Debt and Housing Costs Squeeze Australia's Next Generation

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 warns that future Australians will bear the cost of today’s deficits.

Borrowing to fund deficits now costs roughly four times as much as it did immediately before COVID, after interest rates rose. The report, “Budget reboot: How to fund Australia’s future”, says Australian governments last owed this much outside a pandemic when the country was still paying off debt from a world war. It warns: “Tomorrow’s Australians will increasingly pay the price for today’s deficits, whether through higher taxes or worse public services.”

The pressure on families

A separate AMP report says policy inertia over the past decade has also come at a personal cost for young Australians. Tax breaks, planning restrictions, low interest rates and financial deregulation have pushed 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, 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 analysis says. That shift could add to 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.

Tax and spending choices

Grattan calls for greater spending discipline, especially at state level, rather than sweeping cuts. Lasting budget repair requires changes to spending and revenue, the report says, not simply cuts to “a few wasteful public spending programs”. It 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. There’s room, it argues, for a modest revenue increase.

Its preferred measure: expand the goods and services tax, raising the rate from 10 per cent to 15 per cent and reducing exemptions. The proposal would tax fresh food and consider 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 using $33 billion to cut income tax, particularly for low- and middle-income earners, and about $25 billion to lift welfare payments and rent assistance, offsetting the tax and reducing poverty. The remaining $18 billion would go to state fiscal sustainability amid 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.

Political resistance and reform

The analysis says the 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.

Proposed reforms to rein in NDIS spending, reduce tax minimisation through trusts, and reverse negative gearing and capital gains tax breaks have also drawn pressure on the government. The analysis says those tax breaks have 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 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,” he 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.