Price Waterhouse Coopers (PwC) has today warned that Australia’s various levels of government could face a generation of budget deficits unless the tax system is radically reformed to shift the tax base towards consumption and land taxes, and expenditure is curtailed. From the AFR:
Without fundamental change government deficits could balloon even further, from $27.4 billion now to $593 billion by the 2050 financial year, PwC warns.
“Even without a major downturn the longer-term picture is bleak,” said chief executive Luke Sayers.
“Deficits of this magnitude are ultimately unsustainable and would challenge Australia’s social fabric.”
Blasting the tax system as “broken”, Mr Sayers said that he forecast a future of lower living standards and poorer community services unless tax reform was embraced, spending became sustainable and productivity and workforce participation lifted.
“Without expenditure constraint and tax reform any surplus will be short lived and we will see deficits growing strongly for at least a generation…
PwC argues for a tax mix weighted more heavily in consumption and land taxes, which distort behaviour and impact growth less than taxes on labour and profits.
I am not surprised by PwC’s prognosis. As explained in The three three horsemen of a Budget Apocalypse, Australia is facing three medium to long-term structural headwinds that are likely to lock governments into deficits for years to come.
The first of these headwinds are the falling terms-of-trade, brought about by declining commodity prices, which will weigh on national income growth and depress collections of company taxes, personal taxes, GST, as well as state mining royalties.
The second related headwind is the decline of mining-related capital expenditures, which will detract from Australia’s GDP growth and employment, again placing pressure on government budgets via lower personal and company tax receipts and GST, as well higher welfare payments.
The final longer-term headwind relates to Australia’s ageing population. Australia’s dependency ration – i.e. the ratio of the non-working population, both children (< 20 years old) and the elderly (> 65 years old), to the working aged population – is projected to rise over coming decades as the large baby boomer cohort enters retirement. As such, the Government will have a much smaller pool of workers with whom to collect taxes from, making it much more difficult for the Government to raise the required amount of tax revenue. The higher proportion of retirees and older aged Australians will also increase the amount of health and aged-care expenditure, significantly increasing overall budget outlays.
In short, without radical reforms to the way taxes are collected and fiscal expenditures, the above three headwinds will ensure that government budgets remains in deficit for years to come, irrespective of which party is in office.
