Australia’s long-term budget looks fine. But something important is missing from the forecasts
Predictions of debt, deficit and tax revenue out to 2060 rather nicely avoid the major issue that will confront the economy – climate change
The latest long-term report from the Parliamentary Budget Office provides the good news that the budget looks fine and debt levels even in the worst-case scenario are manageable. The bad news is that, as with all our long-term economic forecasts, there is little attention paid to climate change rendering much of these forecasts irrelevant.
The PBO’s latest “Beyond the budget” report charts where the Australian government’s finances are headed over the next 40 years.
It is a very extensive report that should provide people with a degree of calm when they hear anyone warn of the horrors of growing debt levels or cost blowouts. Importantly the report also provides some much-needed facts to the government’s spin about tax cuts.
One of the more impressive charts provided in the report displays the change in income tax paid according to levels of income and percentile.
It reveals that by the end of the decade only the top 18% of income earners will be paying a lower average tax rate than they were at the start:
This is certainly not consistent with the government’s message about delivering tax cuts to everyone and may not seem to make logical sense because taxes are not rising.
The problem is that incomes will continue to rise (even if slower than in the past) and thus people will suffer from bracket creep by their average tax rate rising as more of their income is taxed at a higher (if flatter) rate.
And bracket creep mostly affects those on lower incomes.
The PBO shows the tax cuts cancel out bracket creep only for those earning more than $100,000:
This overall increase in the average tax rate for most workers is also reflected in the prediction that over the next decade personal income tax will make up a larger share of the government’s revenue base:
This suggests that by the end of the decade we will need more tax cuts targeted at low-middle income earners.
And unless political parties continue to decide offsetting revenue cuts with spending cuts that will mean debt will rise.
As it is, the PBO estimates government debt under a median scenario will only get back to the debt levels of 2017-18 in another 40 years:
If that sounds scary, the good news is that the level of interest rates is projected to be so low that even under the worst-case scenario, Australia’s debt repayment will be lower than it was during the 1980s:
The PBO notes that “Australia’s fiscal position remains sustainable despite the impact of Covid-19, provided governments can achieve a measured pace of fiscal consolidation”.
But predictions of debt, interest repayments or taxation out to 2060 all rather nicely avoid the major issue that will confront the economies of every nation – especially Australia’s – climate change.
The PBO report only mentions climate change once, to note that it is one of the known “trends and sources of risk that will affect Australia and the commonwealth budget over the decades”.
And yet that known risk does not affect any predictions of growth, interest rates, debt or revenue and expenditure.
Climate change does not merit one mention in the supplementary paper outlining the methodology underpinning the report.
This of course is not unusual – climate change is mostly a thing to be acknowledged and ignored in government budgeting.
Because the government has no actual long-term place for climate change, this means the PBO cannot estimate the impact on the budget because it has no idea what the long-term target for emissions is, how it will be cut, and whether it will be too little too late (almost certainly).
But we all know climate change will impact the economy and in turn the budget.
Last week a paper from the Reserve Bank of Australia, for example, found that climate change will likely reduce housing values across much of northern Sydney by 2050.
The report on the impact of tax cuts and bracket creep provides a worthy counter to the spin of the government and it also does a good job of reminding people not to panic about our current government level of debt.
But without providing any sense of the impact of climate change, long-term predictions are of very limited value.
If we don’t even know what level of emissions we are targeting by 2050, let alone what is the likely level they actually will be, there is not much point in caring what debt, deficit and tax revenue will be at that point.