To get our economy on track, we need both tax and spending reform
Judith Sloan does many a disservice when she dismisses calls for tax reform as “code for higher taxes”. This sort of commentary makes it difficult for politicians to fix a broken system.
She’s right to focus attention on government spending. But the truth is, tax reform and spending reform must go together. Reforming spending alone can’t fix the problems with the tax system, nor can tax reform fix spending.
The Intergenerational Report set out the challenges Australia faces: an ageing population, fairness between generations, productivity, climate change and sustained government deficits. These are issues we are facing today, not just problems to be faced tomorrow.
Australia’s population is already ageing. In 2000 we had more than five working-age people for every one over 65. Now it’s around four. In 20 years we will have around three. And fewer working Australians mean fewer people to bear a growing tax burden. This is a policy choice.
The Grattan Institute found the wealth of over-65 households increased by more than 50 per cent between 2004 and 2016, while the wealth of under-35 households barely moved. Remarkably, the share of households over 65 paying income tax has fallen from 27 per cent in the mid-1990s to 17 per cent now, despite their incomes growing much faster than those of the under-35s.
At the same time, our economy is not set up for the future. Productivity growth has ground to a halt, flatlining for the past three years, and business investment is near a 30-year low.
Climate-related natural disasters cost $38bn in 2021 and continue to rise, and governments spend billions more on the clean-up rather than investing in disaster prevention and preparedness.
The commonwealth has been in deficit for most of the past 15 years and the IGR shows more in the decades ahead.
To get back on track, we must look at tax and spending. Australia has a spending integrity problem. We spend billions of dollars on programs with few measures of spending effectiveness. Education is a stark example. Under Gonski 2.0, schools funding is increasing by more than $1bn a year, only to see academic performance decline. There is little economic evaluation of health spending and we are used to seeing infrastructure projects – such as Snowy 2.0 and Inland Rail – cost double or triple the budget.
To truly address spending, we need transparent economic evaluation of public spending, parliamentary oversight of off-budget spending and real improvements in public sector productivity. The government has made some sensible moves: ending some of the most egregious grant rorts, investing in a Centre for Evaluation and discussing how to fund aged care properly. But it needs to go further. And we need the political will to deliver sensible reform.
One example is infrastructure spending. Earlier this year I proposed amendments to require independent evaluation of costs and benefits before the government could invest in major projects. It was based on an amendment moved by Anthony Albanese when he was in opposition and would have ensured public money went only to the best projects. It’s the kind of reform we need, but both major parties opposed it.
We must pursue significant spending reform, but it isn’t enough to fix the considerable problems facing us. Even if we ensured an ageing population didn’t increase the tax burden, it wouldn’t fix the fact the next generation may be the first one that is less well off than their parents. Is this what Australians want for their children?
While tax is not the only driver, every tax setting influences how wealth and tax are shared across generations. We can’t address an ageing population or intergenerational fairness with one hand tied behind our backs.
Tax is also a critical lever for productivity and climate action. Economic and policy experts are almost unanimous in telling us our tax settings – particularly stamp duty, payroll tax, fringe benefits tax and company tax – drag down productivity. Other factors such as workplace relations and red tape also matter, but we can’t ignore tax. So I am working with economists, business groups, social groups, unions and environmentalists to build consensus on meaningful tax reform for two reasons: because tax is a prime mover for many of our most pressing challenges and because nobody else is.
Broad tax reform is simply too toxic for the major parties. And our approach is revenue-agnostic – working out how to tax, before working out how much.
The goal of each generation is to leave the next one better off. If we are serious about that, both tax and spending reform must be on the agenda.
Allegra Spender is the federal member for Wentworth.
This article was originally published in The Australian.