Economic

Tutorial assessment

TA 10.1

(a) Pressure on Australian government budgets has been building for some time. It comes from rising health costs, age pension spending, an inevitable fall in the terms of trade, and the propensity of governments to spend big on signature initiatives such as paid parental leave, new schools funding and the National Disability Insurance Scheme.

(b) Tough choices cannot be put off much longer. Deficits impose heavy costs not only on the next generation but increasingly on this one, in the form of interest bills on the rising debt. Governments cannot expect that higher economic growth will result in budgets growing out of trouble.

TA 10.2

One potential package would broaden the GST to include fresh food and private spending on health and education. It would raise the age of access to superannuation and the age pension, remove the exemption for owner-occupied housing from the assets test for the age pension, and limit tax concessions on superannuation deposits.

Realistic reductions in spending on transport infrastructure, industry support, school class sizes, higher education subsidies, pharmaceuticals, health services, and defence could collectively improve budget positions by $21bn a year. But the economic and social impacts would be acceptable only if the cuts were targeted and executed unusually well.

Serious budget repair almost always involves tax reform. Aside from changes to the GST, increasing fuel excise in line with inflation would raise significant revenue, although it hits low-income earners particularly hard. Higher rates of existing taxes could raise large revenues. Raising the GST and municipal rates would slow economic growth less than other taxes.