Election sure to be full of debt funded promises

Everybody knows the Australia Government’s federal budget is mired in debt.

Indeed, for every new spending initiative you hear over the coming election campaign – and there will be many billions of dollars’ worth from all sides – it is worth reminding yourself that this is money that is all to be borrowed.

With the federal budget deficit forecast for 2021-22 already $99.2 billion after the shock $134.2 billion deficit the year before, all of those promises add to the already hefty pile of gross government debt, which is sitting at $859 billion and is forecast to burst through the $1 trillion mark by the end of the decade.

So, every time you hear an expensive new promise by those trying to be elected, remember that this and every promise will add to this pile of debt – a pile that with rising interest rates is set to become an expensive government “department” of its own, requiring massive tax payments.

Tax reform urgently needed

Of course, the best way to tackle such ballooning debt would be large scale tax reform, although there has been precious little sign of that being in prospect either.

With our over-reliance on company and personal tax and a shrinking employed workforce as the Baby Boomer’s retire, the obvious channels of even modest taxes on growing wealth and consumption seem destined to be ignored.

Even some action on existing tax concessions could produce some startling results to help the Budget work its way back into the black – a feat the latest inter-generational report forecast will not happen over the next 40 years on the current trajectory.

Acting on existing concessions could raise billions

Some recent treasury figures on the cost of these concessions show the massive amounts of money that are being left “on the table” due to tax concessions – particularly as share and property markets have boomed.

The exemption of the family home from capital gains tax (CGT) is a great example that will cost a record $64 billion in forgone revenue this financial year.

That is a hefty $9 billion increase on the forgone revenue estimated for 2020-21 which was itself an $8 billion increase over 2019-20.

This trend is set to continue as households understandably respond to the hefty taxes on personal income by pumping money into their untaxed houses.

Superannuation is another area in which large chunks of the growing wealth of Australians remains outside the taxation net.

The increase in the cost of the concessional tax rates on superannuation rose by a staggering $13.5 billion to a record $43.1 billion.

Similarly, the 50% concession on capital gains tax available to individual Australian taxpayers or trusts that have held the asset for a year or more rose by 21% to a record $11.8 billion.

GST exemptions are also expensive

There are hefty costs to the current range of exclusions to the GST too, which is our main tax on consumption.

Excluding fresh food from the GST will cost a record $8.4 billion in forgone revenue this financial year, while excluding health also hits an all-time high of $7.7 billion.

Not charging GST on education is set to cost the Budget $5.2 billion while having no GST on some financial services will cost $3.4 billion.

There are very good reasons for some of these concessions, but for others, spreading the taxation load further into wealth and consumption is well overdue and could radically change the look of the budget.

Even smaller, concessional tax rates introduced in these areas would produce some meaningful changes, as well as preventing the economic distortions that concessions tend to generate.

Debt can be good but too much is dangerous

Government debt can be a good thing if it is spent on worthwhile projects that benefit the country and stimulate the economy but increasingly the effect could simply be to shift the burden to future generations, which will also be saddled with excessive interest payments.

There is little doubt that higher debt levels reduce the flexibility of governments to do things like increase spending or cut taxes to adjust for economic circumstances.

In extreme cases, they can turn countries into economic backwaters and can even cause debt defaults and currency weakness.

Things are not that bad yet, but unless some meaningful tax reform appears on the horizon, the signs of a continuing debt explosion are all glaringly obvious.