Mon Aug 21

Intergenerational report to warn of slow growth, pressure on revenue

Written by: Michelle Grattan, Professorial Fellow, University of Canberra

New extracts released ahead of the government’s Intergenerational Report show it warns Australia’s economy will grow more slowly in the coming 40 years than in previous decades.

At the same time, there will be pressures on the revenue base, and changes in revenue sources.

Real gross domestic product is projected to grow at an average annual rate of 2.2% from 2022-23 to 2062-63 – which is 0.9 percentage points lower than the average rate over the previous four decades.

The lower growth reflects a slowdown in Australia’s rate of population increase, reduced participation in the workforce as the population ages, and assumed slower long-term productivity growth. Other advanced economies also face slow growth.

The full report will be released by Treasurer Jim Chalmers on Thursday.

By the early 2060s, when Australia’s population is forecast to be more than 40 million, the economy is expected to be about two and a half times bigger than now, in real terms.

The report projects total receipts (tax and non-tax) to rise from 25% of GDP to 26.3% in 2033-34, as predicted in this year’s budget, before gradually declining to 26% by 2062-63.

Tax receipts are projected to climb to 24.4% of GDP by 2033-34, as in the budget.

But the report then assumes the tax-to-GDP ratio remains at this level right through to 2062-63.

It describes this as a technical assumption and says assumptions that limit long-term tax-to-GDP growth have been a feature of every intergenerational report.

Without them, “taxes would rise significantly as a share of GDP over the projection period” as income and wages increased and the progressive income tax system operated. The result “would not be realistic”.

In government the Coalition adopted a tax-to-GDP “cap” of 23.9%, but Chalmers, before the 2022 election, rejected the notion of a cap, describing it as “arbitrary” and “imposed for political reasons, rather than good economic reasons”.

The report says the tax-to-GDP ratio averaged around 23.9% over the eight years to 2007–08 (the period between the introduction of the GST and the global financial crisis) before climbing to 24.2% during the mining boom in 2004–05 and 2005–06.

It says since 2007–08 the economy has been affected by significant external shocks, including the financial crisis and COVID.

The report points to structural changes to the economy it says will put pressure on the revenue over coming decades. It says:

Indirect sources of revenue are expected to decline as the decarbonisation of the transport industry and changing consumer preferences erode fuel and tobacco excise bases.

On the other hand, company tax and other taxes including GST are projected to broadly track economic growth, with personal income taxes increasing as a share of GDP, reflecting rising incomes and wages and population growth, but with the increase limited by the technical assumption about the tax-to-GDP ratio.

Chalmers said Australia’s future prosperity would depend on revitalising productivity growth, delivering high quality essential services and ensuring the budget was sustainable.

Earlier on Monday, he told a news conference the intergenerational report was “all about making the big shifts in our economy and our society work for us and not against us”.

He said the report was aimed at building understanding of five big shifts,

from globalisation to fragmentation, from hydrocarbons to renewables, from information technology to artificial intelligence, from younger to older, and what that means them for our industrial base and in particular for a bigger role for the care economy.

Chalmers welcomed an economic reform blueprint released by the Business Council of Australia on Monday, although he said the government did not agree with all of it.

One area of disagreement was its call to put more of the tax burden on the GST.

There was “a huge amount of common ground that we can work with the Business Council on outside the GST,” he said.