Budget repair measures: tough choices for Australia’s future

Vol: 
2/2016
Author name: 
G Kudrna
C Tran
Year: 
2016
Month: 
February
Abstract: 

This study quantifies the macroeconomic and welfare effects of three proposed fiscal measures to eliminate Australian government budget deficits and to reduce public debt by 2030, namely: (i) temporary income tax hikes; (ii) temporary consumption tax hikes (increases in the GST rate); and (iii) temporary transfer payment cuts. Our quantitative analysis is based on a computable overlapping generations (OLG) model that is tailored to the Australian economy. The simulation results indicate that all three examined fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but severe adverse consequences during the fiscal consolidation period. Moreover, our results show that cutting transfer payments leads to the worst welfare outcome for all generations currently alive, and especially the poor. Increasing the consumption tax rate results in smaller welfare losses, but compared to raising income taxes, the current poor households pay much larger welfare costs. Overall, the welfare trade-offs between current and future generations, as well as between the rich and poor, highlight key political constraints and point to tough policy choices for the wellbeing of future Australians.

Publication file: 

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