Brace for a tsunami of debt as Labor spending sends us broke

An economy that is suffering from a collapse in productivity does not need higher taxes. No nation has ever taxed itself to prosperity, writes Warren Hogan.

The Reserve Bank building at Martin Place. Picture: Monique Harmer

The ‘leaked’ Treasury documents reveal an uncomfortable reality facing our community. We either rein in government spending or prepare ourselves for a big increase in our taxes.

There is another option of course, Budget deficits for as far as the eye can see and periodic episodes of massive government borrowing when the economy inevitably hits a weak spot. This will not end well.

Japan took this route when it was faced with demographic decline 20 years ago.

And this week, the Japanese government’s long-term interest rate rose to the highest level in decades.

Japan is the demographic and economic canary in the coalmine. The canary is coughing. Using government spending to avoid harsh realities is not the answer.

Treasurer Jim Chalmers. Picture: Hilary Wardhaugh

The Treasury’s ‘leak’ does not paint a pretty picture in an increasingly problematic world.

If we want to return to an economy that adapts to a changing world, that adopts new technology and can generate more productivity and higher living standards, then we have no choice.

The government’s Budget must be stabilised through spending restraint. Not higher taxes. Not bigger deficits.

Since 2018 we have seen the biggest increase in the Federal government’s share of the economy in more than 50 years. According to the March quarter 2025 National Accounts, federal government ‘consumption expenditure’ (that is recurrent or locked in spending) was 11.2% of GDP.

Japan’s economy is a warning to us all. Picture: Charly Triballeau

The dollars? A whopping $75.8bn for the three months, and fast heading for $1bn a day.

For context the government’s recurrent spending averaged about 7.5% of GDP for the 45 years prior to 2017. The government’s ‘share’ of the economy was remarkably stable through this golden age of Australian prosperity. It reflected a political commitment to government restraint and financial discipline. That commitment appears long gone.

This surge in the government’s presence in our economy is pressuring the rest of us through a higher tax burden and it is making it harder and harder for businesses and other organisations to find staff.

The budgetary impact of this spending surge was masked by the “whatever it takes” mentality of the pandemic, and more recently, by the big increase in income taxes due to bracket creep.

But an economy that is suffering from a collapse in productivity does not need higher taxes. Increasing taxation will not encourage more investment or workforce participation. It will be a drag on the ambition and entrepreneurialism or our community.

The government’s share of the economy continues to grow. Picture: Brenton Edwards

The ambition and objectives driving the explosion of government recurrent spending are not in question. The question is cost. What is the cost to our economy and to our community?

Those costs are not simply measured in terms of higher taxes, either now or in the future. It is the opportunity cost of scare resources that might otherwise be utilised in productivity enhancing endeavours. It is the impact on business viability of constantly rising costs. It is the threat to the economy if this spending triggers renewed inflation and rising interest rates.

Warren Hogan is managing director of EQ Economics. Picture:Supplied

Some commentators have speculated that the leaks could have been a deliberate wake-up call to federal cabinet ministers.

In the spirit of then Treasurer Paul Keating’s ‘banana republic’ comments from the mid-1980s, this latest leak could be a ploy by the Treasurer, or Treasury, to get the government thinking long and hard about Australia’s economic realities.

Unfortunately, it doesn’t appear to be a devious plot. When given the choice of a stuff up or a conspiracy, nine times out 10 take the stuff up.

All we got from Treasury was a recognition of the problem (an unsustainable budget position), with vague indications of the potential solutions (higher taxes and/or less government spending).

The fact that higher taxes have been suggested as a solution is a concern. No modern nation has taxed its way to prosperity.

Australia was once seen as the great compromise between America’s brutal capitalism and Europe’s expensive and inefficient socialism.

We had the balance right.

Modest (not small) government. Sensible regulations and a thriving business community seeking to drive innovation for the betterment of the whole community. Standing at the centre of all this was an incredibly effective financial system. Australia was a shining example of the benefits of free trade.

Australia’s great economy can be revived but it will mean a fundamental shift in the government’s economic strategy. A shift so great the politics seem impossible.

Today, Australia’s economy is not ‘match fit’ for our rapidly changing and uncertain world. To revive productivity, we must focus on the fundamentals of resource allocation.

A kinder and fairer economy does not mean government directed funding of the economy, unresponsive to the world around it. It should mean a human centred approach to economic flexibility, finding new ways to support people and organisations through change.
Warren Hogan is managing director of EQ Economics.