IGR: We need to talk about a new national revenue model

In the IGR series, Public Accountant has taken a deep dive into the sixth Intergenerational Report.

Released twice each decade since their production was legislated in the late ’90s, Australia’s Intergenerational Reports offer 40-year fiscal projections. IGR6 forecasts the demands on Australia’s budgets to 2063.

Previously in this series, we have examined:

• Aged care demand and costs
• Productivity growth and living standards
• Labour force participation

In this final instalment, we round out the series with a discussion of the impact of productivity, workforce participation, demand for service and more on Commonwealth budgets, revenue and taxation.

The predictions in the 2023 Intergenerational Report (IGR) raise the question: How will governments plan to fund services in the future?

“The report paints a fairly ugly picture. The burden is on wage and salary earners predominantly, and that’s going to rise over time even with stage three tax cuts,”
says Tony Greco FIPA, General Manager Technical Policy at the Institute of Public Accountants.

“There are going to be fewer workers, because of the ageing population. Aged care, NDIS, Defence and more represent rising expenditure for governments. They are going to require more funding.”

Based on Australia’s current tax settings, the funding will mainly be drawn from personal taxes – from wages and salaries – Greco says. The question is whether this is a good system, to be over-reliant on personal taxes. Does it work, or should it be improved?

“Every economist will tell you we shouldn’t be in this situation,” he says. “The tax base is too narrow. The government has to broaden the tax base and not put so much of a burden on workers, because too much of it is coming from that source.”

Greco warns that many possible solutions simply tweak the tax system, creating mildly different outcomes. He suggests a more holistic approach – the current challenge is an opportunity to drive the wholesale change required for a strong Australian economy.

“Let’s start with a conversation about all possible options,” he says. “Before we say that our GST needs to go up, or the GST tax base has to be wider, let’s look at all the possible options. Then we can come to an arrangement where we can address the funding issue.”

Greco believes this is where the real value of the IGR lies.

“The report is there to remind the government that if there’s a problem, it has to adjust its settings to accommodate known scenarios. This is where we’re at. The Intergenerational Report is telling us the period for adjustments has already passed, and we need to get going,” he says.

“The political appetite for big-picture tax changes is non-existent, and there is no bipartisan support for wholesale changes. But the challenge for the government now is to bring the electorate along with them, and to prove the business case for why change is needed.”

Australia’s future: A stocktake

In this IGR series, Public Accountant took a deep dive into what the report’s outcomes mean for Australians, now and in the future. The discussion throughout the series emphasises the ongoing impact of an effective and fair tax system, and the need to think bigger than simple tweaks.

Productivity growth is projected to drop from 1.5% to 1.2% annually. And while productivity is the holy grail of business improvement and economy-wide growth, this slide doesn’t mean less to tax – perhaps just less than we’d like. Matt Grudnoff, Senior Economist at The Australia Institute, was looking on the bright side when we discussed the IGR’s projections with him.

Grudnoff suggests that businesses, and particularly innovative businesses, will have the largest effect on future productivity.

Labour force participation, also intricately linked to personal tax revenue, is also projected to drop from the current 66.6% to 63.8% by 2062-63.

This should not be so much of a concern either, Grudnoff said, thanks to Australia’s release valve.

That skills-based immigration system can be adjusted according to need, augmenting the labour force and shifting the dial on not only tax revenue, but consumer spending, industry capability, innovation and more.

Meanwhile, the cost of Defence is likely to continue to grow, but not without offering investment return. According to the 2023-24 Defence Portfolio Budget Statement, it sits at around $4.6 billion per month, or $55 billion annually. Forward estimates are $57 billion in 2024-25, $60 billion in 2025-26, and $63 billion in 2026-27.

Sam Roggeveen, Director of the International Security Program at the Lowy Institute, told us earlier this year to think about defence spending as we think of insurance.

“The only difference is that defence spending materially changes the thing you’re insuring against,” he said.

Finally, aged care funding, currently around $30 billion, will leap to $42 billion by 2026-27, a Department of Health and Aged Care representative told us when we discussed the future of aged care.

“We do have a very big shift with the ageing population and the numbers of people who will be requiring aged care,” Dr Fiona Macdonald, Policy Director at the Centre for Future Work at the Australia Institute, said at the time.

What does a budget/revenue solution look like?

We need to stop tinkering with the tax system and consider much broader change, Greco believes.

“We have to look at everything, including current exemptions on capital gains, tax-free status on the family home, CGT discounts and negative gearing,” he says.

“Every option has to be on the table, and then we can categorically work through all of them.”

Plenty of options – tinkering with the exclusion of the family home for aged care benefits, increasing GST – may be unpopular, but Greco emphasises the importance of a frank conversation about funding future services.

“We know we’ve got a train wreck. We know we’re still drawing from the same base. But from an economic perspective, taxing effort is not the ideal,” he says.

“Taxing personal effort is a disincentive to earn more, knowing it will just be taken away. Whereas taxation based on consumption is more economically friendly. It rewards initiative.”