Returning the Federal Budget to surplus following COVID-19 may take an additional 19 years, and reaching zero net debt an additional 27 years, without comprehensive tax reform, according to projections undertaken by PwC Australia.
While now is the time to plan for significant reforms to address this challenge, PwC has also cautioned that the country’s health and economic situation must be stabilised before commencing implementation of any changes.
New PwC forecasts show pre-pandemic budget projections of reaching zero net debt in 2029-30 will be delayed until at least 2056-57, due to ballooning deficits, creating additional government debt.
At the end of March 2020, the Commonwealth’s net debt was around $430 billion – around $37 billion higher than the most recent forecast for the end of the financial year, according to the Parliamentary Budget Office.
This burden will grow with PwC predicting that Australia will not be able to return the Commonwealth budget to balance for the next 19 years, and not reach the surpluses needed to pay down the new debt associated with the COVID-19 lock down.
Based on the modelling, an 18 year-old entering the workforce in 2020 would have always been working under federal budget surpluses, had COVID-19 not emerged, and would have expected zero net debt when they reached 28 years of age. Now that same worker cannot expect to see a budget surplus until they are at least 37 years old, with net debt not predicted to hit zero until they near 55.
The forecasts are outlined in PwC’s latest publication Where next for Australia’s tax system? In it we consider the important role that the tax system plays in supporting a longer-term recovery and how it will need to adjust to support the future prosperity of all Australians post COVID-19.
PwC Tax Partner Paul Abbey said tax reform will be needed more than ever in post-COVID-19 Australia as the country looks to generate revenue to support ongoing government expenditure, encourage economic growth and provide employment.
“Now is the time to be planning for comprehensive changes to the tax system – but implementation of these reforms should wait until after this crisis has passed.
“Tax reform in the middle of an economic shock will pose further disruption to householders and businesses that are already being asked to change on many fronts, and may give rise to reforms that will need to be recalibrated once some stability returns. But that does not mean that we should be doing nothing – now is the time to plan for reforms as we emerge from the immediate crisis.”
Chief Economist Jeremy Thorpe said: “Australia began 2020 with an economy that was growing at a slower pace than desired but with relatively low debt, compared with other nations, and a Federal Budget on the verge of surplus – but even then the tax system was not equipped to adequately support the growth required.
“The recent lockdown in Australia combined with social distancing measures and closed borders have exacerbated the ongoing challenges to increasing economic growth in the future as we continue to navigate the uncertainty currently unfolding,” he said.
PwC argues that tax reform should be undertaken through a transparent process, building on the public trust that has been established in the way Governments, business, unions and community groups have come together to respond to the COVID-19 crisis.
“The COVID-19 pandemic in Australia introduced a new openness in how the Government has dealt with the public, who in turn have understood the need to place the economy into temporary hibernation to ensure their health and safety,” Paul Abbey said.
“The tax reform process needs to be seen as fair and equitable. This also means that excluding certain taxes or concessions from any review will undermine trust and affect the acceptability of any final package of reforms.”
Subsequent papers in this series will identify tax reform options for the GST and issues for intergenerational equity. These proposals will be put to a range of stakeholders from across the Australian community to engage them in the discussion.