Australia ‘is shifting the cost of budget repair onto its kids’

Photo by Brendan Hoffman / Getty Images.

Australians personally might be wealthier than ever, but the government’s finances remain stuck with deficits as far as the eye can see.

That’s the finding of a new report from the Grattan Institute, “Fiscal challenges for Australia”, written by institute CEO, John Daley, and fellow Danielle Wood.

The report says its predecessor’s finding in 2013 that “without structural reforms Australian Governments could face a decade of deficits”, might have been optimistic.

“The Commonwealth Government has run deficits for six years, largely due to a rapid increase in net spending on older households. The costs of repaying these deficits will fall primarily on younger households,” the new report said.

Daley and Wood said that both sides of politics have continuously “hoped that bracket creep and favourable economic conditions would deliver a surplus”.

But “over the last six years, outcomes have consistently been worse than these projections. The latest short- and medium-term projections rely on optimistic assumptions about organic revenue growth and spending restraint. If any of them fail to materialise, the burden on younger generations will increase,” they said.

The key issue is that Treasury forecasts consistently project growth to move back to “trend”. But, this expectation appears out of alignment with the IMF and a growing band of economists who believe that the “long-run economic growth in developed countries was trending lower even before the financial crisis, and future expectations should be lower again”.

That means the government needs to completely rethink its budget approach and strategy because “hoping for the best is not a budget management strategy: it simply shifts the costs and risk of budget repair onto future generations”.

There’s the kids again.

The Institute believes four key areas of reform need to become priorities for reforming Commonwealth and state budgets:

  • reducing superannuation tax concessions;
  • changing capital gains tax and negative gearing;
  • broadening the GST; and
  • introducing a broad-based property levy

There are a couple of sacred cows there and it was only yesterday that Prime Minister Abbott said that the government would not tinker with superannuation.

“We have made a very clear decision that we aren’t ever going to increase the taxes on super, we aren’t ever going to increase the restrictions on super because super belongs to the people,” the Prime Minister said. “It’s your money. It’s not a piggy bank to be raided by government whenever it’s short.”

Which is why Grattan says that the changes will be “politically difficult”, particularly as governments do not have the money to “buy” reform.

Getting the budget back on a sustainable footing will take “tough choices, not hope” the report says. Otherwise future generations will have to “foot the bill for today’s inaction”.