Getting The Budget Back in Black

What do you do with a $70 billion budget hole? How do you balance the books without causing chaos in the economy?

That’s the problem racking the brains of Jim Chalmers and the Federal Treasury.

Our overall government debt is set to climb to almost 32% of GDP by the end of the decade, people are demanding more services than ever, and the economy isn’t exactly booming. Yet there is cause for hope.

We outline our top 3 strategies for plugging the widening budget black hole.

  1. Cutting services erodes our quality of life, so rather than more cuts, we should fill the leakages with structural change. The government needs to earn more revenue from large multinational companies and resource giants. These companies, sitting on mountains of profit that would shame Everest, do not pay their fair share of income tax. In Norway the resource tax is at 78%, but in Australia, it is a meagre 40%. To add more salt to the wound, the Petroleum Resource Rent Tax allows enormous deductions on oil projects. Smart accounting can inflate a gas company’s expenses so high that they never pay tax. Fixing that concession and upping the base tax level would bring multiples of $3 billion in extra revenue.
  2. Having a crack at tax on all fronts. The government’s first step should be to restructure or scrap the proposed stage 3 tax cuts. If they are made less top heavy and more generous to middle income workers, the government could save about $8 billion per year. That is no small fry sum. Furthermore, investing in the middle class is the fastest way to spur economic growth. It all comes down to marginal propensity to consume, or how much out of every extra dollar earnt you spend. The difference between classes is drastic. According to a 15 year study by the Boston Federal Reserve, low income households have an MPC 10 times higher than wealthy households. So modelling a tax structure around this would generate income through tax on consumption, and keep the government war chest full.
  3. Trim down wasteful spending and stamp out corruption. Research from the Australia Institute found that corruption has reduced our GDP by $72.3 billion-or 4%-, whichever figure scares you more. Whether it is bribes to government officials, businesses using their political clout to form monopolies, or unfairly preferenced approvals – corruption is rife in many industries. It is reducing competition and disrupting the market in a way which forces honest, tax-paying players to the sidelines. Cracking down on it would give Australia a much needed budget lift. Furthermore, the Grattan Institute argues that cleaning up grants and advertising to support only the most robust ventures would save up to $2 billion. Couple this with more cautious infrastructure spending on roads, and you have a windfall. Reducing our wasteful spending would be an immediate boost to the budget bottom line and should be a matter of high priority.

As you can see, hope is not lost for Chalmers and his plan to narrow the budget black hole. Let’s hope he can stick the landing in an economy that doesn’t seem to enjoy stability.

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.