When it comes to paying for government services, Australia has a bad case of cognitive dissonance. We want more and better services, but we are less happy to foot the bill for them. The budget challenge is big and getting bigger. Official projections suggest a structural budget deficit of about $50bn a year over the next decade. We estimate the true number could be closer to $70bn.
Over the next decade, the government will spend significantly more on the NDIS, defence, health and aged care. Federal government spending is estimated to average more than 27% of GDP in that period, compared with less than 25% over the three decades before Covid. Many state governments have also increased their spending as a share of the economy. And these spending pressures will grow as our population ages and the climate changes.
But we haven’t yet had a conversation about how we pay for this. Government revenues are expected to rise only modestly over the next decade. And that is largely through growth in personal income tax collections due to bracket creep.
Australia’s “conversations” about tax seem to quickly degenerate into shouting matches. Tax changes garner far more column inches and airtime than spending changes. There is a laser-like focus on the losers from any tax change, rather than the broader national benefits.
And important context is often missing from these stories.
First, despite often-repeated claims that Australia is a “high-tax country”, we are actually towards the bottom among industrialised nations. Based on 2019 data and including state taxes, we are the eighth-lowest country in the OECD for tax collection relative to our economy’s size, with tax revenue at 28% of GDP compared with the OECD average of 33%. Closing that gap alone would be enough to foot the eye-popping Aukus submarines bill in less than three years.
Sources of general government tax revenue in the OECD, 2019 (per cent of GDP)
Second, our supposed heavy reliance on personal income taxes is overegged. Unlike Australia, many of our economic peers require their citizens to make social security contributions in exchange for benefits when times get tough – much like an income tax. Once these contributions are factored in, Australia’s taxes on individuals are actually lower than the OECD average, both in terms of the share of tax revenue and relative to GDP. Even if you count our compulsory super contributions – which are more like savings than a tax, since they go into individual accounts and not a pool to share with others – our taxes on individuals would still be lower than the OECD average.
Even our seemingly high company tax receipts – 4.7% of GDP compared with an OECD average of 3.1% – are not as high as they may first appear. That’s because the government hands back one-third to half of those receipts to shareholders via Australia’s almost unique dividend imputation system.
Australia’s tax mix hasn’t changed much since the early 2000s. And some components have gone backwards in terms of ability to raise revenue. GST receipts – sold as a reliable “growth tax” that would keep pace with the economy – shrank from almost 4% of GDP in the early years of this century to 3.4% before the pandemic hit.
All of this suggests that tax collections could rise without the sky falling in. Of course, that doesn’t mean just blindly cranking up rates. Broadening tax bases and reducing tax concessions not well targeted to a policy purpose are much less economically damaging ways to raise more revenue.
At the same time, we must also reduce lower-value and inefficient spending. If we’re going to ask people to contribute more tax, they have a right to expect that services will be delivered as efficiently as possible and targeted to the people that most need the support.
The Grattan Institute puts forward a range of concrete suggestions for tax and spending reforms in our latest report, Back in black? Our aim is to generate a well-informed conversation about what might make a dent in that structural budget problem.
But to get there Australia must first tackle its national cognitive dissonance. That means recognising that you don’t get BMW services on a Kia budget. We are not a high-tax country by OECD standards. If we can’t have a sensible conversation about tax collections, we will simply continue to kick the can down the road.
Danielle Wood is the CEO and Iris Chan is a fellow at the Grattan Institute
