Tax reform is essential to protect Australia’s future, says PwC

Wednesday, 13 November 2013 by Steve Burnham

PriceWaterhouseCoopers (PwC) has produced a report entitled Protecting Prosperity: Why we should talk about tax (download it from this page), which highlights how the existing Australian tax system poses a major systemic risk for the nation.

As a result of deficits each year, PwC said that combined government debt as a proportion of gross domestic product (GDP) is on trend to grow from 12.1% now to 32.9% by 2039-40, and to 77.9% of annual GDP by 2049-50. It said these trends are unsustainable as the population ages.

“Australian governments risk not being able to meet the key needs of our community and a further slide into debt. And higher debt at the Commonwealth level would mean that another shock like the GFC in the next few years could see its debt climb to 30% of GDP by 2025-26.”

The big four accounting firm said failure to address fundamental tax reform threatens a blowout of combined federal and state/territory government deficits. “If government spending, productivity and workforce participation maintain current trends, and tax reform is ignored, we face a future with reduced living standards and poorer community services,” PwC’s chief executive Luke Sayers said.

“Without expenditure constraint and tax reform, any surplus will be short lived and we will see deficits growing strongly for at least a generation. Another global economic shock could tip us into disaster,” Sayers concludes.

PwC said that even without a major downturn like another GFC, the long-term picture is bleak. “Deficits of this magnitude are ultimately unsustainable and would challenge Australia’s social fabric.”

After 22 years of continuous economic growth, PwC said Australia is facing huge economic and social challenges. “As a nation we need to have a serious debate about what this growing fiscal gap means for our future prosperity,” Sayers said. He said that successive governments have attended to funding needs such as health, the national disability insurance scheme and education, but failed to address the revenue side of the equation.

 “Our future prosperity depends on us having a functional, efficient, equitable tax system that provides the fiscal muscle needed for government to provide the services and support that our society needs.”

PwC said it believes successful tax reform is about getting the right balance between what activities are taxed, by how much, and how the tax is raised. “Rather than rushing to specific solutions, we need to have a debate that considers the needs of individuals, community organisations, businesses and government,” its report said.

“The existing tax system is all but broken. A long term, sustainable solution to replace the existing system will take a number of years to evolve but the downside of not doing so is clear,” Sayers said.

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