Treasury releases its budget sustainability state of play ahead of roundtable

Treasurer Jim Chalmers said that the issues papers sought to define the challenges and opportunities faced by Australia’s economy, so that the economic reform roundtable could focus on the reform agenda.

“The roundtable is all about building consensus around reforms, the issues papers do the problem definition,” Chalmers said in a statement.

“They are deliberately flat and factual, and the issues are already well-known and broadly understood, but we are circulating them so we can spend time at the roundtable on specific ideas, not just problem identification.”

The biggest long-term trends affecting Australia’s budget included population ageing, expanded use of digital and data technology, climate change and the net zero transformation, growing demand for care services, and increased geopolitical risk and fragmentation.

The Treasury noted that the budget was in a structural deficit driven by pressures in the care economy, defence and interest repayments on public debt.

Interest costs were projected to grow by 9.5 per cent per annum over the medium term, which could see interest payments rise to 1.4 per cent of GDP by 2035–36.

Defence spending was also expected to grow amid a more fractured geopolitical environment, while spending pressures in aged care, childcare, medicare, hospitals and the NDIS were projected to grow.

As structural challenges loom large, Treasury added that public revenue was under pressure amid demographic and economic shifts such as an ageing population, waning mining profits and shrinking returns from “indirect” taxes, including fuel and tobacco excises.

Treasury said that a rejig of the tax system would be critical to fostering productivity, budget sustainability, and intergenerational equity.

“A smaller share of the Australian population [is] set to shoulder the burden of generating income tax revenue as the population ages,” the issues paper read.

“In 1982–83, there were 6.6 working-age Australians for each Australian over 65. Over the 40 years to 2022–23, this has fallen to 3.8 and it is projected to fall to 2.6 by 2062–63.”

It added that tax changes had reduced the income tax burden on older Australians – only 16 per cent of Australians over 70 paid income tax in 2022–23, down from approximately 30 per cent in the 1990s.

Treasury added that economic shifts, such as the net zero transition, would “significantly impact” company tax receipts. The mining industry accounted for 39 per cent of company tax in 2022–23.

It noted that the current headline company tax rate was high by international standards, sitting at 30 per cent compared to the OECD average of 21 per cent.

“Company tax settings can also distort business decisions and disincentivise investment, which can result in lower productivity, fewer jobs and lower wages,” it said.

Treasury also zeroed in on tax concessions that “disproportionately benefit higher income earners”, including super contributions concessions, super earnings and related capital gains tax (CGT) concessions, and CGT discount concessions.

It found that almost 90 per cent of CGT discount concessions flowed to the highest income quintile, as well as approximately 60 per cent of super earnings concessions and just above 50 per cent of super contributions concessions.

At the same time, income tax receipts contributed over half (51 per cent) of Australian public revenue in the 2022–23 financial year, data from the tax office showed, a portion projected to rise over time due to bracket creep.

“Labour income is generally subject to higher headline tax rates due to concessions on most savings income,” the issues paper read.

“Over time, without government intervention, bracket creep will also result in rising average tax rates. High effective marginal tax rates (including means testing of benefits) can disincentivise labour market participation and savings and discourage investment in skills.”