Canberra urged to seize ‘sliding door moment’ for structural reform
Simply banking surprise upsides in revenue might help the budget deficit but does nothing to disarm the “fiscal timebomb”.
The government should seize upon a “sliding doors moment” for structural reform of its revenue base while the federal budget is in its strongest position since the Howard-Costello years, according to the latest Deloitte Access Economics Budget Monitor.
It said in contrast to the “precarious position” position of the economy – with growth down increasing population growth and inflation hitting households –the government has an expanding tax base and revenue was forecast to increase.
It said if the government kept banking the additional revenue it could secure a larger-than-expected surplus in 2022–23 and potentially another surplus in 2023–24.
Deloitte Access Economics partner and report lead author Stephen Smith said that the approach fixed the budget but represented a huge missed opportunity to address the longstanding structural deficit.
“At its simplest, the government’s fiscal strategy appears to be to project spending in line with relatively conservative revenue projections, and then stick to those spending projections when revenue outperforms,” he said.
“In the mining boom in the early 2000s, Treasury consistently underestimated revenue and the resulting upside surprises were spent on everything from personal income tax cuts to baby bonuses.
Report co-author Cathryn Lee said December’s Mid-Year Economic and Fiscal Outlook was likely to reveal over $70 billion worth of additional revenue over the next four years compared to the budget forecasts released in May.
“Treasury’s commodity price assumptions are likely to be conservative, leading to upward revisions in company taxes. High inflation, a strong labour market, and a surging population are likely to grow the personal income tax base beyond expectations.”
Deloitte Access Economics was now forecasting an underlying cash surplus of $2.4 billion in 2023–24 compared to the $13.9 billion deficit expected in the 2023–24 budget. From there, the deficits were predicted to be smaller than previously anticipated by more than $51 billion through to 2026–27, allowing a reduction in net debt to an average of 20 per cent of GDP over the next four years, rather than the forecast 23 per cent.
But Mr Smith said relying on “forecast misses” to improve the bottom line did nothing to address the long-term spending challenges.
“Fiscal timebombs are ticking away in plain sight,” he said. “It’s no secret that spending pressures will accelerate markedly over coming decades, with the ‘fast five’ categories of costs expected to grow particularly quickly: health, aged care, the National Disability Insurance Scheme, defence and interest costs.
“A fiscal strategy that simply relies on a fast-growing nominal economy and a disciplined approach to banking the revenue surprises is not an adequate fiscal strategy for the long run.”
Deloitte referred to alternative tax policy settings it proposed six months ago that involved a simpler and lower personal income tax, a broader and higher GST (with compensation for welfare recipients), and a reduction in the capital gains tax discount.
“These policies do not represent an exhaustive set of reform options. They are examples of balanced, meaningful and achievable reforms that would place the budget on a firmer structural footing while contributing to a more equitable and efficient tax system,” said Mr Smith.
Deloitte Access Economics estimated that the three reforms would add $377 billion in revenue over 10 years and shift the budget into surplus through 2029–30.
“Critically, the reforms would do more than just alleviate the structural budget deficit,” said Mr Smith. “They would simplify the tax system, lessen the burden of our tax system on productivity, and help solve some of the equity issues and intergenerational concerns stemming from our current tax system.
“Reform is always easiest from a position of fiscal strength. The current three-year election cycle may ultimately be seen as a ‘sliding doors’ moment for Australia.”
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