Mind the gap
A report this week by the Grattan Institute offers clues as to how a Labor government might reduce the structural deficit which it estimates will rise to $100 billion if left unchecked by the end of the decade. The report’s title, “Back in black?” would be heartening were it not for the question mark which suggests that Grattan thinks that budget deficits from here to eternity are an actual option. BY NIck Cater.
Economic historians will one day debate when governments abandoned the principle of balanced budgets. Was it 2008 when a Labor government panicked during a brief international financial crisis and began shovelling money out of the door? Or was it 2022 when the election of a Labor government determined that emergency levels of pandemic spending should became the new normal?
Either way, 20 years from now there will be little disagreement about the consequences when kids entering high school today will be members of a shrinking proportion of taxpayers carrying the burden of a bigger government on their backs.
The strain an ageing population puts on government finances should hardly be a surprise.
In 2002, the first Intergenerational Report forecast that the dependency ratio (the proportion of non-working age people to those of working age) would rise steeply in coming decades.
That ratio was 48.5 at the time of the report, well below the world average. At the time of the 2021 Census it had risen to 54.3 putting it on track to meet Treasury’s 2002 forecast of 64.3 in 20 years’ time.
The underlying drivers are unlikely to change. More people will live longer and fewer will have babies. Immigration can offset those factors only slightly and the long-term effects cannot be avoided since immigrants possess no magical immunity to the ageing process.
To make things worse, the burden on government is far heavier than that Treasury forecast in 2002. The report’s authors assumed that the ratio of government revenue to gross domestic product would fluctuate around 24 per cent. The latest Treasury projections, however, point to government spending averaging 27.2 per cent over the next 10 years.
Hence the so-called structural budget deficit, about which we will be probably hearing much for the next month as Treasurer Jim Chalmers prepares to deliver his second Budget. It is the gap between spending the government of the day considers must be spent and the revenue it is able to raise.
A report this week by the Grattan Institute offers clues as to how a Labor government might reduce the structural deficit which it estimates will rise to $100 billion if left unchecked by the end of the decade. The report’s title, “Back in black?” would be heartening were it not for the question mark which suggests that Grattan thinks that budget deficits from here to eternity are an actual option.
While the report says that returning to surplus will require both cuts to spending and an increase in revenue, it heavily favours the latter course. Grattan manages to find just $15 billion in savings. They include $1.4 billion which could be saved by scrapping Family Tax Benefit Part B for all except single-parents. For Grattan, pressuring mothers of dependent children into the workforce is apparently a good thing.
So too is including more equity in the family home as part of the Age Pension asset test. This tax-grab on unrealised capital gains will save another $4 billion. Other proposed savings, like undoing the WA GST deal or reviewing defence procurement arrangements, are political non-starters.
The revenue raising options are dealt with greater gusto. Grattan identifies $53 billion of costed revenue proposals, including $21 billion in reduced tax concessions on superannuation, capital gains tax, negative gearing and family trusts. It proposes raising the GST to 15 per cent with low-income compensation. It also recommends that the government break its 2022 election promise to implement the Stage 3 tax cuts and instead retain the 37 per cent rate.
Grattan goes on to include a set of un-costed revenue grabs under the heading “bolder options”. Of these, realigning company tax rates at 30 per cent is arguably the least-worst in a very bad bunch. The others Grattan favours are a carbon tax and an inheritance tax.
The good news is that most of Grattan’s return to surplus ideas are so politically toxic that they are unlikely to be adopted by a Labor government in such a crude form.
The bad news is that Labor appears to have few ideas of its own as to how to cut spending and is searching hungrily for more revenue. Since the ageing population makes extracting more in income tax progressively harder, a government that wants to increase revenue must look to taxing wealth.
Personal retirement savings, whether in superannuation or property, is no longer sacred territory, if indeed it ever was. We are back in that dispiriting world Robert Menzies spoke of 80 years ago in his Forgotten People radio broadcast with measures that penalise the thrifty, discourage independence and looks on income from savings as if it possessed a somewhat discreditable character.