Good morning.
Over the past 2 days, we have discussed a wide range of issues to do with Australia’s productivity performance and our economic security.
We have discussed the need to manage a significant shift in the global trade system, to attract capital, to increase investment, to build skills and to better regulate our economy.
Today’s discussion turns to budget sustainability and tax reform.
The relationships between fiscal sustainability, economic resilience and productivity are tight.
A sustainable fiscal position gives confidence to businesses, markets and the community that the economy is being well run. And this supports investment and productivity.
A more resilient economy with stronger productivity growth, in turn, supports a sustainable fiscal position.
And a sustainable fiscal position enables government to provide an appropriate fiscal response to shocks and disruptions when they inevitably occur.
The Treasurer has circulated a background issues paper on Budget sustainability and tax reform which lays out a range of key facts which are pertinent to today’s discussion, and I won’t repeat them here.
What I thought I would do this morning is to draw together some threads that connect the discussions of the past 2 days with today’s discussion. I will highlight why fiscal sustainability matters, how fiscal sustainability is given an ongoing focus in Australian policy making system, and what this means for policy reform going forward.
Why fiscal sustainability matters
There are 4 key reasons why fiscal sustainability matters:
- it preserves our capacity to respond to crises
- it supports investment and economic growth
- it promotes greater intergenerational equity and
- it supports discipline in government decision making.
Let me elaborate on each of these briefly.
Crisis resilience
Having a sustainable fiscal position keeps options open for government. It enables government to respond to the significant shocks they will face from time to time – whether they be financial shocks such as the GFC, health shocks such as COVID‑19 or natural disasters — and to minimise the long‑term consequences of such shocks.
Being able to support communities to rebuild after floods or bushfires enables them to quickly get back on their feet, supporting the private sector to retain their key roles in driving activity and employment in these communities.
During the GFC and the COVID‑19 crisis, Australia’s fiscal position enabled the government of the day to respond boldly and directly. By providing direct support to individuals and businesses the government reduced the risk of scarring in the labour market that could otherwise have been a long‑term echo of the crises.
And by focussing on fiscal sustainability during good times, governments allow monetary policy to play the primary role in demand management outside of crises. This allows inflation to remain low and stable.
When the next shock or crisis hits, governments with fiscal space will have policy flexibility to respond appropriately.
Supporting investment and growth
Secondly, fiscal sustainability directly supports the economic growth that improves living standards and enables the funding of priorities such as social welfare safety nets, health and education systems and national security priorities.
When businesses and investors have confidence in a government’s fiscal trajectory, government borrowing costs are lower, and investment decisions are supported.
And lower government borrowing costs, in turn, reduce business borrowing costs because yields on government bonds act as a benchmark for the pricing of private debt.
Recently we have seen how crucial Budget sustainability can be for maintaining investor confidence and keeping the cost of government debt low. Sovereign bond markets are reacting negatively to governments without a credible commitment to medium term fiscal sustainability. Increasing uncertainty has pushed global yield curves steeper, and governments have seen lower investor demand for their bonds when markets have viewed their fiscal statements unfavourably.
But the benefits also go deeper. The literature consistently demonstrates that fiscal multipliers are larger when fiscal sustainability is credible. In other words, when households and businesses trust that current policies are sustainable, they’re more likely to spend and invest – thereby growing the economy – rather than engage in precautionary saving.
Intergenerational equity
This brings me to intergenerational equity.
Debt policy is fundamentally about transfers between generations.
Future Australians will inherit our infrastructure, our institutions, our knowledge – and also our debts. The question isn’t whether governments should invest for the future, but how they ensure those investments generate returns that justify the debt burden being placed on tomorrow’s taxpayers.
So fiscal sustainability is critically about intergenerational fairness and ensuring future generations have both the prosperity and fiscal capacity to address their own challenges.
Discipline dividend: Innovation, efficiencies and prioritisation
Finally, a focus on fiscal sustainability supports discipline in decision making. It is a catalyst for prioritisation within government, for innovation in the delivery of government services, for rigorous program evaluation and evidence‑based policy. And also for ongoing genuine reform of our systems – both tax and expenditure systems – to improve their effectiveness and operation.
It drives honest conversations about opportunity costs and trade‑offs within and across portfolios and extends decision‑making horizons beyond the short‑term. It requires consideration of not just whether something is justifiable today, but whether it is defensible to taxpayers 20 years from now.
This shift from short‑term focus to longer policy outcomes is precisely what is required to confront complex challenges like climate change, the demographic transition and the deteriorating geostrategic environment.
Australia’s fiscal focus
So those are 4 compelling reasons to ensure that fiscal policy is sustainable. But what does fiscal sustainability mean in practice? It means that there needs to be an ongoing focus on the short, medium and long‑term fiscal position.
There needs to be confidence in budget projections and transparency around the structural trends that will affect longer term budget outcomes. There needs to be a commitment that when conditions are supportive, fiscal buffers are replenished and debt is brought down, to create the room for adequate fiscal responses when required.
Australia has established a number of institutional mechanisms to support this focus on fiscal sustainability. We were ahead of most other countries when 4‑year budgeting was introduced under the Hawke government in 1984. In 2002, the Howard government introduced 10‑year projections into budget papers to better capture the medium‑term impacts of policy decisions. In 2002, the first Intergenerational Report was published providing 40 year fiscal insights into the structural pressures across key expenditure areas and the underlying trends affecting growth outcomes.
And the Charter of Budget Honesty requirements around budget processes, fiscal strategy, pre‑election budget outlooks, complemented by the Parliamentary Budget Office, have been designed to embed transparency and discipline into fiscal decision making.
Together, these requirements, combined with public expectations, have meant that Australia has had a keener focus on fiscal sustainability than many other comparable countries.
And as a consequence – and as laid out in the Budget sustainability and tax reform issues paper – Australia’s fiscal position is much stronger than most other comparable countries.
The Commonwealth Budget has rapidly recovered from the COVID shock, and we retained our AAA credit ratings from all major agencies. Australia enters 2025–26 with a gross government debt‑to‑GDP ratio of less than 35 per cent – a strong position by international standards.
But the issues paper is also honest about the pressures we face. There are pressures across a range of portfolios but especially the health, aged care, disability and defence portfolios – and deficits are projected for 10 years before the budget returns to balance. If we fully returned bracket creep – holding average tax rates at 2028–29 levels – this would add 1.7 percentage points of GDP to the deficit by the mid‑2030s.
The government’s gross debt‑to‑GDP ratio, while low by international standards, lifted significantly in COVID‑19 and is high by our own historical standards – is projected to fall slower than in past debt reductions.
And, given that it is the fiscal position of the whole country, including the states, that matters for resilience, we should also be concerned that the fiscal position of most of the states has deteriorated markedly over the past decade.
Finally, there is a genuine debt risk in the world at the moment, in a way we have not seen for decades. This partly reflects the challenges that almost all countries have faced rebuilding their fiscal buffers after the COVID pandemic. It also reflects particular concerns about the size of the US fiscal deficit and debt projections.
It is arguably more important now than ever to maintain our discipline over the medium‑term given the potential for disruption to global debt markets and the ramifications this would have.
Australia has choices to take today – that will have implications for future generations.
To my mind it is critical to be committed to fiscal sustainability to underpin our ongoing prosperity. To deliver this, we will need reforms that improve productivity – and exploit the opportunities that new technologies offer to deliver services better and more sustainably.
But given the structural pressures on the budget, and without a significant shift in community expectations, a commitment to fiscal sustainability is likely to require a combination of expenditure restraint and a lift in tax revenue over the period ahead.
Ongoing disciplined decision‑making across expenditure priorities will be fundamental – drawing upon rigorous evaluation, confronting challenging trade‑offs and ensuring the balance is right between the role of government and expectations of contributions from the broader community.
There will also be a need to ensure that the tax system raises sufficient revenue to fund our priorities in a way that best supports growth outcomes. That’s what an efficient tax system should deliver.
As discussed over the past 2 days, many of the major challenges Australia will face, from climate change to the demographic transition to technological disruption, will require sustained, strategic investments in our systems and our people over decades. That’s only possible if we maintain the fiscal capacity to see these challenges through.
Fiscal sustainability is about ensuring Australia has the capacity to achieve its ambitions and deliver ongoing prosperity, both today and for the generations that follow.
Thank you.