State Debt Rises as Young Australians Pay the Price

More than half of Australians under 30 have changed their plans about having children because of cost-of-living pressures, and state government debts have more than doubled since 2019. The Grattan Institute warns that “Tomorrow's Australians will increasingly pay the price for today's deficits, whether through higher taxes or worse public services.” Governments make the decisions; families trying to afford housing and everyday life bear the costs.

Who carries the bill

An AMP survey-based report says close to half of adults under 30 have reconsidered having children altogether. Nearly two-thirds feel they need to get onto the property ladder before starting a family, while AMP calculations show most need more than a decade to save a 20 per cent deposit. Australians are having children later and having fewer of them, the report says, a trend that could compound budget pressures, particularly as smaller migration programs are in vogue.

Tax breaks, planning restrictions, low interest rates and financial deregulation combined to push housing out of reach, AMP says. Its deputy chief economist, Diana Mousina, writes: “As Australia ages, the challenge is sustaining living standards and meeting growing demand for care without placing an ever-greater burden on working families.”

Grattan says interest payments on state debt have doubled to 0.6 per cent of Australia's annual economic output. As interest rates increased, the cost of borrowing to fund deficits rose roughly four-fold since immediately before COVID. Outside the pandemic, governments last owed this much when Australia was still paying off debt from a world war, the report says.

The federal government hasn't spent as freely since the pandemic stimulus period ended, but it remains in structural deficit and could face liabilities if some states approach fiscal disaster. Grattan says governments should save now because global economic, climate and geopolitical shocks are expected to become more frequent. Most governments aren't doing so.

The proposed fix shifts the tax machinery

Grattan's report, “Budget reboot: How to fund Australia's future”, calls for greater spending discipline, especially at state level, rather than sweeping budget cuts. Lasting repair needs spending and revenue reform, not merely cuts to “a few wasteful public spending programs”, it says. Australia is “a relatively low-taxing country”, the report says, with tax at 29.4 per cent of GDP compared with an OECD average of about 34 per cent.

Its preferred measure would expand the goods and services tax, raising the rate from 10 per cent to 15 per cent and cutting exemptions. That would mean taxing fresh food and considering the removal of exemptions for health and education, which Grattan says favour higher-income earners who spend more on those services. The proposal would raise an additional $76 billion in annual revenue.

Grattan proposes using close to half that revenue, or $33 billion, to cut income tax, particularly for low- and middle-income earners. It would direct about $25 billion to higher welfare payments and rent assistance to offset the GST and reduce poverty, then allocate the remaining $18 billion to states facing rising health costs. Grattan also recommends ending the 2018 GST allocation deal with Western Australia and using the $6 billion saved to improve the federal budget bottom line.

Reform meets the veto points

The analysis says the plan may not be politically achievable. Anthony Albanese has opposed abandoning Western Australia's favourable GST distribution, which his Liberal predecessor Scott Morrison devised. The federal government also faces opposition to removing an additional private health insurance subsidy for older Australians. Opponents say pensioners would be worse off, but the modelling they cite doesn't distinguish full- and part-pensioners. Grattan's analysis says relatively few full pensioners are likely to have private health insurance; most insured pensioners receive part-pensions and often supplement them with income from substantial savings.

The government also faces pressure over proposed reforms to rein in NDIS spending, reduce tax minimisation through trusts, and reverse negative gearing and capital gains tax breaks. The analysis says those breaks inflated the housing market and reduced intergenerational equity. Treasurer Jim Chalmers recently said: “Power is much more effective right now in the distorting and blocking than the building or reforming.”

Joe Hockey, one of Chalmers's predecessors, told The Business that matters would need to get worse before improving. The article links Hockey's reform vision to his largely rejected austerity budget of 2014. “There's going to have to be a crisis now. There's going to have to be a financial crisis,” the Abbott government treasurer said. “And people will only take the medicine when they feel really ill about it. And I think this is coming right across the world.” Debt is ballooning globally, and interest rates are rising, the article concludes.