Hard road ahead no matter who wins
By this time next week, the federal election will be behind us, with the newly elected government facing a challenging budgetary situation. Fundamentally, existing expenditure commitments - particularly in health and income support for an ageing population, as well as new commitments for education and disability - face the problem of slowing revenue growth.
Discretionary tax increases are always an option to help balance the books, but even here the choices available are constrained by past decisions and election promises. As highlighted last week, both major parties have ruled out adverse changes to superannuation tax rules for at least three years.
The stated objective of both parties is to reduce the company tax rate, not to increase it. Both major parties have also ruled out changes to the GST. This tax has always been designed as a revenue earner solely for state governments. Increases to the GST rate or additions to the items subject to this tax would help the federal budget only if the resulting increased revenue reduced federal direct grants to the states.
This leaves personal income tax and charges for goods and services, including federal excises, as the only major sources of additional revenue. There's always the possibility of increases in fuel excises and other charges, but increases in personal income tax bills face a major hurdle.
The tax-free area for a single taxpayer is now in excess of $20,000 annual income and a couple with income split equally between them can earn in excess of $40,000 annually before paying tax. As our population ages, a smaller percentage of the population will be income taxpayers and that marginal rates of tax will have to increase substantially to raise large amounts of revenue.
During the election campaign, both political parties have accepted the inevitability of budget deficits for a considerable period ahead. This raises the question of whether a continuing string of deficits is a matter of concern. The general consensus is that unlike many other countries, Australia is still in a strong financial situation with the capacity to fund increased debt and still retain a high credit rating.
A serious issue in the longer term will be if additional debt is incurred to fund ongoing recurrent outlays. It is preferable to use debt raisings for capital purposes including infrastructure which yields benefits to the community to compensate for the ongoing interest rate costs.
The sustainability of debt commitments also depends upon the costs of borrowing. Continuing deficits will not present an immediate problem if interest rates remain at current low levels, but if they were to rise substantially, the budgetary pressures for our next government would be even greater than they currently are.