1 trillion debt

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    Australia is heading towards a $1 trillion deficit cliff

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    THERE’S a lot of economic doom and gloom this week.
    The unemployment figures have hit a decade-high while the Reserve Bank has again warned about current property prices keeping first home buyers out of the market. The RBA’s move to cut interest rates for the first time in 18 months have also driven home that Australia’s economic situation isn’t as rosy as the one we’ve grown accustomed to.
    So here’s another figure that is sure to terrify you and send you scurrying for your safety blanket: By 2037, the Australian federal government will be $1 trillion in debt.
    Currently, the deficit for the 2014/15 financial year is expected to reach $40.4 billion, a $10 billion blowout from what Treasurer Joe Hockey had forecast in May.
    But figures from PwC have us reaching a $1 trillion deficit in 22 years, if the current trajectory doesn’t change.
    HOW WE GET THERE
    How could we end up in such a troubling situation between now and 2037? A combination of declining government tax revenue with a growing spending bill thanks to our ageing population.
    PwC tax partner Paul Abbey told news.com.au: “There will be changing dynamics in the outlays the government faces in terms of the health system and the ageing of the population. Contributions from the older populations will decline as people age — the contribute less but cost the government more.”

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    Old people are living longer, which is costing the government more money. Source: News Limited

    Mr Abbey said that if you break the population down, (post-education) young people tend to contribute more to government coffers without taking as much back while those in the middle stage of life and have children tends to even out in give and take. But the older population, which are, and will continue to be, a larger portion of the population consume more, especially as life expectancies rise.
    WHAT HAPPENS THEN?
    But what happens to Australia, the land of formerly flowing mining profits, when it’s staring down the barrel of a huge deficit?
    “If you’ve got a government that has a significant debt, then a large part of the budget is being used to service that debt,” Mr Abbey said. “You’ve got no capacity to get the debt down and you have the risk, from a budget perspective, of spiralling out of control, especially if you have to borrow more money just to service the interest payments.
    “Eventually, you get to the point where your ability to deliver government services is hampered. Like Greece, where there are constraints from their creditors as to what government can spend on.

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    Our potential budget situation is like a ticking time bomb. Source: Getty Images

    “It takes the demand out of the economy — there will be less consumption and less production. And you’ll get yourself into a very difficult situation for a long period of time.”
    He argued that once you’re in that position, it could take a long time — like 20 years — to dig yourself out.
    Mr Abbey stressed that it’s not just commonwealth debt that Australians need to be worried about. By 2045, the combined deficits of the federal and state and territory governments is projected to be $6.5 trillion, according to PwC.
    The PwC figures put Australia’s debt to GDP ratio above 50 per cent within two decades. Currently, it’s sitting at between 12 and 15 per cent which, according to Mr Abbey, is an acceptable level.
    “The US debt level is about 70 per cent of GDP while Japan is in excess of 100 per cent, as is a lot of Europe,” he said. “A lot of countries, especially in the OECD, have particularly high debt levels. Globally, governments are spending more in delivering services to voters and the voters’ expectations are greater than what governments can deliver.
    “Right now we are not at a crisis point but we’re on a crisis trajectory. The current ratio of 12 to 15 per cent is manageable, we can get it down. But our trajectory is the problem; we’re on the cusp of moving to a poor position.”

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    Stakeholders are urging the government for tax reform to correct Australia’s course. Source: News Corp Australia

    HOW WE CAN AVOID IT
    Rather than resign ourselves to a calamitous situation, Mr Abbey said that we can try and reverse the situation while we still have a chance.
    “We need to pursue a tax reform agenda. One that gives the government sufficient revenue, supports economic growth, productivity and labour participation but is also equitable and fair. One that still supports people in difficult circumstances or with disabilities.”
    The government has announced a tax white paper which should pave the way forward for tax reform but the paper has been delayed in favour of the intergenerational report. The Australian Financial Review reported that the move has been designed to give the Abbott Government an easier path to build a case for tax reform.
    “The most important part of a tax reform discussion is to not rule anything out,” Mr Abbey said. “You need to explain to the public why there needs to be tax reform and you have to reinforce that message constantly. We have to look at everything and be open minded.”
    Which, presumably, could mean raising or broadening the GST.


    http://www.news.com.au/finance/econ...on-deficit-cliff/story-e6frflo9-1227220294660
 
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