Structural deficit reform: growing Australia without borrowing from the future

Australia is in its eighth year of substantial and unsustainable fiscal deficit. To be sure, this is partly due to the GFC and governments’ additional spending in response to this. But that additional expenditure was temporary. What we are dealing with now is structural.KPMG Economics estimates that on current policy settings, the budget remains in actual and structural deficit at least until 2030.

Continual failure to deal with this decline produces a very poor endgame.

If our government finances are not sustainable, it limits what we can do in the future. The cost of failing to maintain a sustainable fiscal position is accentuated with its deterioration. As our credit rating declines, our interest bill rises for a given level of debt.

All Australians have a responsibility for the sustainability of what our governments do and what they don’t do. The desirability, efficiency and contributive justice of what they raise as revenue and the sustainability, effectiveness and distributive justice of what we spend.

Essentially it is about justice, and the legacy and burdens we leave we will pass on to future generations – Gens Y, Z and Alpha. That is, fundamentally, what our structural deficit is about, borrowing from the future and placing an increasing burden on future generations.

It is clear that based on our current policy settings, government expenditure will increase faster than revenue projections.  What we are doing now, and have been doing for almost a decade is simply not sustainable. There is no ideological foundation in this simple statement.  The entire political spectrum – spanning government and business leaders – needs to be concerned about, and agree to act on this.

An early fix is the least costly option. The very nature of the problem is one that grows as interest on borrowings grow. Fixing the structural deficit also provides the ability of governments to adjust fiscal policy and thus “smooth” through the cycles, thereby reducing the human cost of a downturn. To do so, however, requires surpluses in the “up years”.

The assumptions for addressing the deficit is not based on either just a reduction in spending or an increase in taxes. The better option is to do both. To reverse this decline we need to grow the economy in real terms at a stronger pace than what is currently expected in the forward estimates. Unless this occurs, Australia is destined to maintain actual and structural budget deficits well into the future, worsening our debt position as a consequence.

Our recommendations urge change in four broad areas: health and aged care, welfare, superannuation and age pension, and education. Our estimates are that these would improve the budget position on a long term basis by around $12 billion in today’s terms annually.

Our pathways are not ‘slash and burn’, but rather the search for sensible and rational changes, drawing both on our expertise at KPMG and beyond.

I invite you to read the full report, Solving the structural deficit.

Grant Wardell-Johnson


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