The cost of putting off an economic reckoning is looming

Procrastination. As your correspondent can attest, it's an easy trap to fall into. 

Prioritise another task to avoid something more difficult or unpleasant, even though you know you'll eventually need to do the thing you've been putting off, and it will be all the more painful because of the delay.

The problem is that we're now doing it collectively, at least across much of the Western world, including Australia.

Take the prime example of budget repair, with related implications for long-term fiscal sustainability and intergenerational equity.

A new Grattan Institute report titled "Budget reboot: How to fund Australia's future" notes that state government debts have more than doubled since 2019.

"Outside of the COVID pandemic, the last time Australian governments owed this much, the country was still paying off debt from a world war," the report observes.

The interest bill on state government debt has also doubled to 0.6 per cent of Australia's annual economic output, and is likely to soon double again as rising interest rates have pushed the cost of borrowing to fund deficits up roughly four-fold since immediately before COVID.

The federal government hasn't been nearly so profligate, at least since the pandemic stimulus period ended, but it too is stuck in a structural deficit, and may find itself on the hook as some states meander towards fiscal disaster.

The Grattan report argues that governments should be saving for a rainy day now, as global economic, climate and geopolitical shocks are set to become more frequent. But most aren't.

"Tomorrow's Australians will increasingly pay the price for today's deficits, whether through higher taxes or worse public services," the authors warn.

The price of past inaction

A separate survey-based report from AMP finds that today's young Australians are already paying a large personal price for policy inertia over the past decade, long after it became clear that a cocktail of tax breaks, planning restrictions, low interest rates and financial deregulation was pushing housing out of reach.

The study finds that more than half of adults under 30 have changed their intentions around having children due to cost-of-living pressures. Close to half have reconsidered having children altogether.

Nearly two-thirds feel they need a foot on the property ownership ladder before starting a family, but AMP's calculations show saving a 20 per cent deposit takes more than a decade for most.

No wonder Australians are having children later, and fewer of them when they get around to it.

One might consider this a form of enforced procrastination due to the social and economic conditions young people are facing.

Ironically, this seems likely to compound the budget problems already brewing, especially in an era where smaller migration programs are in vogue.

"As Australia ages, the challenge is sustaining living standards and meeting growing demand for care without placing an ever-greater burden on working families," AMP deputy chief economist Diana Mousina writes.

A plan for GST reform

The Grattan Institute's plan isn't for swinging budget cuts, although it does urge far greater spending discipline, especially at the state level.

"Too often, politicians approach 'budget repair' as if it merely requires cutting a few wasteful public spending programs," Grattan pointedly cautions.

"But given the size of the fiscal challenges Australia faces, the reality is that lasting repair will require both spending and revenue reform."

In fact, given it considers Australia "a relatively low-taxing country", at 29.4 per cent of GDP compared to the OECD average of about 34 per cent, the Grattan report argues there's room for a modest revenue increase.

But is there the will?

The single best means to raise that additional revenue, the Grattan report argues, is through an expanded goods and services tax (GST), with a higher rate of 15 per cent (up from 10) and fewer exemptions.

It wants fresh food taxed, with future consideration given to removing other current exemptions, such as health and education, which it argues favour higher income earners who spend more on these services.

The higher rate and taxation of all food would bring in an additional $76 billion in annual revenue.

Grattan argues close to half of that ($33 billion) should go to cutting income tax, particularly for low- and middle-income earners.

It earmarks about $25 billion to boost welfare payments and rent assistance to compensate for the increased GST, with a bit extra to reduce poverty among this group.

The states would receive the remaining $18 billion to improve their fiscal sustainability in the face of soaring healthcare costs.

It also strongly recommends pulling the 2018 sweetheart GST allocation deal with Western Australia and using the $6 billion that saves to boost the federal budget bottom line.

Is a crisis necessary?

However, it's difficult to have much optimism that Grattan's vision is politically possible.

We've already seen Anthony Albanese run a mile from any hint of abandoning WA's favourable GST distribution, concocted by his Liberal predecessor Scott Morrison.

Even where the federal government is trying to claw back savings, it's on the back foot.

Look at the losing battle it's facing to remove an additional private health insurance subsidy from older Australians.

Politicians opposing the change have pointed to the number of pensioners who would be left worse off, portraying them as a universally disadvantaged group who cannot afford the extra cost.

But the modelling they have provided hasn't distinguished between the numbers of full and part-pensioners affected. The reality is that relatively few full pensioners are likely to have private health insurance.

Most of those with health insurance are on part-pensions, often supplemented by income streams from substantial savings, and are typically owner-occupiers with very low housing costs because they aren't paying rent or a mortgage.

In fact, my GP's practice stopped blanket bulk billing pensioners a few years ago because many of these patients had larger disposable incomes. The clinic now bulk bills on a discretionary basis to those in genuine need.

That's not to mention the heat the government is facing over its much bigger reforms to rein in NDIS spending, reduce tax minimisation via trusts, or to wind back the negative gearing and capital gains tax breaks that have done so much to pump up the housing market and reduce intergenerational equity in the first place.

As Treasurer Jim Chalmers recently said: "Power is much more effective right now in the distorting and blocking than the building or reforming."

The sense of hopelessness is spread across the political spectrum.

One of Chalmers's predecessors, Joe Hockey, with a very different vision of reform as expressed in his largely rejected austerity budget of 2014, recently told The Business things would need to get a lot worse before they might get better.

"There's going to have to be a crisis now. There's going to have to be a financial crisis," the Abbott government treasurer warned.

"And people will only take the medicine when they feel really ill about it. And I think this is coming right across the world."

As debt balloons around the globe and interest rates start soaring with it, it seems the time for procrastination is finally approaching its end.