The cost of putting off an economic reckoning is looming

The issue of budget repair is becoming increasingly urgent across much of the Western world, including Australia. State government debts have more than doubled since 2019, with interest costs on this debt now exceeding 0.6% of the nation's annual economic output. The federal government, while less profligate than before the pandemic, still faces a structural deficit.

A new Grattan Institute report warns that future generations will bear the brunt of these financial challenges, either through higher taxes or reduced public services. Young Australians, in particular, are already feeling the impact of delayed policy decisions. Over half of adults under 30 have altered their plans for starting a family due to rising living costs, and nearly half have reconsidered having children altogether.

This "enforced procrastination" is likely to exacerbate budget problems, especially as Australia ages and healthcare costs rise.

The Grattan Institute proposes a two-pronged approach to budget repair, advocating for both spending and revenue reforms. While they caution against cutting wasteful public spending, they argue that lasting solutions require reforms to both spending and taxation. They propose an expanded goods and services tax (GST) with a higher rate of 15% and fewer exemptions, as well as a modest revenue increase through taxation of fresh food.

The additional $76 billion in annual revenue they estimate could be used to reduce income taxes for low- and middle-income earners, boost welfare payments and rent assistance, and improve fiscal sustainability in the face of soaring healthcare costs.

However, implementing these proposals faces significant political challenges. The proposed GST changes, particularly the higher rate and taxation of all food, have already sparked controversy, with politicians wary of alienating key voting blocs like Western Australians. The federal government's attempts to claw back savings, such as reducing private health insurance subsidies for older Australians, have also faced opposition, with critics pointing to potential hardship for pensioners.

Despite these obstacles, the Grattan Institute remains optimistic that their vision for budget repair is necessary to address the growing fiscal challenges facing Australia.