OPINION: Arbitrary tax cap means higher deficits
Let’s get one thing clear up front: a commitment not to raise taxes, given all the things the government has promised to pay for, is a commitment to fiscal unsustainability. Public accounting isn’t rocket science. But to commit simultaneously to lower taxes, higher spending and budget responsibility defies the fundamentalAlas, that is where we find ourselves in the parallel universe that is the 2022 election. On Sunday, the prime minister reaffirmed the government’s commitment to its 23.
The budget problem we face is simple. Both sides of politics have agreed to the government doing more on a range of fronts, but neither side has committed to the higher taxes necessary to pay for it. This has nothing to do with the pandemic – the budget forecasts large “structural” deficits as far as the eye can see.
In my commentary, I try and avoid referencing Australia’s level of debt because I don’t think the level is a concern. It’s the result of money mostly well spent to preserve our economic capacity – during the GFC and pandemic – which has locked in greater prosperity for every Australian evermore. The Shadow Treasurer should noteWhat I’m more concerned about is the trajectory. At any given time, setting aside temporary cyclical factors, we want to ensure the budget is on a sustainable path.
So, the fiscal strategy should not target a surplus on average over the cycle, and instead should target falling net debt to GDP, which would imply a structural deficit of no more than about 1 per cent of GDP, given a slight conservative bias. And even though the tax cap should go, it should be replaced by a cap on real spending growth of 2 per cent to 3 per cent on average.
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