Intergenerational Report to reveal slower growth and higher tax future

Australia is sliding towards a new era of higher taxes and lower growth, as Jim Chalmers warns there’s no quick fix to the productivity challenge.

Treasurer Jim Chalmers discussing the BCA’s reform report in Canberra on Monday. Picture: NCA NewsWire / Martin Ollman

Australia is sliding towards a new era of higher taxes and lower growth, as Jim Chalmers warns there is no quick fix to the nation’s productivity challenge despite it being a major plank of the government’s agenda.

This Thursday’s Intergenerational Report will reveal a more pessimistic productivity outlook that will drag on national output over coming decades and leave the economy $900bn smaller in 2063 than under the previous forecasts.

The upcoming report will warn that “structural changes to the economy are projected to put pressure on the revenue base over the coming decades”, with the tax-to-GDP ratio rising above the 23.9 per cent cap under the Coalition to a long-term average of 24.4 per cent.

Writing in The Australian, Dr Chalmers says Thursday’s report will highlight the challenges that risk undermining future prosperity, but also “illuminate the path forward”.

“It emphasises that Australia’s future productivity performance will depend on how governments, business and the broader community respond to some of the big structural changes in the economy like the impact of climate change, growth in the care economy and the spread of digital technology,” Dr Chalmers says.

“The Albanese government is rising to the productivity challenge, but even with the best ­intentions, this productivity challenge has been building for some time and will take time to turn around as well.”

While company tax, GST and other taxes are “projected to broadly track economic growth”, Treasury forecasts will show ­“personal income taxes are projected to increase as a share of GDP, reflecting rising incomes and wages and continued population growth”. 

The October budget projected tax-to-GDP would rise to 24.4 per cent by 2033-34, and Treasury will bake this into its projections for the following three decades.

As bracket creep increasingly eats into workers’ take-home pay, Treasury’s estimates of the ­growing personal income tax ­burden “are limited by the ­technical ­assumption for the tax-to-GDP ratio,” the report will say.

While previous intergenerational reports have also assumed a limit to tax as a share of the economy to guide their long-term projections, the Treasurer has said the Albanese government will not limit itself to “arbitrary” tax caps, after abandoning the Coalition’s official tax-to-GDP ceiling of 23.9 per cent.

Treasury’s long-term projections will show real GDP expanding on average by 2.2 per cent in the 40 years to 2062-63, or 0.9 percentage points slower than over the previous four decades.

The updated growth outlook is also substantially below the 2.6 per cent predicted as recently as the 2021 intergenerational report, as a more pessimistic productivity outlook weighs heavily on long-term growth and adds to the ongoing weight of an ageing society and weaker population growth.

While the economy will be about 2½ times bigger in 40 years, according to Treasury estimates, the downgraded growth forecast will leave real annual output $900bn, or 14 per cent, smaller in 2063 than estimated two years earlier, according to analysis by The Australian.

In highlighting the climbing tax burden as a share of the economy, the intergenerational report will say the projection does not take into account policy decisions that may be taken by governments into the future.

“Technical assumptions that limit tax-to-GDP over long-term projection periods have been a ­feature of every intergenerational report,” it will say. “Without this assumption, taxes would rise significantly as a share of GDP over the projection period due to ongoing income and wages growth in the context of a progressive personal income tax system, which would not be realistic.”

Treasury’s latest growth forecasts come after the Business Council of Australia on Monday called on the government to pursue a wide-ranging reform agenda to inject dynamism, flexibility and competition into the economy.

Dr Chalmers says he welcomes the BCA report, adding that the ­Albanese government was “already making progress in many if not most of the areas identified by the BCA – whether it’s building stronger institutions, boosting housing supply, investing in human capital or maximising the opportunities of the energy and digital transformations under way”. The Treasurer touted the government’s “big, broad and ­ambitious” productivity agenda focused on five pillars: revitalising institutions, investing in the digital economy, developing a more skilled workforce, supporting the care economy and transitioning to a low-carbon economy.

But, speaking in Canberra on Monday, Dr Chalmers said there would be no return to a 1980s-style debate on productivity, ruling out “harsh” industrial relations changes or an increase to the GST following a new warning from business over declining global competitiveness.

The Treasurer said he was taking a more “modern approach” to productivity growth after big business made the case for major tax and workplace relations changes in its landmark “seize the moment” economic reform blueprint.

Dr Chalmers acknowledged there were areas of disagreement with the BCA, but said there was a “great deal of alignment” between the peak business lobby and the government’s agenda across ­“energy and housing, human capital, (and) institutional reform.”

“There are more things in the BCA’s welcome contribution that we agree with than areas where there is disagreement,” he said.

However, Dr Chalmers warned there were “still some who pretend that the only way to get productivity gains in our economy is with harsh industrial relations”.

“It feels like the productivity frontier has evolved substantially. But a lot of the contributions, and I don’t mean the BCA, have not evolved substantially since the 1980s,” he said.

Dr Chalmers said there was a need for a “much broader, more modern agenda when it comes to productivity – whether it be data and digital, the whole dynamism and resilience agenda, the workforce issues particularly around skills, the care economy and services and particularly when it comes to energy”.

In its 223-page report, the BCA said that, without remedial action, Australia risked “surrendering our advantages in energy, and our chance to capitalise on the skills and experience of our people.”

“On our current path, we face the real risk of Australia being overtaken by the rest of the world and Australians being worse off for generations to come,” it said.

The BCA proposed: broadening the base and increasing the rate of GST, reducing reliance on personal and company tax; cutting the corporate rate cut to 25 per cent; and reforming state taxes to better drive growth. “Pre-emptively ruling out changes to the GST on equity grounds would be shortsighted,” the BCA said.

Dr Chalmers rejected the BCA position, ruling out any changes to the GST and declaring it was “one of the things we don’t have agreement with the BCA on”.

He said the government was pursuing tax reform in the areas of “multinationals, high balance superannuation, compliance, cigarettes and PRRT reform”

Anthony Albanese, who will address the BCA annual dinner on Wednesday night, welcomed its report and said he would “have a look” at its findings.

The Prime Minister noted its “endorsement of the National Reconstruction Fund” and the BCA’s “ongoing support for net zero”.

The BCA report proposed a number of changes to the $15bn NRF including narrowing its ­investment mandate on fewer priorities to co-invest in about five areas of critical sovereign capability such as semi­conductors, space, additive manufacturing and quantum mechanics.

Climate Change and Energy Minister Chris Bowen said the BCA recognised Australia was in a “prime position” to lead the clean energy revolution. “That’s why we have invested over $40bn in setting Australia up as a renewable energy superpower, including $2bn for our Hydrogen Headstart program to scale up development of Australia’s renewable hydrogen industry,” he said.