Leading economists have issued a stark warning that the Albanese government must enact sweeping tax reforms, including the potential introduction of an inheritance tax, to prevent the nation's budget deficits from spiralling out of control.
The End of Surplus and a Looming Fiscal Gap
Despite overseeing the first back-to-back budget surpluses in 15 years, driven by unexpected tax windfalls, Labor's fiscal success is at risk of becoming a distant memory. According to the latest Deloitte Budget Monitor report, Australia is now on track for budget deficits 'as far as the eye can see.'
Deloitte Access Economics partner Stephen Smith highlighted that the government's only notable revenue-raising policy from the May election – taxing unrealised gains on large super balances – had been 'watered down.' Meanwhile, a resurgence of inflation has dashed hopes for near-term interest rate relief, pushing cost-of-living concerns back to the forefront for voters.
The report projects that the gap between government revenue and spending could more than double over the coming decade, from $34.2 billion in 2026–27 to $84.8 billion in 2035–36. Net debt is forecast to climb from 21.7% to 29.6% of GDP in the same period.
Five Pillars of Proposed Tax Reform
To address this looming crisis, Deloitte has proposed a five-point plan for a dramatic overhaul of the tax system.
Firstly, it recommends indexing personal income tax thresholds to inflation to combat 'bracket creep.' The proposed structure includes a $33,000 tax-free threshold, a 33% rate for income up to $330,000, and a 45% rate above that. This change, costing an estimated $54 billion annually after a decade, aims to remove work disincentives for low-income earners.
Secondly, to fund such changes, Deloitte suggests increasing and broadening the Goods and Services Tax (GST) to 15%, extending it to currently exempt items like food and education. This could raise around $90 billion per year, with increased support payments for low-income households leaving a net gain of approximately $58 billion.
Thirdly, the report advocates for a 10% inheritance tax with a $100,000 tax-free threshold and an exemption for the family home. This controversial measure, common in the UK, US, and Europe, is estimated to raise an average of $3 billion annually to 2035–36 and address intergenerational inequality.
Fourthly, it proposes cutting the company tax rate to 20% to spur investment, offset by a 'super profits' tax on businesses, together generating about $12 billion yearly.
Finally, Deloitte recommends reducing the capital gains tax discount from 50% to 33% to improve fairness and help cool investor demand in the housing market.
An Intergenerational Imperative
Stephen Smith emphasised the profound intergenerational inequity embedded in the current trajectory. 'The fiscal burden will disproportionately fall at the feet of younger, working-age Australians,' he stated, as debt mounts and reliance on personal income tax grows.
The report argues that without major reform, younger generations will be left to shoulder a larger debt burden, while older generations retain asset price windfalls. 'If not now, when?' Mr Smith concluded, urging the Albanese government to put significant tax reform firmly on the policy agenda.
