Australians can expect to pay higher taxes and face cuts to services if the Albanian government does not find a solution to its chronic debt problem.
The federal bottom line is expected to be $21.8 billion worse than previously forecast over the next four years, the mid-year economic and fiscal outlook revealed Wednesday.
With spending rising due to challenges including an aging population and falling tax revenues due to slow economic growth, Australia is not expected to return to surplus until 2034/35.
Government finances have long been in structural decline, but nothing is being done to reverse it, warned EY chief economist Cherelle Murphy.
Deficit reductions are expected to add an additional $49 billion to public debt by 2027/28, meaning more money will need to be dedicated to interest payments.
That means less flexibility to solve future problems, Murphy said.
“The government has failed to find a way to raise the prosperity of the Australian people and get out of the debt burden,” he said.
“We need a plan to boost our productivity through major reforms – including, importantly, those to our tax system, trade and education – or we will face higher taxes and cuts to essential services in the future.”
EY chief economist Cherelle Murphy (pictured) warned that government finances have long been in structural decline, but nothing is being done to reverse it.
Treasurer Jim Chalmers (pictured) said the government had not ignored structural pressures on the budget.
The mid-year update included increases in spending on items such as childcare, the PBS and cost overruns on infrastructure, which the government classed as “unavoidable” spending.
Independent economist Saul Eslake didn’t buy it.
“I’m not saying they are ‘bad’ decisions, but they are not decisions that absolutely should be made,” he said.
“What the government has avoided is making decisions about how this additional expense should be paid for.”
Eslake said public spending was now permanently at a higher plane of around 26.5 percent of GDP, which is around 1.75 percentage points of GDP higher than the average between the mid-1970s and the start of the COVID-19 pandemic.
This is the result of higher spending on health, aged care, disability services, childcare and defence, as well as higher interest payments.
One way to reduce spending would be to scrap the ‘No Worre Off’ GST deal with Western Australia, which will worsen the federal budget by $21.1 billion over the four years to 2027/28.
Beyond that, it’s much harder to find politically acceptable spending cuts, Eslake said.
Independent economist Saul Eslake (pictured) said: “What the government has avoided is making decisions about how this extra spending should be paid for.”
Prime Minister Anthony Albanese is under pressure ahead of next year’s election
“Neither side of Australian politics has been willing to have an ‘adult conversation’ with the Australian people about how all this extra spending should be paid for,” Mr Eslake said.
Without structural change, the burden will fall disproportionately on younger generations, who will be forced to pay increasing personal income taxes and be forced to pay larger budget deficits.
Treasurer Jim Chalmers said the government had not ignored structural pressures on the budget.
It had racked up previous upward revisions to revenues, made modest but significant changes to the tax system and found $92 billion in savings and changed spending priorities since the election, he argued.
But shadow treasurer Angus Taylor said Australians were experiencing lower living standards due to increased government spending and promised to reimpose tax barriers, capping taxes at 23.9 per cent of GDP, if elected.
“What we see in this update is red ink as far as the eye can see,” he said.