Treasury boss Martin Parkinson says the goods and services tax will have to be boosted or broadened if the budget is to have any hope of returning to surplus.
Addressing the Sydney Institute on Wednesday, Dr Parkinson detailed a bleak budget outlook in which there would be no return to surplus in a decade, even if “bracket creep” through wage inflation was allowed to push up the average tax rate on full-time workers from 23 to 28 per cent.
Sustaining such an increase was “unlikely to be politically feasible”, he said.
It was also “hardly likely to be economically desirable” as it would turn Australians away from work.
Dr Parkinson’s calculations back those of Treasurer Joe Hockey and point a budget of “hard decisions” in May, many of which will bite their hardest in years to come.
Mr Hockey’s office confirmed on Wednesday that Dr Parkinson would have his term as treasury secretary extended until after Australia hosts the G20 world leaders meeting in November.
He had been due to leave after the May budget.
Dr Parkinson said after years in which Australia’s real income per head had grown by 2.3 per cent a year, it was now set to scarcely grow at all for a decade.
That meant that by 2024, real income per head would be $69,000, much less than the $82,000 per head Australians would have come to expect.
By then the budget would be in deficit for the 16th consecutive year.
That was the outlook given “a relatively benign scenario”, he said.
It assumed another ten years without a recession on top of the past 23, taking the total to 33 recession-free years, almost a world record.
And it assumed that personal income tax collections could keep growing with inflation, without political costs.
More likely scenarios would require deep budget cuts.
“It is widely known that the National Disability Insurance Scheme and school reform funding will add $3.1 billion and $2.8 billion to total spending over the forward estimates, with the net cost to the Commonwealth of the of the NDIS to be $11.3 billion per annum by 2023-24,” Dr Parkinson said.
“What is less well understood is that total Commonwealth expenditure on health is anticipated to rise from $64.7 billion in nominal terms to $116 billion in 2023-24.
“Similarly, our three main pension payments – the aged pension, disability support pension and carers’ payment – grow at an annual rate of 6 per cent per annum in nominal terms over the forward estimates, adding around $13 billion to annual payments by 2016-17, and another $39 billion by 2023-24.
“Ultimately the return to surplus must be underpinned by policy decisions - by individual, hard decisions,” Dr Parkinson said.
The goods and services tax was shrinking in importance as Australians shifted spending to untaxed services such as private health care and private schools, he said.
Boosting or broadening the GST would be a less damaging means of increasing the tax take than allowing so-called bracket creep to push lower and middle income earners into higher tax brackets.
If unchecked, bracket creep would dissuade Australians from working and increase incentives to avoid tax.
A switch in the tax mix toward consumption taxes such as the GST would be “a key challenge for the upcoming White Paper on Taxation”, Dr Parkinson said.
Sharpening the challenge would be the knowledge that this time the switch couldn’t be sold as a payoff for a cut in income tax.
Treasurer Joe Hockey was in a meeting of the government’s expenditure review committee in Perth as Dr Parkinson spoke. The meeting was expected to decide the broad shape of the May budget.
In a departure from tradition it was chaired by Prime Minister Tony Abbott, rather than the treasurer or finance minister.
- with Gareth Hutchens