Debt stems from lack of fiscal discipline, tax reform needed

In their February 2026 report, Rising Pressures, Fading Discipline: A Review of Australia’s Fiscal Sustainability, the e61 Institute and McKinnon have found that as a share of GDP, expenditure has increased from 34.7 per cent in the early 2000s to 38.2 per cent in 2024.

The report said that public debate has underplayed the risks of Australia’s fiscal challenges by not taking a consolidated view of government accounts, which shows Australia’s governments have been running a combined deficit in the fiscal balance every year since the Global Financial Crisis in 2008.

Ageing population

The findings revealed that the rising debt experienced by Australian governments has been caused by gradual, embedded spending growth driven by ageing, political incentives, and institutional habits, in the absence of sufficient discipline or reform.

The report highlighted that if not addressed, weak productivity growth and population ageing will lead to a continued rise in government expenditure.

This spend will come from increased demand for healthcare, a reduction in labour force participation due to the growing ageing population, and the expansion of broad-based in-kind services and supports, which gradually shift the focus away from income support to alleviate poverty, the report said.

In addition, it said that government spending on the ageing population has increased since 2013, putting greater demands on labour-intensive services such as health, aged care, and disability support, while slowing labour force growth constrains government capacity to raise revenue.

In addition, the expansion of the baby boomer cohort has led to greater spending on health and social protection such as the age pension, it found.

In-kind supports

The report found that instead of banking savings from keeping spending at 4.5 per cent of GDP, in line with its 25-year average, Australian governments have redirected these funds to in-kind supports such as child care and the National Disability Insurance Scheme (NDIS).

“Going forward, it will be difficult to control the cost of in-kind supports. These services are labour intensive and hands-on. As demand rises, so too will wage costs,” the report said.

Despite increased spending on health, the research revealed only modest improvements to health outcomes despite hikes in real spending, as well as the social protection being less effective and targeted towards reducing poverty, the fall of student outcomes and, defence procurement struggling with delays and cost overruns.

Lack of fiscal discipline

The findings showed a lack of fiscal discipline in areas where ageing was not a key driver such as in the education sector. It found that between 1999 and 2014, per-student spending went up by about half a percentage point above the GDP, which was above that of demographic trends.

“This largely reflects underlying funding mechanisms in the education sector in the ‘Gonski’ school reform era that have tended to boost funding per student, especially for private schools with lower levels of public funding,” the report said.

As a result of this lack of fiscal discipline, there has been a surge in spending per person on in-kind social services and education, the research revealed.

The impacts of defence and economic activity function

The institute added that defence and economic activity, such as business bailouts and wage subsidies, would add pressure to government spending.

Further, it said that the rise in geopolitical instability may force a larger investment in defence infrastructure and further involvement in national interest sectors by the government.

As a result of sluggish productivity growth, less revenue is being raised to fund new or expanded services, with the rising cost of the ageing population narrowing the nation’s fiscal options, it said.

“This ageing is unavoidable, but the fiscal cost depends on policy decisions that are made now,” the report said.

It noted that larger government debt implies that younger generations will need to pay for some current government expenditure and as a result, Australian governments will begin to be less able to support Aussies in the event of a large external shock.

Recommendations

The report identified the need for policy change involving a combination of spending restraint and tax reform so that public finances can gain a more sustainable footing. stressing that the continuation of the current systems will result in a deterioration of the government’s fiscal health.

To strengthen resilience, it recommended reform directions including the independent assessment and analysis of fiscal settings, the adoption of longer-term budget horizons, better integration of federal-state service provision, and the introduction of explicit soft fiscal rules that are credible and adaptable to demographic and macroeconomic change.

Further, the report recommended that fiscal choices should distribute risks and opportunities fairly across generations and income groups. To sustain intergenerational fairness, recommend an evaluation of the shift toward in-kind and universal supports.

“Assessing how this shift has changed the distribution of who pays – and ensuring younger cohorts are not over-burdened by age-related spending – is fundamental to sustaining intergenerational fairness,” it said.

Finally, the institute stressed that value for money and spending and tax financing efficiency are not guaranteed through habit-based fiscal choices.

“Spending reviews should focus on outcomes not just inputs, and agencies should be provided with new tools to incorporate a whole of government lens to their advice,” the report recommended.

“Strengthening independent fiscal advice and consistently assessing the benefit of projects against the cost of revenue raising will generate a fiscal environment that rewards good choices,” it said.