Tax rich retirees to fix budget’s $50bn black hole, says Grattan Institute

Growth alone won’t overcome Canberra’s chronic $50bn-a-year deficit, the Grattan Institute has found, arguing the federal government needs to slash spending and raise taxes on wealthy retirees.

Grattan chief executive Danielle Wood says Labor needed to make ‘a bold statement of intent in the budget’.

Growth alone won’t overcome Canberra’s chronic $50bn-a-year deficit, the Grattan Institute has found, arguing the federal government needs to slash spending and raise taxes on wealthy retirees to unburden young Australians from decades of debt.

In a pre-budget report published on Tuesday evening, the influential policy institute has called on the Albanese government to immediately undo Western Australia’s special GST deal, raise the GST rate from 10 to 15 per cent and rejig the stage three tax cuts that come into effect in July next year.

Grattan recommends counting more of the family home in the pension assets test, abolishing family tax benefit part B for couples, raising taxes on the wealthy, winding back fuel tax credits for business and redesigning the Petroleum Resource Rent Tax.

The report, Back in black? A menu of measures to repair the budget, also argues the government will have to rein in cost growth in aged care and on the National Disability Insurance Scheme, “or those programs will become unsustainable”.

The institute’s politically contentious and audacious suite of proposals seeks to address growing intergenerational inequality and challenges the government to take action on both sides of the ledger in its second budget on May 9, which is being framed amid global turmoil and slowing growth.

Grattan chief executive Danielle Wood told The Australian Labor needed to make “a bold statement of intent in the budget”, as well as revive strict fiscal rules to achieve medium-term progress and promote discipline within the federal sphere.

“We should not fall into the trap of thinking we can simply grow our way out of debt,” Ms Wood said.

“None of these options are easy, but if the government is serious about budget repair it will need to embrace at least some of them.

“And to those who rush to reject these policies out of hand, I say: What’s your solution?”

The Melbourne-based think tank has become the go-to well of advice for Labor, with the government relying on its ideas to shape policy in housing, superannuation, migration and education.

Grattan’s costed revenue measures would deliver around $55bn a year, with the bulk of tax collected from the wealthy, retirees and high-income earners.

Trimming tax breaks for superannuation, raising the super preservation age from 60 to 65, and freezing the super guarantee rate at 10.5 per cent would raise almost $20bn a year.

Reducing the capital gains discount, limiting negative gearing by not allowing losses on passive investments to be written off against unrelated labour income and setting a minimum tax rate of 30 per cent on trust distributions would raise over $9bn.

Raising the degree of political difficulty to an almost impossible level, Grattan argued lifting the GST from 10 per cent to 15 per cent, with compensation for vulnerable households, and 50 per cent of the net revenue shared with the states would yield around $6bn a year.

More plausibly, the report said redesigning the stage three tax cuts, by retaining the 37 per cent bracket, would save $8bn a year.

Jim Chalmers said the contentious tax policy, which favours high-income earners, would “be in the budget in May”.

“We have indicated we will be trimming spending further in the May budget but that’s so that we can make room to fund the things we value, whether it’s healthcare or aged care, the NDIS, protecting our borders and our national security,” the Treasurer told Nine’s Today show on Tuesday.

The report said the size of government had grown, with federal spending rising from an average 25 per cent of GDP and stabilising at 27 per cent over the coming decade, due to an ageing population, AUKUS costs and the servicing bill for pandemic debt.

Ms Wood said the $5bn deal done by the Coalition government in 2018 to guarantee WA at least 70 cents in the dollar of GST revenue on a per-person basis was bad policy and “now untenable”, given the state’s surging mining royalties and the parlous condition of budgets in other jurisdictions.

Further spending cuts the institute nominated were: including all equity over $750,000 in the family home in the Age Pension asset test (raising $4bn); cutting the costs in hospitals, pathology and pharmaceuticals ($2bn), and; improving infrastructure and defence projects (several $bn).

Ms Wood said the government “should also consider bolder revenue-raising options such as realigning company tax rates and introducing a carbon tax and an inheritance tax”. “Continually adding to national debt by running sizeable deficits reduces the government’s room to respond to future economic shocks and pushes the cost of today’s spending on to future generations. Governments should pursue policies to boost growth, but that alone is unlikely to put the nation’s finances on a sustainable trajectory.”