Economists fear for nation’s finances as major parties shirk how policy pledges will be funded
Australians expect a range of services from their government, but it needs to be paid for. Neither party is being upfront yet about how to fund our lifestyle.
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Australia needs to have an “adult conversation” about the nation’s finances, but on the eve of the federal election, economists have found both Labor and the Coalition wanting.
“I think it’s more likely I’ll see a thylacine on my front lawn,” laments independent economist, and proud Tasmanian, Saul Eslake on whether the 2025 poll will be used to seek a mandate to undertake major tax reform.
“A pox on both major parties for that,” he adds.
A record investment in Medicare, infrastructure promises, childcare and TAFE funding, multi-billion dollar schemes to fund green steel, housing, domestic manufacturing and nuclear power are among the initiatives Labor and the Coalition are throwing cash at, but neither have fully articulated a plan to pay for it all long term.
The Albanese Government’s spending commitments in the lead up to the election, which must be held by May 17, were largely budgeted for in the Mid-Year Economic and Financial Outlook (MYEFO) released in December last year.
The Coalition is yet to release how it will fund all of its own promises, including matching several of Labor’s health investments, with the opposition unlikely to reveal its plan until it gets an update on the state of the nation’s finances either at the March 25 budget or as outlined in the Pre-election Economic and Financial Outlook (PEFO).
But with Australians likely only weeks from being sent to the polls, there have been no substantial revenue-raising measures outlined by the major parties to deal with the budget’s structural deficit.
In December, Labor’s MYEFO updated the forecast deficit for 2024-25 to $26.9 billion – which is about one per cent of Australia’s Gross Domestic Product (GDP).
Though election spending will impact future deficits, its actually permanent spending on five key areas – aged care, health, the National Disability Insurance Scheme, Defence and interest payments on debt – that is putting pressure on the budget long term.
With inflation fuelling a cost-of-living crisis, substantial revenue raising measures to cover these expenses would have been politically untenable for Labor this term.
So the government instead set about trying to reduce some of the structural spending, even as Treasurer Jim Chalmers repeatedly warned this was difficult to do given understandably higher public expectations around health services.
Labor set a target of limiting annual growth of the NDIS to eight per cent, which it hopes to achieve in large part by incentivising states to take back responsibility for early interventions for young children with developmental delays.
The government also reached a landmark bipartisan deal with the Coalition to lift the cap on how much Australians who can afford it are required to contribute to their own aged care costs.
But neither move is enough to pull the budget out of the red.
Mr Eslake says to be fair to Labor, their lack of ambition on tax this term is a reflection of the fact the party had not sought a mandate to make major changes in 2022.
“You can’t do tax without a mandate, and obviously they were scarred by 2019,” he says in reference Labor’s proposed tax changes blamed for the party’s shock election loss that year.
Mr Eslake is more concerned that with so little time remaining, Labor “clearly have no appetite to articulate a case for a mandate for tax reform in a second term of government”.
This is a problem, Mr Eslake warns, because it has been “clear” for several years now that federal spending as a percentage of GDP is locked at a higher rate.
A work around used by both parties is to use “off budget” measures to keep election commitments from impacting the bottom line, like Labor’s 20 per cent cut to HECS student loans and the Coalition’s $310bn nuclear power plant plan.
Other promises, like a $573m women’s health package proposed by the government and matched by the opposition, have already been funded in MYEFO, as has Labor’s permanent extension of fee-free TAFE and three-days of childcare guarantee.
The big ticket commitment of the 2025 election so far has been Labor’s a $8.5bn investment in Medicare incentives for GPs to lift the bulk billing rate to 90 per cent, which has been matched by the Coalition.
Labor says about $5.4bn of the cost of the election pledge had already been included in MYEFO released in December last year, but the government has not yet revealed how the remaining $3.1bn will be paid for.
After opposition leader Peter Dutton matched the bulk billing promise “dollar-for-dollar” he pledged to fund the commitment with some of the revenue it plans to raise from cutting up to 36,000 public servants a year, which would save up to $6bn annually.
But this still equates to only about 0.3 per cent of GDP, leaving the man who wants to be Australia’s next treasurer, Angus Taylor, the task of finding significantly more revenue if the Coalition is to seriously bring down the deficit.
Economist Steven Hamilton says there is one obvious thing that could be done to increase the government’s revenue base and get the budget onto a more sustainable footing: raise the GST.
The former Australian treasury worker is now an assistant professor of economics at The George Washington University in the US, says tax policy should “encourage good behaviour and discourage bad behaviour”.
“When you tax people’s incomes, they earn less and the economy is poorer,” he says.
“So it may sound strange to people but a situation where you raise the GST, which is a really broad tax, if everyone pays just a little more we can raise a huge amount of money in a way that doesn’t discourage behaviour.”
The 10 per cent tax on the majority of goods and services sold in Australia has remained unchanged since its introduction in 2000 by then-prime minister John Howard and treasurer Peter Costello.
Prof Hamilton says there’s never a politically good time to raise a tax, but highlights the introduction of the GST as proving how the case can be made to the nation.
“Just two years into his first term, John Howard took the GST to the Australian people, he said we are going to introduce a new tax on everything, and the Australian people returned him to office,” he says.
Without this kind of intervention, income taxes will continue to take more and more of the burden as bracket creep over time results in Australians paying more even as other excises and sources of government revenue stagnate.
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