Debt, Housing Costs Shift the Burden to Workers

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, a Grattan Institute report says. People will pay for deficits through higher taxes or worse public services, it warns.

Who Pays

The cost of borrowing to fund deficits has risen roughly four-fold since just before COVID, as interest rates climbed. Outside the pandemic, the report says, Australian governments last owed this much when the country was still paying off debt from a world war. It spells out the burden ahead: “Tomorrow’s Australians will increasingly pay the price for today’s deficits, whether through higher taxes or worse public services.”

The federal government hasn’t been as profligate since the pandemic stimulus period ended, but it remains in structural deficit. Grattan says it could also become liable if some states approach fiscal disaster. The report urges governments to save now, with global economic, climate and geopolitical shocks expected to become more frequent. Most governments aren’t doing so, it says.

A separate AMP report describes costs young Australians already face. Tax breaks, planning restrictions, low interest rates and financial deregulation have combined to push housing out of reach, the report says. More than half of adults under 30 have changed their intentions about having children because of cost-of-living pressures. Close to half have reconsidered having children altogether.

Nearly two-thirds feel they need to get onto the property ladder before starting a family. AMP calculations show most need more than a decade to save a 20 per cent deposit. Australians are having children later and fewer of them, the analysis says. That could compound budget pressures, particularly 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.

A Revenue Plan and Its Costs

Grattan calls for greater spending discipline, especially at state level, but not sweeping budget cuts. Its report says lasting repair requires changes to both spending and revenue, rather than cuts to “a few wasteful public spending programs.” It calls Australia “a relatively low-taxing country,” with tax at 29.4 per cent of GDP compared with an OECD average of about 34 per cent. Governments, it argues, could raise revenue modestly.

The report’s preferred measure: lift the goods and services tax from 10 per cent to 15 per cent and reduce exemptions. It proposes taxing fresh food and considering removing exemptions for health and education, which the report says favour higher-income earners who spend more on those services. Taxing all food at the higher rate would raise an additional $76 billion in annual revenue.

Grattan proposes directing close to half that amount, or $33 billion, to income-tax cuts, particularly for low- and middle-income earners. It would allocate about $25 billion to welfare payments and rent assistance to offset the GST and reduce poverty, with the remaining $18 billion going to states facing rising health costs. The report 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 Blocked

The analysis says Grattan’s plan may not be politically achievable. Anthony Albanese has opposed abandoning Western Australia’s favourable GST distribution, devised by his Liberal predecessor Scott Morrison. 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, often supplemented by income from substantial savings, and typically own their homes without rent or mortgage costs.

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 have inflated the housing market and reduced intergenerational equity.

“Power is much more effective right now in the distorting and blocking than the building or reforming,” Treasurer Jim Chalmers recently said. Joe Hockey, one of Chalmers’s predecessors, told The Business that matters would need to get worse before improving. “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.