Australia’s ‘safe haven’ status under threat

Speaking in Sydney yesterday, Standard Life Investments chief economist Jeremy Lawson said Australia should act now to reverse its structural fiscal slippage, with a rise in taxes and a drop in spending both necessary for better fiscal control.

"Australian governments have rested on their fiscal laurels during the commodity price boom and rather than squirrel large surpluses away for a rainy day, governments have satisfied voters’ appetite for lower taxes and more generous spending,” Mr Lawson said.

“Australia’s tax share of GDP has declined by 1.3 percentage points since 2003, despite the increase in government finances generated by the commodity boom and rapid income growth before the global financial crisis,” he said, adding that only five other OECD countries have seen larger falls.

“Meanwhile, Australia’s government spending share of GDP has increased by two percentage points over the past decade, slightly above the OECD average, and could continue to rise.”

The aging population could add more than five percentage points to the budget deficit over the next 40 years, mostly due to rising health care spending, Mr Lawson said.

“Australia’s public finances will deteriorate over time without action to raise taxes and restrain spending,” he said.

The group's view is that long-term fiscal consolidation of the magnitude required will have to involve raising taxes as well as greater spending discipline.

“If governments and oppositions wait too long to confront the country’s long-term fiscal challenges, Australia could eventually lose its safe haven status,” Mr Lawson said.

“That would raise government and private sector borrowing costs, as well as reduce demand for riskier Australian assets, making everyone worse off,” he said.