The RBA says it out loud: Raise taxes to fix the budget

The problem is structural, and without action the federal government will still be running a deficit in a decade.

Dry fiscal conservatives fantasise that the government can rely on spending cuts to put the budget back in the black.

Spending control is important and Treasurer Jim Chalmers has rightly promised to crack down on the pork-barrelling that was rife under the Coalition.

But the rorts on sports clubs and country back roads are only pocket money in the context of a $650 billion annual budget.

There is simply not enough fat to cut to pay for the increases in services that the community expects and that only the government can supply.

Chalmers will need several billion dollars to meet his campaign commitments on childcare and aged care and that is just the start. Lowe said that the community expects a lot more spending on defence, infrastructure, education and care for the disabled.

As Chalmers said in his economic statement on July 28, the budget is “burdened by long‑term demographic challenges that come with critical and necessary spending”.

Australia should of course also look for Lowe’s holy grail of productivity-boosting reforms that make the pie bigger.

But these will take years to have an effect and they are notoriously difficult to get right.

In reality, Australia will simply not be able to meet community expectations and control the deficit without some tax increases.

It should not be that painful. Compared to other countries, the share of tax compared with the size of the economy in Australia is fairly low at only 27.7 per cent of gross domestic product.

Chalmers, however, is terrified of a political backlash, having gone to the election promising to introduce the Coalition’s so-called Stage 3 personal income cuts, which take effect from 2024-25. These will cost $243 billion over a decade.

There is no easy solution to this dilemma, but Lowe is right. Chalmers must make a start this term in reforming and sometimes raising taxes, and that debate should include personal income taxes.

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