Australians robbed $500k from poor productivity, budget honesty breached: Henry

Former Treasury Secretary Ken Henry says government spending has reached a point where Australians will pay more in tax unless productivity improves.

The federal government has a spending problem, breached charter of budget honesty and is partly to blame for the “robbery” of $500,000 from the average worker in lost productivity gains according to former treasury boss Ken Henry.

Ahead of Anthony Albanese’s economic reform roundtable next month, Dr Henry on Wednesday warned there is a lack of fiscal discipline and the country was staring down the barrel of a rapid rise in taxes if it is going to meet its spending as a share of the economy.

The architect of the Henry tax review said all of his recommendations, knocked back by then treasurer Wayne Swan and his adviser Jim Chalmers, were all still valid including his dismissal of Labor’s plan to introduce unrealised capital gains tax on superannuation.

Dr Henry delivered a spirited plea at the National Press Club for the both sides of politics to pass economic reforms including environmental regulations to allow projects from housing through to mining to proceed and activate more economic growth.

“I’m upset. We should, all of us, be angry at our collective failure to design economic structures, including environmental regulations, that underpin confidence in a better future for our children and our grandchildren,” Dr Henry said.

Treasurer Jim Chalmers has prioritised productivity for the second term of the Albanese government Picture: NewsWire

“The average full time Australian worker has been robbed of about half a million dollars over the past 25 years because of our failure to meet that level of productivity growth.”

Treasury expects that spending as a percentage of GDP, outside of the Covid stimulus, will hit the highest level since 1986 at 27 per cent of GDP in 2025-26, placing further pressures on the budget, which Dr Chalmers admits is “unsustainable”.

Dr Henry said the Charter of Budget Honesty Act designed to promote transparency, discipline, and accountability in the federal government’s fiscal policy was now clearly in breach.

“It’s in breach, and it’s been in breach for a long, long time now,” he said.

“What we need is enhanced transparency mechanisms that are published so the people like you can read an explanation from the government of the day about the future impact of the decisions that are being taken today.”

Dr Henry, who served the Howard, Rudd, and Gillard governments, was asked whether the current government had a spending problem.

“You were asking about the need for spending discipline and whether we’ve got a problem there. In general, I’m going to agree with you,” he said without specifying where he thought cuts could be made.

While Dr Chalmers has been banking more windfall revenue, his budget in March revealed he had also presided over the biggest deterioration in the country’s underlying cash balance outside Covid and the global financial crisis, with a $43bn plunge into the red from a surplus the year before.

The treasurer has made productivity the central focus of his second term in power and will hold an economic reform roundtable next month, coinciding with the release of a draft report from the Productivity Commission which addresses five key areas in the economy with recommendations to be provided later. Dr Chalmers has said he might not necessarily implement all the PC’s recommendations.

Productivity – essentially economic output per hour of work – is declining at 1 per cent in the year to March and is averaging 60 year lows.

Without properly growing productivity again, then taxes would have to be raised, Dr Henry said.

“Over the decade of the 1990s average productivity growth was 2.31 per cent a year. Over this past 25 years, it’s averaged 0.98 per cent a year. That’s a pretty fundamental difference. If we continue on that trajectory we will have no option but to raise taxes and quite significantly, by several percentage points of GDP,” he said.

“If we can repeat the 1990s for 40 years, then we can avoid the need to lift the tax to GDP ratio.”

In the 2025-26 year the federal tax-to-GDP ratio is projected to be around 29.8 per cent, reflecting a slight increase from the previous year. Treasury expects income taxes will hit 54 per cent of total tax revenue by 2029 – the highest level since the introduction of the GST a quarter of a century ago.

The only other alternative for Australia was to “cut spending well below what was projected in the intergenerational report of 2002,” he said.

Government spending globally has been rising and the US Trump administration has just pushed through new spending that would add $US2 trillion to the country’s deficit. the world’s richest person Elon Musk has railed against the spending, falling out with the president over its excessiveness.

Elon Musk has railed against the levels of public sector spending in the US Picture: AP

The Albanese government is relying on higher tax revenues including a plan to introduce unrealised capital gains tax anticipated to bring in more than $40bn for the government over the next decade.

Dr Henry said he stood by his recommendations from his 2010 tax review which included ways of taxing superannuation more equitably. 

“Every recommendation in the Henry review remains valid. There’s nothing in that review that I would write bits of differently and that includes with respect to superannuation,” he said.

“I need to sharpen it up, not to change the substance.”

Among the alternatives to Labor’s unrealised gains tax plan not considered by Treasury in its 2023 advice to the prime minister and Dr Chalmers was a recommendation from the Henry tax review that made the concessional tax rates on super contributions more equitable between richer and poorer superannuants.

“It’s understandable the government would want a more equitable tax treatment of superannuation but to do that you do not need to tax unrealised capital gains,” Dr Henry told The Australian in May this year.

“There are other options and these are outlined in our review from 15 years ago.”

On Wednesday, Dr Henry said he also thought that Australia’s dividend imputation system was “a tariff on imported capital” and that if the government did have a considered debate on tax reform then changes to dividend imputation should be considered.

“If we have the opportunity for a broad ranging discussion about tax reform in this term of parliament, the question that you’ve raised has to be on the table,” he said.