Australia will need massive budget savings of about $90 billion if it is to stabilise its government debt by 2030, International Monetary Fund estimates show.
The fund’s latest review of budget management around the world shows that Australia remains vastly better off than any other advanced country, with the smallest government debt, but its deficit is among the largest.
Allowing for normal cyclical movements in the budget bottom line, the IMF estimates Australia’s deficit will fall to 2.3 per cent of GDP (about $37bn) this year, compared with an advanced-country average of deficits equivalent to 1.3 per cent of GDP.
There has been a big fall in budget deficits across the advanced world, with only Japan and Norway having bigger deficits than Australia.
The IMF has calculated what would be required to bring Australia’s public-sector debt back to this year’s levels, allowing for the expected growth in age-related spending over the next 15 years. It estimates this would require savings from federal and state budgets of 5.6 per cent of GDP, equivalent to $90bn.
It would represent about 15 per cent of all government spending.
Australia’s position compares favourably with other advanced countries, which face an average adjustment of 8 per cent of GDP.
The US must find savings twice as large as a share of GDP, reaching 11.7 per cent of GDP.
The IMF says that pensions and healthcare are the most important areas for savings, while education can be more efficient.
It estimates that to neutralise the effect of the ageing population on pension costs, economies could raise the retirement age by 2.5 years, cut benefits by 15 per cent or raise payroll tax by 3.25 percentage points.
“Gradually raising retirement ages seems the most attractive option because it would both contain increases in pension spending and lift employment levels and economic growth,’’ it says.
Allowing for greater competition and choice is the most profitable area for reducing health spending, while education reforms should aim for greater efficiency.
The fund says education costs have been rising because teacher salaries have been rising in line with the rest of the economy, despite a lack of productivity improvement. The IMF urges that countries needing to rein in budget deficits should apply strict rules on spending growth.
Treasury sounded an alarm last night on the world financial system, warning that the failure of the US to approve reforms to IMF voting would lead countries to rely more on their own accumulation of reserves and bilateral and regional agreements to insure against crises.
“Unless international economic policymakers act decisively, we may be approaching a tipping point beyond which the global financial safety net will fragment because of a combination of stasis at the IMF and increasing concentration of safety net resources that are unlinked with the fund,” a Treasury study concludes.