The inevitable cacophony from the galahs of the economic commentariat about “out of control” spending and budget deficits that followed yesterday’s Mid Year Economic and Fiscal Outlook (MYEFO) is all about power: who has it, and who doesn’t, in Australia’s political economy.
Yes, deficits blew out across the Forwards — by over $20 billion. And yes, it’s driven by higher spending (especially next year, which forecasts a whopping $46 billion deficit). On current projections, the budget won’t return to balance until 2035.
But MYEFO didn’t really tell us anything we didn’t already know: we want governments to spend between 26-27% of GDP, but only want to pay around 25.5% of GDP in taxes and other receipts. And governments want to spend even more: AUKUS will be a $400 billion-plus monster dogging the budget decades to come (we’ve already committed $2 billion just to planning the whole debacle). Peter Dutton has his own $400 billion nuclear disaster to inflict on us, albeit dumped “off-budget” in the capital accounts so it doesn’t show up in the deficit.
Good luck finding offsetting savings for those.
Many of the commentators and outlets complaining that deficits need to be reined in want their own handouts. The Business Council of Australia (BCA), and its cheerleaders at the Financial Review, continue to call for “tax reform” by which they mean reducing the corporate tax rate. How would that be paid for? (The BCA used to say “raise the GST” but eventually read the room on that).
Indeed, corporate interests and the readerships of outlets like the AFR, nodding sagely along to yet another column about how there’s too much health and caring spending, are part of the problem: they’re the beneficiaries of the generous tax concessions that prevent governments from adequately funding their spending. They have negatively geared investments or property which, according to the latest Tax Expenditures and Insights Statement from the federal Treasury, will cost the budget a record $26.5 billion this financial year before climbing to $32.4 billion by 2027-28. Or they claim rental deductions, which will cost another $26.5 billion in revenue.
Many of the more affluent enjoy two of the biggest tax rorts of all, trusts (net income reported by taxpayers from trusts will jump this year by more than 12%, or $7 billion, to a record $67 billion this year) and franking credits ($22.6 billion of which were claimed by 3.3 million residents on their individual tax returns in 2021-22; $13.4 billion of them were received directly, with the remainder going indirectly via… trusts.
Entire media outlets devote themselves to representing these powerful, fiscally toxic interests in opposing any meaningful tax reform, while demanding that spending for the least powerful in the community be curtailed. It’s all to do with who has power in Australia and its rotten, dying media industry.
In the best comment on MYEFO yesterday, Deloitte Access Economics partner Stephen Smith wrote:
Combined with the release of the 2024-25 Tax Expenditures and Insights Statement, the budget update released today also shows that Australia’s fiscal settings are increasingly inequitable. Almost half of all revenue raised by the federal government is sourced from taxes on individuals. At the same time, major tax expenditures such as the concessional taxation of superannuation contributions and earnings, and the capital gains tax discount, disproportionately benefit the wealthiest Australians.”
And the way the “tax debate” is skewed in the media will ensure that that inequality will continue to worsen — to the cost of younger, poorer Australians and the benefit of older, wealthier Australians.
All sides blame politicians for lacking the courage to bridge the gap between tax and spending, ignoring that they all make it politically suicidal for any politician to hurt vested interests by removing tax concessions. Just ask Labor, which went to the 2019 election with a suite of moderate, sensible tax reforms, only for the media, from News Corp and the AFR through to the ABC, to campaign as one against them on behalf of greedy seniors and tax rorters.
As economist Saul Eslake put it in his MYEFO commentary:
Neither side of Australian politics has been willing to have an ‘adult conversation’ with the Australian people about how all this additional spending should be paid for. As a result, by default, it’s going to be paid for by a combination of an ever-increasing personal income tax take due to ‘fiscal drag’ (which will fall much more heavily on wage and salary earners than those earning income in other ways), and larger budget deficits. In both cases, the burden is falling disproportionately on younger generations (the same ones who are finding it much harder to become home-owners than their parents or grandparents did).
The least politically painful reform is still in superannuation — though look at the inordinate fuss created by Labor’s simple proposal to lift tax on super balances over $3 million. According to the tax expenditures statement, the largest single concession is superannuation, which will cost the budget $55.5 billion in foregone revenue this financial year. That will rise to $64.9 billion by 2028 (the main objection to reducing the cost of tax concessions is usually “stop fiddling with super, there have been too many change” — curiously you never hear commentators saying we should stop fiddling with eligibility for NDIS because it has changed so often).
Super is the $4 trillion gorilla in a few different rooms in the Australian economy — one that is continuing to grow — whatever the rage at industry super funds in right-wing media outlets. Its distortions of the economy, consumer demand and the tax system have a massive impact that most of us are too close to to see. With yet another super contribution increase set for next year, at some point we might work out that even a minor adjustment in the tax appeal of super could get us much of the way there to covering the gap between tax and spending.
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