The RBA says it out loud: Raise taxes to fix the budget

Australia’s economic debate is dominated by the immediate problems of the jump in the cost of living and rising interest rates. But Reserve Bank of Australia governor Philip Lowe on Friday turned the focus back onto the much deeper medium-term problem of the federal government’s fiscal policy.

Basically, Lowe said that the federal budget is in deep structural deficit and, among other things, the federal government needs to raise taxes to address the problem.

“We can’t pay for these things on the national credit card,” he said at his twice-yearly appearance before the House of Representatives Economics Committee.

Reserve Bank of Australia governor Philip Lowe says the budget deficit is a significant issue.Credit:Alex Ellinghausen

To be sure, raising taxes was only one of three broad strategies Lowe recommended. He also encouraged the government to look for spending cuts and to enact reforms that will make the economy grow faster. But he said that he hoped “as an Australian” that the Albanese government would in its first term start addressing all three of these tasks — controlling spending, increasing the size of the “economic pie” and raising taxes. Australia had no choice but to run a big deficit during the pandemic, but it should not be running a deficit now when the economy is booming.

Unemployment is lower than it has been in 50 years, meaning social security benefit payments are lower. And the price on world markets of Australia’s exports, especially coal and gas, is close to record highs. The problem is structural and without action, the federal government will still be running a deficit in a decade.

Dry fiscal conservatives fantasise that the government can rely on spending cuts to put the budget back in the black. Spending control is important and Treasurer Jim Chalmers has rightly promised to crack down on the pork-barrelling that was rife under the Coalition. But the rorts on sports clubs and country backroads are only pocket money in the context of a $650 billion annual budget. There is simply not enough fat to cut to pay for the increases in services which the community expects and which only the government can supply.

Chalmers will need several billion dollars to meet his campaign commitments on child care and aged care and that is just the start. Lowe said that the community expects a lot more spending on defence, infrastructure, education and care for the disabled. As Chalmers said in his economic statement on July 28, the budget is “burdened by long‑term demographic challenges that come with critical and necessary spending”. Australia should of course also look for Lowe’s holy grail of productivity boosting reforms which make the pie bigger.

But these will take years to have an effect, and they are notoriously difficult to get right. In reality, Australia will simply not be able to meet community expectations and control the deficit without some tax increases. It should not be that painful. Compared to other countries, the share of tax compared to the size of the economy in Australia is fairly low at only 27.7 percent of gross domestic product.

Chalmers, however, is terrified of a political backlash, having gone to the election promising to introduce the Coalition’s so-called stage three personal income cuts, which take effect from 2024-25. These will cost $243 billion over a decade. There is no easy solution to this dilemma, but Lowe is right. Chalmers must make a start this term in reforming and sometimes raising taxes and that debate should include a close look at personal income taxes.

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