25 August, 2023

The 2023 Intergenerational Report released by The Treasury this week predicts that in 40 years 50% of Australian Government expenditures will be allocated to the National Disability Insurance Scheme, aged care, health, defence, and interest payments on debt.

These sectors currently cover one-third of expenditures, and spending is expected to increase by 5.6% of GDP to $140 billion by 2062-2063. Poor economic conditions, high inflation, increasing interest rates, climate change, and an aging population will present fiscal challenges for these expenditures.

The report projects future budgetary scenarios to assess the prolonged viability of existing government policies, and analyse how an ever-changing society will affect the future economy. The report doesn’t address the tax of an aging population, but the process doesn’t have to be painful.

The Institute of Public Accountants has for many years been advocating for holistic and bold tax reform, starting with the tax mix, as part of the solution to our crumbling tax base and lagging productivity growth.

Tax reform will help the Australian Government to create jobs, and grow the economy. Tax reform can also help the Australian Government to manage long-term fiscal sustainability, and long-term debt to lower the risk from structural expenditures

IPA general manager technical policy Tony Greco said the Intergenerational Report is a strong reminder of the need to address long-term policy problems with long-term policy solutions.

“Clearly, our tax settings are not fit for purpose, and the situation will get worse as demographic changes cause long-term pressures to build up over time,” said Greco.

“To ignore tax reform is like putting your head in the sand while allowing debt to climb as deficits are locked in for at least the next ten years in order to fund essential services,” said Greco.

Australia is reliant on individual income taxes, and company income taxes. Approximately 60% of the Australian Government’s tax receipts come from these taxes, which is nearly twice the Organisation for Economic Cooperation and Development average. The OECD has warned Australia that the outlook for future living standards will be downgraded if reforms to increase productivity growth, and decrease expenditures from an ageing population, are not introduced.

“The best insurance we have is to undertake fundamental tax reform to address the deficit and improve lagging productivity growth,” said Greco.

“A piecemeal approach over time like the ‘Better targeting superannuation concessions will only add to the complexity of the tax system without dealing with the real problems.”

Personal tax revenue growth is driven by bracket creep, and reliance on personal income tax can have long-term risks for the Australian Government’s budget. Treasury analysis shows that the estimated average personal income tax rate will rise from 23% to 27% over the next decade. Even if the stage three personal income tax cuts take effect in 2024-2025, it still represents a significant burden on future taxpayers unless corrective action is taken to broaden the tax base.

An effective tax system should achieve:

  • Fairness, to ensure equal taxation that corresponds with the ability to pay it.
  • Efficiency, to create a system that doesn’t distort economic decisions.
  • Simplicity, to provide clarity, and reduce the administrative burden.

Arguably, the Australian Government’s tax system has moved away from these principles. The current system relies on high levels of compliance, but this can change over the next 40 years if Australians don’t believe the system is fair.