$500bn+ deficit crunch; tax reform essential for Australia’s future, PwC - 23 July 2013

Failure to address fundamental tax reform threatens a blowout of combined Commonwealth and state/territory government deficits from $27.4 billion to $213.5 billion by 2039-40 and to $583.1 billion by 2049-50, according to new research from PwC.

“If government spending, productivity and workforce participation maintain current trends, and tax reform is ignored, we face a future with reduced living standards and poorer community services,” PwC CEO, Luke Sayers said.

“Without expenditure constraint and tax reform any surplus will be short lived and we will see deficits growing strongly for at least a generation. Another global economic shock could tip us into disaster. Without reform, another shock like the GFC in the next few years could see Commonwealth debt climb to 30% of GDP by 2025-26 and accelerate from there.

“Even without a major downturn the longer-term picture is bleak. Deficits of this magnitude are ultimately unsustainable and would challenge Australia’s social fabric.”

PwC’s report, “Protecting Prosperity: Why we should talk about tax” highlights how the existing tax system poses a major systemic risk for Australia.

As a result of deficits each year, combined government debt, as a proportion of gross domestic product (GDP), is on trend to grow from 12.1 per cent now, to 32.9 per cent by 2039-40 and to 77.9% of annual GDP by 2049-50.

After 22 years of continuous economic growth, Australia is facing huge economic and social challenges.

“As a nation we need to have a serious debate about what this growing fiscal gap means for our future prosperity,” Mr Sayers said.

Governments are committing to long term, growing expenditure to address important community needs such as health, the national disability insurance scheme and education, but failing to address the revenue side of the equation.

Mr Sayers said the tax system and its transformation is a critical element for Australia’s future economic wealth.

“Australia faces a historic choice in the years ahead. It could cut government services radically, it could build tax revenues by incremental change, or it could prioritise growth through carefully targeted expenditure cuts and tax reform.

“Our future prosperity depends on us having a functional, efficient, equitable tax system that provides the fiscal muscle needed for government to provide the services and support that our society needs.

“As individuals we think of tax as a take but as a community we need to acknowledge that it’s tax that provides the services and infrastructure we all depend on.”

Where to for Australia?

“Without tax reform, Australians face materially worse living standards, lower incomes, and poorer government services,” Mr Sayers said.

“Without tax reform, Australia is far more vulnerable to economic downturns – we have spent our war chest on the Global Financial Crisis - another would impact Australia more in line with what we have seen in the US and Europe over the past 5 years.

“When the GFC struck, the effect on Australia was cushioned by a Budget surplus, negative net debt and terms of trade that were at a historic high.

“These buffers have all eroded,” Mr Sayers said.

“We can no longer rely on strong commodity prices for our exports to sustain our living standards. The key to high living standards is strong, real per-person income growth.”

PwC’s research shows that not only will tax reform make Australia’s economy more resilient, but its people more prosperous.

Getting the right mix

PwC believes successful tax reform is about getting the right balance between what activities are taxed, by how much, and how the tax is raised. A good tax system must preserve social equity, stimulate economic growth and sustain strong government.

The right tax system can boost investment, create jobs, and provide a fairer return for working people. It provides the funding an ageing population needs and the infrastructure a growing economy requires.

“Getting the tax mix right is critical to this reform. All taxes must be up for review, both state and federal. Previous attempts at reform where this has not been the case have been doomed from the outset,” Mr Sayers said.

“Further, rather than rushing to specific solutions, we need to have a debate that considers the needs of individuals, community organisations, businesses and government. Any fundamental change will require public and bipartisan political support and a willingness to balance competing interests.

“The existing tax system is all but broken. A long term, sustainable solution to replace the existing system will take a number of years to evolve but the downside of not doing so is clear,” Mr Sayers said.

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