This piece was originally published in the AFR. Click here to read.
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Tightening the purse strings is great, but it won’t solve our economic problems. The scale of the challenge means a review of the tax system is critical.
There is something mildly entertaining about being lectured on government spending by someone whose party took $136 billion more in spending measures to the last federal election – and still lost in record style.
But irony aside, former NSW Liberal Party president Jason Falinski raises a fair question: can we deal with the intergenerational and fiscal challenges I and others have identified simply by managing spending, or do we need tax reform too? My answer is that spending restraint is necessary, but not sufficient – tax reform is critical – and that it is time we move beyond platitudes to costed proposals.
At McKinsey, I learnt to ask a deceptively simple question: What is the problem you are trying to solve? I see three problems in our current economy that are either caused or exacerbated by our personal tax system.
First, fewer Australians are now able to build financial security for themselves compared to previous generations. Despite being more educated and more likely to work, younger Australians own fewer homes, carry more debt, have fewer children, and spend less on non-essentials than their parents did at the same age. The wealth of younger Australians has stalled, while that of older generations has grown substantially. This was happening before the recent high inflation era.
Second, our tax system taxes people most heavily precisely when they face the greatest financial pressure. A younger household earning $100,000 pays on average twice the tax of an older household on the same income – despite being around twice as unlikely to own their home and four times less wealthy.
Third, our tax system is not resilient to an ageing population. Our community is rapidly ageing, our working-age population is shrinking, and the proportion of older Australians paying any income tax has dropped from 27 per cent to 17 per cent over recent decades. This is not sustainable.
Restraint is not enough
Can spending restraint alone solve these problems? It can help – but the scale of challenge is genuinely underappreciated, and that is why tax reform is critical.
At 26.9 per cent of GDP, government spending is at a historically high level, outside the pandemic. Our ageing population creates real long-term spending pressure, but the pace of increase in recent years is unsustainable. As The Australian Financial Review has reported, Australia’s leading economists agree the government must pull back spending.
There are specific areas where significant savings are achievable. The National Disability Insurance Scheme is a critical program, but its growth and scale are fiscally unsustainable. It’s essential the government wind back NDIS spending growth.
Our $100 billion-plus infrastructure pipeline should be rigorously prioritised on value-for-money grounds – too much of it currently is not. The WA GST deal should be revisited, although WA electoral maths means the major parties can’t admit it.
The fringe benefits tax exemption on electric vehicles is a concession that has outlived its justification. And across the public service, AI offers genuine opportunities to deliver better services at lower cost – we should be pursuing this aggressively, alongside the return of efficiency dividends.
But nothing replaces the harder work – the line-by-line, painful justification of every dollar spent. That means cutting underperforming government pet projects, not just those inherited from the previous government.
Even with all of this, the arithmetic is brutal. Over the next decade, we should return the budget to structural balance, end our reliance on bracket creep to fund growing expenditure, and get defence spending to 3 per cent of GDP. Together, these represent an enormous fiscal task – somewhere in the order of $910 billion over 10 years. Spending restraint and stronger economic growth must do the heavy lifting. But history shows it is a rare government that achieves this quickly, and on its own it leaves the three problems I identified substantially unaddressed.