Australia fiscal reform pressure builds as debt, housing and ageing strain outlook

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Australia fiscal reform outlook

Highlights

Australian state government debt has more than doubled since 2019, with interest costs reaching 0.6 per cent of GDP and expected to rise further.
Grattan Institute proposes increasing GST from 10 per cent to 15 per cent and removing exemptions, potentially raising $76 billion annually to address deficits and rising healthcare costs.
AMP reports over half of adults under 30 are delaying family plans due to housing inaccessibility, with political resistance impeding reforms on tax, welfare, and health spending.

Debt trends and reform options

As reported by ABC News, a new Grattan Institute report says Australian state government debt has more than doubled since 2019, with interest costs rising to 0.6 per cent of annual economic output and likely to increase further as higher rates lift borrowing costs. The report argues governments should rebuild budget capacity now because economic, climate and geopolitical shocks are becoming more frequent, while warning that persistent deficits will leave future Australians facing either higher taxes or weaker public services.

Grattan says durable budget repair requires both tighter spending discipline and revenue reform, rather than narrow cuts alone. It argues Australia remains a relatively low-tax country at 29.4 per cent of GDP, below the OECD average of about 34 per cent, leaving room for a modest increase in tax revenue.

The report identifies an expanded goods and services tax as the most effective option, proposing a 15 per cent GST rate instead of 10 per cent and fewer exemptions, including fresh food. It says the change could raise an extra $76 billion a year, with about $33 billion used for income tax relief, roughly $25 billion directed to welfare and rent assistance, and the remaining $18 billion allocated to states facing rising healthcare costs.

Grattan also recommends ending the 2018 GST allocation arrangement that benefits Western Australia, arguing that doing so would save $6 billion for the federal budget. But the political path remains difficult, with Prime Minister Anthony Albanese already rejecting any move away from the state's favourable distribution terms.

Housing costs and political constraints

A separate AMP survey-based report indicates younger Australians are already adjusting family plans because of cost-of-living pressure and housing inaccessibility. The study finds more than half of adults under 30 have changed their intentions around having children, while nearly two-thirds say they need to own property before starting a family, even as saving a 20 per cent deposit takes more than a decade for most.

AMP deputy chief economist Diana Mousina says an ageing Australia faces the challenge of sustaining living standards and meeting growing care demand without placing a heavier burden on working families. That dynamic risks compounding budget problems if smaller migration programs persist and the tax base comes under greater strain.

The article also points to resistance around other savings measures, including private health insurance subsidy changes for older Australians, National Disability Insurance Scheme spending reforms, trust taxation and curbs to negative gearing and capital gains tax breaks. Treasurer Jim Chalmers says political power is currently stronger in blocking reform than building it, while former treasurer Joe Hockey warns that a financial crisis may be needed before harder policy choices become politically viable.

In our earlier article on sovereign resilience in a higher-rate environment, we explained how persistent geopolitical shocks and elevated fiscal spending can erode governments’ fiscal headroom and increase refinancing risk as debt rolls over at higher costs. We also noted that these pressures are especially acute for emerging and frontier markets, where interest burdens are high relative to narrower revenue bases, leaving public finances more exposed when inflation and funding costs stay elevated.

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