This year’s forecast budget surplus of $5 billion is on track to be a deficit of at least $50 billion. Next year, the deficit is tipped to reach at least $100 billion – as a share of GDP and in nominal terms, the biggest since Hughes.
While the battle continues to save lives and keep the spread of coronavirus to a minimum, minds within Treasury and federal parliament have already turned to how these costs will be covered.
KPMG chief economist Brendan Rynne argues that it will take generations of Australians to pay for the emergency actions now in place. He says that before analysts and politicians start throwing around ideas, there must be an agreed starting principle. “The whole country has benefited directly and indirectly from the state and federal stimulus packages, and the only way we are going to pay this back is that everyone contributes,” he says. “The thing we know from tax reform or other major reforms is that it’s really, really difficult. Even before you start there are vested interests trying to protect their patch.”
The government faces three choices to deal with the debt mountain left by the fight against coronavirus.
The easiest, and the one used by the Chifley and Menzies governments, is for sharp economic growth and elevated inflation to eat away at the debt. Surging population growth – both from the post-war baby boom and Australia’s new immigration program – delivered strong economic growth for those governments. Inflation averaged almost 7 per cent between 1946 and 1960.
But University of Western Australia macro-economist Jakob Madsen says this time there will be no escape from tough decisions. “Debt has to be reduced the hard way; particularly because GDP growth is likely to be very low over the next decade,” he says. “Furthermore, I expect interest rates to increase significantly in the years to come because the ageing population and the massive government debt that will build up around the globe will push interest rates up.”
Madsen says federal and state governments will have to look at higher taxes, noting a GST increase, higher petrol taxes, re-introduction of an inheritance tax, elimination of stamp duties and a revamp of mining taxation should all be on the agenda.
The Abbott government set a precedent for increasing taxes in 2014 when it put in place its budget repair levy, a 2 per cent impost on people earning more than $180,000 a year.
George Gear was a minister in Paul Keating’s government, serving as assistant treasurer between 1993 and 1996. Gear, now the mayor of the Perth council area of Melville, says the government needs to treat public money as if it was spending its own cash.
That requires a big change to the “coasting” that governments of both persuasions had pursued over the past eight years to pay down the nation’s overall debt. “The government of good or no tough decisions that offend anyone will have to change. The question is are they up to it? Can they make unpopular decisions ? The debt crisis will force them to. It has to happen,” he says.
Gear says spending has to be in the government’s gunsights as well as revenue initiatives. That includes franking credit reform and the end of negative gearing for established houses, he says.
Deloitte Access Economics director Chris Richardson cautions that the interest bill on government debt will be the least of the country’s worries. Global interest rates are extraordinarily low, meaning interest costs will barely rise over coming years.
But getting down the debt through budget measures alone will be difficult as the Reserve Bank – which has taken official interest rates to their lowest level on record – will be unable to deliver any more economic support.
This means finding tax increases and spending cuts that do the least amount of economic damage. He says the superannuation sector is one where years of tinkering could be resolved with a major overhaul to make the tax on super more equitable, particularly for low income earners. Capital gains tax, particularly its interaction with negative gearing, should also be on the agenda.
On the spending side, education and health stand out as areas of potential reform. “We could finally resolve the question of whether health and education should be state or federal responsibilities,” he says.
Some analysts are suggesting even more radical proposals, including an increase in the $1.6 billion annual levy on banks that Scott Morrison introduced when he was treasurer. “The banks are being protected big time by the government’s actions. There is a case to be made [that] they could pay a fair bit more,” one policy maker said, on condition of anonymity.
The government has argued its various measures are targeted and shortlived with no ongoing cost. That’s true for most, but enabling people to access up to $20,000 of their superannuation will cost the budget at least $3 billion this decade.
The federal budget’s largest annual cost is social security. From the age pension (at $48 billion, the single biggest expenditure) to family tax benefits ($18 billion), welfare payments account for a third of budget spending.
In the wake of the global financial crisis, all governments tightened welfare payments in a bid to bring the budget to heel. While major savings may be elusive, improving the overall effectiveness of the welfare system in the post-virus world may be achievable.
The Australian National University’s Centre for Social Research and Methods last year released research into a system that includes 20 welfare payments and 55 supplementary payments. It came up with ways to cut poverty by 11 per cent (the unemployed would likely get the biggest gains under its proposals) at no cost to the overall budget.
Principal research fellow Ben Phillips says the dream is for the economy to bounce back to normality once the virus moves through the country, but the reality is likely to be far different. “The reality is what we see after all big downturns, like increased number of people out of work for years and other issues. This is not going to be easy,” he says.
EY chief economist Jo Masters says thought needs to be put now into the post-virus economy and the way the government will need to support it. A stimulus package with infrastructure projects should be considered. “We know you don’t want to crunch government spending at the end of this. That will cause even more problems for the economy,” she says.
Shortly before Billy Hughes raised his concerns about the state of the budget in 1945, Harold Holt – future treasurer and prime minister – also gave his views on the nation’s finances. He likened them to the “equally dubious” ingredients found in a meat pie.
The Morrison government is focused on protecting the nation’s residents from a silent killer, throwing every possible resource at the health and economic fallout from that battle. But it will have to return to its own fiscal pie and find a way to make it palatable for current and future taxpayers.
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Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.