Lowe’s predecessor, Glenn Stevens, said essentially the same thing before passing the baton to Lowe in 2016. Australians were kidding ourselves if we didn’t think a “tougher conversation” was needed about “putting public finances on a sustainable medium”. -term track,” Stevens warned in a farewell address.
“There will be many difficult choices to be made,” he concluded.
Tough choices now fall to treasurer Jim Chalmers, who will deliver his first budget next month, followed by another in May next year.
The easy option for politicians is to increase spending, cut taxes and leave budget deficits to future generations to pay back.
In a world of rising lending rates, Lowe urges Chalmers & Co. urges you to aim higher: “We can’t pay for these things with the national credit card… I hope during this parliamentary term you can probably do any of these three things to pay for the services our community wants.”
Lowe’s comments also echo those of Treasury Secretary Steven Kennedy in a June speech, where he warned, “The last two years have seen significant pressure on medium-term spending.”
According to Kennedy’s calculation, federal spending on disability care will grow by 0.8 percent of gross domestic product between 2018-19 and 2025-26, making it by far the fastest-growing component of federal spending.
Spending on elderly care is also expected to grow by 0.3 percent of GDP and defense spending by about a quarter of a percent, with upward pressure also on health care and infrastructure budgets.
Overall, federal spending as a share of total economic output is expected to average 26.4 percent over the next decade, a sharp increase from the pre-pandemic average of just 24.8 percent.
Kennedy also examined the options of tax increases and austerity, warning, “The increased size of government will have to be weighed against the associated costs, including barriers associated with some taxes to operate or invest.”
Bottom line from everyone? If we want all the beautiful things, we have to pay for them.
While economists generally agree with government spending that increases the productive capacity of the economy (i.e., help grow the pie), most also agree that it is a matter of fairness that each generation should foot the bill for their own recurring spending, rather than simply passing the money on to their children.
So yes, taxes may have to go up if this doesn’t happen.
The real kicker is that households would do well to brace themselves for a higher tax burden, no matter what politicians decide. If they do not decide to generate income from less distortive tax bases such as land and consumption, taxes on personal income will bear a greater share of the tax burden.
Politicians under pressure to set the budget are unlikely to deliver income tax cuts (at least not new ones). Over time, wage increases naturally push more workers into higher tax brackets where they pay higher tax rates.
Even taking into account the phase three tax cuts baked into the legislation, Kennedy warns that the average income tax burden is on track to hit a record high of more than 26 percent of income by the end of this decade.
Do you understand? Higher taxes are coming anyway. The only questions are: on whom and with how much?
Raising the prospect of higher taxes means Lowe is hardly breaking new ground. However, he points to an important debate that we as a nation need to have about which specific taxes we would like to use to fund our growing demand for spending.
Jessica Irvine is a senior economics writer at The Sydney Morning Herald and The Age.
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