Australia is on course for 20 consecutive years of combined state and federal deficits by 2028 as spending consistently outstrips revenue, a new report by the e61 Institute and McKinnon has found.
The report titled Rising Pressures, Fading Discipline: A Review of Australia's Fiscal Sustainability found the consolidated fiscal deficit - combining federal, state, and territory budgets - currently exceeds 3% of GDP and is larger than in the years before the COVID-19 pandemic.
As a share of GDP, consolidated expenditure has increased from 34.7% in the early 2000s to 38.2% in 2024.
“Over the past two decades, Australia’s financial position has become increasingly fragile. Australian governments have been running a combined deficit every year since the Global Financial Crisis in 2008. Debt is higher after two global shocks, and governments have struggled to rebuild fiscal buffers for the next one,” said e61 Institute CEO, Michael Brennan.
“There is no imminent debt crisis, but with renewed pressures ahead – like an ageing population and slow productivity growth – Australia’s fiscal options are narrowing.”
The report found the biggest spending pressure is health which has grown from 5.5% of GDP in 1999 to 7.1% today. Meanwhile, education spending has stayed constant at around 5% of GDP despite the population share of school age children shrinking.
“Much of the recent growth in spending is explained by our aging population which demands more labour-intensive services such as health, aged care, and disability support,” said Mr Brennan.
“However, policymakers have chosen to increase spending on education and in-kind services such as childcare and the NDIS, often without a clear link to value-for-money outcomes.
“Over time, this will build pressure to raise more revenue, including from income tax, which is the workhorse of the Australian tax system. The income tax is by far the largest single source of tax revenue across all tiers of government. It funds federal programs but also indirectly underpins state services via tied grants.”
The report noted that even if spending was maintained at its current share of GDP, the Federal Government will need to increase average income tax rates substantially over the next 10 years to achieve budget balance.
“With the tax system as it currently stands, we will be asking workers to pay a larger share of their income to fund a fiscal gap that has been building for two decades — and that's before any new spending commitments are added to the ledger,” said Mr Brennan.
“Without tax reform, spending restraint will be needed to avoid burdening future generations with a fragile, inequitable and inefficient Australian economy. Potential directions include a renewed focus on efficiency in state service delivery, curtailing cost pressures through greater means testing of in-kind transfers and, inevitably, hard choices about priorities.”
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Charlie Moore: 0452 606 171