Rising deficits and vanishing targets

Growing up in Newcastle in the 1990s, I spent hours riding bikes and surfing at some of Australia’s best beaches. I benefited from a strong education and healthcare system, the longest run of economic growth in Australia’s history and a solid fiscal position. That was partly because earlier governments had restored budget surpluses after the recession.

The outlook for young Australians today is starkly different, and I fear for their future.

The burden of rising government spending, much of it funded by debt, is eating away at their future prosperity. At the same time, global instability is intensifying cost-of-living pressures, tempting governments to offer more cash handouts that could fuel inflation and cause further fiscal damage.

Despite these pressures, there are few guardrails in place to contain spending splurges. The federal budget is in deficit and, while some state governments expect to return to surplus over the next few years, large upward revisions to employee costs, infrastructure projects and programs such as the NDIS have become commonplace.

Rapidly rising interest bills on debt approaching $2 trillion are also among the fastest-growing expenses for governments, rising from a total of $24 billion in FY19 to nearly $51 billion in FY26.

Realistic spending forecasts that properly account for fiscal pressures are important. But fiscal sustainability metrics, or rules that contain government spending and provide clear guardrails, are just as important.

These can include quantified targets to reduce or limit debt relative to the size of the economy or revenue, limits on interest costs as a share of revenue, commitments to balance the budget or run surpluses over a cycle, ceilings on spending growth tied to revenue growth or inflation and caps on tax collections relative to the size of the economy.

Financial performance indicators, such as profit margin and return on equity, help businesses and shareholders track performance and keep management accountable. Why shouldn’t governments also have financial performance indicators? Government revenue is limited, and clear fiscal guidelines can help ensure money is well spent and future generations can access essential services without inheriting an excessive debt burden.

In the past, fiscal sustainability metrics were a feature of the budget. During the Hawke and Keating years, the “fiscal trilogy” was introduced to bring high debt and deficits under control. It included three linked targets: no increase in the tax-to-GDP ratio; a reduction in government outlays as a share of GDP; and a cut to the budget deficit in absolute terms and relative to GDP. This restrained expenditure growth and led to a budget surplus within three years.

The Howard government followed by legislating the Charter of Budget Honesty to improve transparency. It also adopted medium-term fiscal targets, including achieving budget balance or surplus on average over the economic cycle, capping the tax-to-GDP ratio, placing limits on expenditure growth and reducing debt.

Combined with strong economic conditions and revenue growth, this delivered a decade of budget surpluses and ensured Australia’s debt levels were among the lowest in the world, helping the country withstand the crises that followed.

Since the 2008 global financial crisis, these fiscal sustainability metrics have been watered down, loosely followed or removed altogether. Government stimulus was needed during this period, but even after the immediate crisis had passed, and despite the mining boom, structural budget deficits continued with few metrics to hold governments to account. Any remaining fiscal rules were quickly abandoned during the 2020 pandemic.

State fiscal rules put in place after the fiscal crises of the 1990s have also been loosened. Victoria dropped its net debt-to-GSP cap of 12 per cent after the FY21 budget in favour of a broad benchmark to “stabilise and reduce in the medium term”.

Victoria’s gross debt is now expected to reach more than $290 billion by FY29. NSW legislated explicit fiscal targets through the Fiscal Responsibility Act 2012, which aimed to protect the state’s AAA credit rating by setting an expense growth cap and funding the state’s superannuation liability by 2030. The pandemic led to the targets being suspended and the state losing its AAA rating.

Strong financial targets are especially important for states because they rely on federal transfers and are more fiscally constrained, with limited tax bases. Germany has a similar federated system and limits how much state governments can borrow and how large their deficits can be, leaving it in a stronger position than many other European countries. It, too, recently eased these constraints to invest in defence and infrastructure.

By contrast, Canada, like Australia, has done little to contain state spending and debt, with some provincial governments among the most indebted subnational entities in the world.

Credit ratings act as report cards on governments. Several states and territories have faced downgrades since the pandemic because of waning fiscal discipline. The credit rating agency S&P recently noted that a decade ago, a potential downgrade or negative outlook was a serious issue for governments, but today it is of little concern. This is likely linked to polls suggesting debt and deficits have tumbled down the list of voter priorities.

I grew up assuming economic stability was a given in Australia. It isn’t. It is the result of deliberate choices by governments that treat fiscal discipline as a responsibility to the next generation.

Today, that lesson feels increasingly ignored. Australia lacks clear, credible fiscal guardrails that would govern spending, improve transparency and signal a genuine commitment to repairing the public balance sheet. Without explicit targets, we risk squandering the foundations that allowed earlier generations to prosper, leaving those who follow with fewer options when the next economic shock arrives.