Working Australians will contribute more than half of every tax dollar collected by the federal government without a major overhaul of the nation’s entire tax system amid warnings the budget deficit is on track to become unsustainable.
Economists and policy experts said the 2021 intergenerational report, released on Monday by Treasurer Josh Frydenberg, strengthened the case for broad-based tax reform as the budget increasingly relied on wage earners, banks and miners to cover vital services.
Treasurer Josh Frydenberg’s intergenerational report shows the budget will be increasingly reliant on ordinary workers to cover spending.Credit:Alex Ellinghausen
The report, which projected the budget will not return to surplus over the next 40 years, showed even with the government’s planned stage 3 tax cuts, workers would bear the brunt of tax over coming years.
By the mid-2030s, without change, personal tax will comprise 53.1 per cent of total tax collected by the federal government. The tax will come from a smaller proportion of the working population as more people retire or don’t earn enough to pay income tax.
At present, working people account for 49 per cent of total tax receipts.
As a share of GDP, personal tax receipts will reach 12.7 per cent by the mid-2030s, higher than the previous peak recorded just before the advent of the GST in 2000.
Not only will a smaller proportion of working-age people be responsible for a greater share of the nation’s tax burden the report also notes collections from the corporate sector are disproportionately reliant on just two industries – financial services and resources – which could prove a substantial budget risk.
Other taxes such as tobacco and alcohol excise are at risk of declining due to falls in smoking and drinking rates while improved fuel efficiency and the switch to electric cars is likely to reduce petrol excise.
Treasurer Josh Frydenberg said the stage 3 tax cuts, due to start in 2024-25, would reduce the tax burden on most workers while signalling the government was committed to future tax relief.
“Our track record shows that Australians can rely on this government to continue delivering tax relief as fiscal capacity permits,” he said.
Melinda Cilento says “comprehensive tax reform must be put back on the table”.Credit:Janie Barrett
Committee for the Economic Development of Australia chief executive Melinda Cilento said the report showed the federal budget would become increasingly reliant on personal income tax.
“This is not a realistic assumption. Comprehensive tax reform must be put back on the table, with a renewed resolve to reshape the system to sustain a strong and dynamic economy and pay for the essential services so important to our communities,” she said.
Chief economist with the Blueprint Institute think tank, Steven Hamilton, said the budget was being built on bracket creep which was acting as “one big tax”.
“What we need instead is to move our tax base away from personal tax, with its damaging incentives to cheat and disincentives to work, and towards more efficient and resilient tax bases, like the GST, land, resources, carbon and death,” he said.
Grattan Institute chief executive officer Danielle Wood said Mr Frydenberg had yet to confront the issues raised in his report, including how to put the budget on a sustainable long-term footing.
“The reality is that we will need to either increase taxes or cut spending elsewhere if we are going to accommodate the growth in health and aged care spending,” she said.
Apart from tax, the latest intergenerational report revealed a huge fall in the life expectancy of Australians since the 2015 edition.
In 2015, a locally-born boy was forecast to have an average lifespan of 91.5 years while girls had an average of 93.6 years.
But this has been cut to 81.4 years for boys and 85.4 years for girls. Over-optimistic assumptions included in the 2015 report plus a slowdown in the rate of improvement in longevity contributed to the sharp change.
Fewer babies and reduced migration has sliced 4 million from the nation’s long term population forecasts.Credit:iStock
Lower fertility among Australian women and a drop in migration means the population will be smaller and older than had been forecast in 2015. The population is now expected to reach 38.8 million by 2060-61, about 4 million fewer than projected in the 2015 report.
Income support payments, including Family Tax Benefit and childcare, are expected to cost each Australian $3710 in 2060-61. This year they are forecast to cost $3840 per person.
Despite the ageing population, expenditure on the age pension is tipped to fall to 2.1 per cent of GDP from 2.7 per cent.
Foregone tax revenues on superannuation, however, will increase as the super system matures. By 2040, the costs of superannuation concessions will exceed spending on the age pension.
Treasury estimates the median super balance will climb from $125,000 now to $460,000 (in 2020-21 dollars) by 2060-61 with one of the biggest winners being women.
People retiring with super will have a better life than someone on the age pension.
“The maturing superannuation system should generally also result in future retirees being better off than current retirees, with more income available to support their living standards during retirement,” it said.
The report is based on an assumption productivity will grow at 1.5 per cent over coming decades and wages will grow at 4 per cent. Neither level has been achieved over the past 10 years.
If productivity grows at 1.2 per cent, the budget deficit by 2060-61 will be 4.5 per cent of GDP or $86 billion in today’s dollars. At 1.5 per cent, the deficit would be 1.8 per cent of GDP or $34 billion.
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