State Debt Has Doubled Since 2019, Grattan Warns

State government debts have more than doubled since 2019, while the interest bill has doubled to 0.6 per cent of Australia's annual economic output. That's the central finding of a new Grattan Institute report, "Budget reboot: How to fund Australia's future." The report warns tomorrow's taxpayers will bear the cost of today's deficits.

Borrowing costs to fund those deficits have risen roughly four-fold since just before COVID, as interest rates climbed. Outside the pandemic itself, Grattan says, Australian governments last owed this much when the country was still paying off debt from a world war. "Tomorrow's Australians will increasingly pay the price for today's deficits, whether through higher taxes or worse public services," the report states.

The Debt Problem

Grattan's analysis says Australia and much of the Western world have delayed economic reform, including budget repair, with consequences for long-term fiscal sustainability and fairness between generations. The federal government hasn't been as profligate since the pandemic stimulus period ended. But it remains in structural deficit and could face liability if some states approach fiscal disaster.

The think tank's advice is blunt: save now. Global economic, climate and geopolitical shocks are expected to become more frequent. Most governments aren't saving, Grattan says.

The plan calls for tighter spending discipline, especially at state level, instead of sweeping budget cuts. Lasting repair, it says, requires changes to both spending and revenue, not simply trimming "a few wasteful public spending programs."

The Revenue Proposal

Grattan describes Australia as "a relatively low-taxing country," with tax at 29.4 per cent of GDP compared with an OECD average of about 34 per cent, and argues there's room for a modest increase. Its preferred option is a bigger GST, raising the rate from 10 per cent to 15 per cent and cutting exemptions. The plan would tax fresh food and consider removing other exemptions, including those for health and education.

The higher rate and broader base would raise an extra $76 billion a year. Grattan would direct close to half, $33 billion, to income tax cuts, particularly for low- and middle-income earners. About $25 billion would fund higher welfare payments and rent assistance to offset the GST and reduce poverty. The remaining $18 billion would support state finances as health costs rise. 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.

Political Reality

The analysis acknowledges the package may not be politically achievable. Anthony Albanese has opposed ending Western Australia's favourable GST distribution, which the article says his Liberal predecessor Scott Morrison devised. The government also faces opposition to removing an additional private health insurance subsidy for older Australians. Critics say pensioners would be worse off, but the modelling they cite doesn't distinguish full from part-pensioners. Relatively few full pensioners are likely to have private cover. Most insured pensioners receive part-pensions, often supplemented by income from substantial savings, and typically own their homes with low housing costs.

The government also faces pressure over proposed measures to rein in NDIS spending, curb tax minimisation through trusts, and reverse negative gearing and capital gains tax breaks. 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, gave The Business a grimmer assessment. "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." The analysis links Hockey's reform vision to his largely rejected austerity budget of 2014.

The Cost to Young Australians

A separate report based on an AMP survey says young Australians are already paying for a decade of policy inertia. Tax breaks, planning restrictions, low interest rates and financial deregulation have combined to push housing out of reach, it says. More than half of adults under 30 have changed their intentions about having children because of cost-of-living pressures, and close to half have reconsidered having children altogether. Nearly two-thirds feel they must get onto the property ladder first, yet AMP's calculations show most need more than a decade to save a 20 per cent deposit.

Fewer children, born later, could add to budget pressures, the analysis says, especially as smaller migration programs are in vogue. "As Australia ages, the challenge is sustaining living standards and meeting growing demand for care without placing an ever-greater burden on working families," AMP deputy chief economist Diana Mousina writes.

Why This Matters:

Interest on public debt is money that can't go to hospitals, roads or tax relief. State debt interest has already doubled to 0.6 per cent of GDP, and borrowing costs have risen roughly four-fold since before COVID. That leaves less room to absorb the next shock. Grattan warns those shocks are expected to come more often.

The political story is just as telling. Even a plan that pairs a bigger GST with income tax cuts and welfare offsets is considered hard to sell, and the Treasurer himself says blocking beats building in Canberra right now. Reformers who'd rather act early than wait for a crisis face a stubborn problem: voters and vested interests tend to resist the medicine until the illness is undeniable. For working families and younger Australians, that delay means higher taxes, thinner services, or both.