Australia's Demographic Challenges
We could elect to do nothing now, and raise taxes in the future to cover budget deficits as they occur.
Some argue in favour of this position, noting that in 40 years average incomes will be substantially higher than they are today due to continuing economic growth. They argue a richer society will be able to afford higher taxes.
While society will be richer, we need to think carefully before condemning our children to higher taxes.
We are not talking about a minor tax increase. The projected tax-expenditure gap is 5 per cent of GDP. To put this into perspective, the GST currently raises $32.4 billion or 4 per cent of GDP. Personal income tax raises $94.7 billion or just under 12 per cent of GDP. A tax increase of 5 per cent of GDP would require an increase in personal income tax collections of over 40 per cent.
Increasing international competition for skilled people — such as entrepreneurs and managers, scientists, teachers, nurses, lawyers and accountants — would make retaining skilled people in Australia even more difficult than it is today. Higher tax rates could simply encourage our best and brightest to head overseas.
In addition, living standards elsewhere are likely to continue to grow in the future — the United States in particular. A slowing in Australia’s per capita GDP growth would represent a substantial decline in relative living standards. Ongoing improvements in transport and communications technologies are likely to make relative differences in wealth all the more obvious.
This is not the sort of Australia we should aspire to leave to our children.
An alternative approach would be to cut future government expenditure by around 5 per cent of GDP.
Without doubt we will need to be very careful about government spending priorities in the future. But again, the dimensions of such spending cuts are enormous. For example, the sorts of expenditure cuts required to achieve a 5 per cent reduction of GDP could include:
- the entire amount allocated to health
- over half the social security and welfare budget.
Clearly neither of these options could ever seriously be contemplated.
However, this does not mean that the Government will not need to become increasingly careful about where it spends taxpayers’ money.
The Government already has taken some steps to try to moderate some growth in health and income support expenditure. However, these decisions on Pharmaceutical Benefit Scheme co-payments and ‘ability to work’ requirements for people on the Disability Support Pension — have been blocked in the Senate.
In the circumstances, clearly future demands for health and welfare spending from an ageing population will increasingly reduce the capacity of government to increase spending in other areas. Moreover, those future demands will seriously restrict the Government’s ability to respond to new priorities as they emerge. Significantly, the Government will have to be careful about taking on new expenditure priorities in the future, particularly in areas that are highly sensitive to the effects of the ageing of the population.
In this regard, the Government also will need to reassure itself that all its ongoing expenditures are still relevant to its current set of priorities and objectives; and importantly that all current services and benefits should continue to be directed to the appropriate elements within the community.
We could run deficits and hence increase debt.
This is not a sustainable or responsible solution, as it merely passes the problem on to our children’s children. Interest payments on debt would grow at an ever-increasing rate, reducing the money available to pay for pensions and health care. Eventually our descendants have to start to pay off the debt — further reducing the scope for government provision of essential services.
This option — while it avoids some of the hard decisions now — would leave a legacy of economic disadvantage to our children’s children, and is not one that any responsible Australian should be prepared to contemplate.
The best approach is to look for ways to increase the size of the economy so that we all have higher incomes and are better able to meet the costs associated with our ageing population.
The way to increase the size of the economy is to grow at a faster rate. The key ways to improve economic growth are through increases in labour force participation and productivity.
The government is seeking comments from interested parties by Friday 14 May 2004. The comments should be forwarded to the following address:
Australia’s Demographic Challenges
Social Policy Division
PARKES ACT 2600
Email address: email@example.com
Copies of this publication are available from the Website: http://demographics.treasury.gov.au
It will be assumed that submissions are not confidential and will be publicly available unless the contrary is indicated when the submission is made. However, if an application is made pursuant to the freedom of information legislation for access to a submission in respect of which a claim of confidentiality has been made, the principles of that legislation will apply.
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