The Intergenerational Report is a useful document in that it reinforces the need for tough fiscal measures to avoid ever-increasing budget deficits and debt – a need that has been apparent for some time – but alas the IGR offers no solutions to Australia’s fiscal challenge. It will certainly help the Government make the case for tough budget measures, but the Government will need to find a new set of savings that the public considers fair, to use the word that has been prominent in political debates recently, if it is to have any hope of getting changes through the Senate. It’s unclear whether that set of savings exist, as any policies that significantly improve the long-term budget position will almost certainly involve cutting payments or tax concessions to particular groups in the community – groups that will then argue they are being treated unfairly.
Nonetheless, the Government will need to find (in its judgment) the least unfair set of budgetary savings to repair the budget, and a good place to start would be the Grattan Institute’s excellent report on budget pressures on Australian Governments, which I commented on in a post in May last year. The Government appears to have failed in its higher education reforms, which would have led to substantial savings, so perhaps now it’s time to turn to other measures suggested by Grattan, such as cutting back superannuation tax concessions and having a tougher assets test for the age pension (e.g. possibly by including the value of the family home above a certain threshold). Also the Government should review rules around negative gearing and capital gains taxation and determine if any tightening would be worthwhile. Negative gearing is fine as a principle, but arguably it, in combination with the current concessional treatment of capital gains, is diverting too many investment dollars into property. So tightening the rules could save taxpayers’ money and improve the allocation of capital in the economy.
The IGR gives the Government some useful facts with which to illustrate the budgetary challenge Australia faces. It is now up to the Government to identify large savings and convince cross-bench Senators of their merits. The IGR has set the scene, but now the Government must really perform.