The Australian Government is on track for more than 25 years of deficits. Teenagers starting high school today have never seen a

budget surplus and probably won’t until they are well into adulthood.  The challenge is structural. Spending has grown because of rising

community expectations, an ageing population, and the growing costs of providing labour-intensive services. But this increase in spending

has not been matched by growth in the tax base. Indeed, the growing cost of income tax concessions and poor design of other taxes has

eroded our revenue-raising capability.

The result is a persistent structural budget deficit. Official estimates suggest the structural deficit is about 2 per cent of GDP, or almost $50

billion each year in today’s dollars. But using more realistic estimates of spending –including in defence, health, and support for the vulnerable

–suggests a figure of more than $70 billion a year in today’s dollars by the end of the decade.

Continually adding to national debt by running sizeable deficits asks future generations to foot part of the bill for today’s spending and may

reduce the government’s room to respond to future shocks.  Now is the time to start the heavy lifting of budget repair.

Pursuing policies to boost growth is critical. Grattan Institute has previously published many recommendations on how we can ‘grow the

pie’. But higher growth will not alone close the gap. Given the scale of the challenge, governments will need to both cut spending and boost

revenue.  There are no easy solutions, but this report puts forward a menu of ‘least bad’ options to reduce spending and boost revenue without

hurting economic growth. Some of our options would even boost economic activity.

On spending, better procurement processes for infrastructure and defence could save several billion dollars a year. We put forward

another $15 billion of savings measures, including undoing the WA GST deal, counting more of the family home in the aged pension

asset test, and making health spending more efficient. Critically, the government will also need to make changes to ensure fast-growing

programs such as the NDIS and aged care are sustainable.

On revenue, the menu includes winding back income tax concessions, redesigning the Stage 3 tax cuts, increasing the GST, and better

taxation of fossil fuels. We would not expect the government to move on all these changes at once, but the menu includes choices worth

about $50 billion a year once mature. Even if we did them all, we would still be below the OECD average in terms of tax collections as a share

of our economy.

None of these policy options are easy. But if the government is serious about budget repair, it will need to embrace at least some of them.

To those rushing to reject these policies out of hand, we say: what’s your solution? We show that some of the perennials like cracking down

on multinational tax avoidance and improving welfare compliance are unlikely to yield much for the budget.

If today’s teenagers are going to see a meaningful reduction in the structural budget deficit before their middle age,

now is the time for us to move on from head-in-sand optimism and ‘easy’ answers towards real solutions.