commence in June 2024. The changes cut the tax rate from 32.5 cents in the dollar to 30 cents on income from $45,000 to $200,0000, which will mean the top rate of 45 cents in the dollar is only applied to earnings above $200,000. That is why the greatest benefits by dollar value goes to those on higher incomes. Earlier stages in the Coalition tax plan had benefits for those on lower incomes.
“We are one of the wealthiest countries in the world but what we’ve got to grapple with is we are not raising enough revenue,” says Cassandra Goldie, the chief of the Australian Council of Social Service. “Where do we start? We think the stage three tax cuts are deeply unfair, they’re bad policy and they should be removed from the books. We could invest that money in really critical safety nets and essential services.”
The alternative is to scale back stage three. The Grattan Institute suggests the government proceeds with the lower 30 per cent rate on earnings up to $120,000 but keeps the existing 37 per cent rate on earnings from $120,000 to $200,000. The 45 per cent rate would apply as usual to earnings over the top threshold. Grattan estimates this could save $8 billion a year.
Chalmers wanted a debate over stage three last October, but Albanese held the line. With bracket creep eroding earnings, most workers who get the stage three tax cuts do not feel rich. The safest approach for Labor is to honour its election promise and work on a policy for the next term of parliament that might haul back revenue at the top end of the income scale, preferably with an election mandate. Call it stage four.
Spending cuts have to be on the agenda. Finance Minister Katy Gallagher says this budget has $17.8 billion in “savings and reprioritisations” but the jargon hides an awkward fact. There are no net savings in this budget. Any money recovered has been spent on something else – hence the creation of a word like reprioritisation. Outlays will increase by at least $12 billion next year as a result of these policy decisions.
Eslake names a top priority for the axe: a GST deal with Western Australia that uses federal money to top up state coffers. As senior economics correspondent Shane Wright reported in these pages on Thursday, this will cost the federal government $5.7 billion in 2026. The federal deficit will subsidise a state in rude surplus.
Spending on infrastructure can also be spread out over a longer period when construction costs are rising and workers are in short supply. This is why economists are largely happy with the government decision to review this spending rather than add another burst. Wood says this is a chance to work with the states to delay or in some cases drop what she calls “hugely expensive mega-projects” that do not deliver enough benefit for their cost.
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The Grattan Institute also suggests cutting Family Tax Benefit Part B for couples (saving $1.3 billion), cleaning up government grants (at least another $1 billion) and trimming some of the outlays in medicines and pathology (about $2 billion).
One of this week’s most important decisions will increase spending on the National Disability Insurance Scheme at a lower rate than previously planned. That is not a cut, but it is certainly a tighter restraint on the scheme. This saves $15.3 billion over four years and $59 billion over the subsequent six years, adding up to $74.3 billion over a decade. Unlike other options, this is already factored into the new bottom line.
Tax breaks are the fourth and largest target for change – and Chalmers knows it. The treasurer issued a report earlier this year that listed the concessions and, for the first time, highlighted the way wealthier Australians get the greatest benefits. This intensifies the questions about changing concessions on rental property – negative gearing – as well as capital gains, superannuation and family trusts.
Rental deductions for property owners are tipped to cost $26.6 billion in tax revenue in fiscal 2024, more than the deficit that year. The concession on capital gains tax for investors in property and other assets is likely to cost $10.5 billion in the same year. The tax discount for individuals and trusts costs $$23.7 billion this year.
The Grattan Institute even suggests a new rule that would impose capital gains tax on the family home, or at least the value it has over a benchmark of $750,000, on the grounds that the benefits for home owners are too big. This is economic logic and political poison.
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Albanese and Chalmers are walking with care toward a better budget balance. On this and most things, the prime minister is making sure he does not startle voters with dramatic changes he did not tell them about before the election. This leads to inevitable disappointment among those who hoped for faster reform from Labor in power. But Labor only holds power by two seats – and it only secured that power by throwing budget reform overboard.
This means serious budget repair depends on whether Albanese and the cabinet seek a second term with a more ambitious agenda.
Wood says there is no single policy that would produce a surplus outside scrapping the stage three tax cuts. “Generally, you are looking for incremental improvements that chip away at the deficit,” she says. “Many need to be phased in and therefore take a while for the full benefit to be felt. Budget repair is a long game.”
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