The Committee of Audit panel yesterday appeared before a Senate Inquiry, with Committee head, Tony Shepherd, describing Australia’s public finances as “good but deteriorating”, whilst declaring that the Committee would be guided by “fairness” and would ensure that any recommendations to privatise public assets contain safeguards t0 protect the quality of public services.
The Committee’s appearance at the Senate Inquiry has attracted calls from a range of economists to focus on ways to find savings and raise additional sources of revenue rather than reducing the size of government, given the federal government has barely grown over the past 20 years and Australia’s ratio of tax-to-GDP is amongst the lowest in the developed world.
With Australia likely facing decades of Budget deficits unless major reforms are made to the way that taxes are collected, as well as entitlement spending and superannuation, one way or another Budget savings will have to be found.
The fact of the matter is that Australia’s revenue base is shrinking, as the large baby boomer cohort shifts into retirement. As such, the proportion of workers to non-workers is destined to shrink, irrespective of the rate of immigration:
This phenomenon will also cause the employment-to-population ratio and participation rate to trend lower:
The ageing of Australia’s population and the growing army of retirees means more than just a shrinking tax base from having a smaller pool of workers with whom to collect taxes from. The higher proportion of retirees and older aged Australians will increase the amount of health and aged-care expenditure, significantly increasing overall Budget outlays:
Added to these demographic headwinds is the ongoing unwinding of Australia’s terms-of-trade from 140-year highs, along with headwinds in the form of declining mining-related capital expenditures, will detract from Australia’s income/GDP growth and employment, again placing pressure on government budgets via lower personal and company tax receipts and GST, as well higher welfare payments (see below charts).
Unfortunately, a few billion dollars of savings here and there won’t cut it, and instead radical reform is required if the Budget is to get back in the black. According to the Grattan Institute, in a decade the collective budget deficit for Commonwealth and state governments could be as large as $60 billion in today’s dollars!
According to Grattan, major inroads could be made, for example, by:
- broadening the GST to fresh food, health and education (raising $13 billion a year);
- increasing the age at which people can access the Age Pension and superannuation (eventually raising $12 billion a year);
- capping concessional superannuation contributions to $10,000 a year, instead of $35,000 currently (raising $6 billion a year); or
- including the family home in the means test for the pension (raising around $7 billion per year).
None of these (or other) Budget reforms will be easy, but they are vital to Australia’s long-term prosperity and to ensure the integrity of the Budget. I will add that with Australia’s population ageing, and the vested interest pool of older retirees continuing to grow, it would also be wiser to act soon rather than delaying reform.
