Fiscal Policy for the Future

Globally, the planet sits at a cross-roads where tough decisions must be made for a better future.

There are many demands placed on governments and their budget positions, which have come under strain over recent decades. Events including the Global Financial Crisis, EU debt crisis and most notably the recent Covid-19 pandemic, combined with increasing natural disasters have seen a deterioration in levels of global government debt. According to the IMF, global government/public debt has stepped up to 96% of total world GDP. In Australia, government debt is expected to reach $776.8 billion by 2025-26.

Whilst a lot of this spending can be justified on certain crises, at some stage, the world needs to take stock and realise that future demographic realities mean that the planet can’t continue to rely on economic expansion to grow itself out of debt, such as what has occurred over the last two centuries as the world industrialised, most notably in the post WW2 boom.

There are significant demographic factors that will burden the planet and its ability to achieve growth going forward. A good case study is Japan, who’s population peaked in 2008 and since then have struggled to achieve growth, with their GDP Growth Rate averaging just 0.43% from 1980 until 2022 (vs China which averaged 9% from 1989 until 2022). Last month, there was great media speculation when it was announced that China’s population had peaked and will now face a period of decline, combined with existing population ageing, leaving it struggling to achieve the same levels of growth that is has in past decades. Expect this trend to be replicated globally over various stages in the next 5 decades, which will leave an unadapted world with massive labour force shortages, worse than what Australia and many advanced economies got a snapshot into when migration could not increase their populations during Covid border closures.

There will also be extreme pressure on budgets due to spending requirements for health and aged care to attend to the many needs of a structurally ageing population. Combine this with major energy Capex requirements to meet net-zero by 2050, (Goldman Sachs forecasts estimate a total investment opportunity in clean tech infrastructure of US$56 trillion by 2050.) These two necessities (occurring with less tax revenue from a structurally ageing population) mean that globally budgets are going to be under unprecedented levels of strain in the next decades.

So why is this a problem? Can’t governments just print more money? Well, if governments print money to fund their debt, you get inflation, as we have seen 2022’s global inflation outbreak off the back of Covid-19 stimulus. High inflation is an advent that smashes economic confidence, Higher government debt also implies more state interference in the economy and higher taxes in the future. With household debt also increasing to near-record levels and a smaller slice of the demographic pie paying taxes, future generations should be extremely concerned about their taxation liabilities going forward. At least Australia’s welfare spending on the aged pension will be somewhat cushioned due to compulsory superannuation.

Whilst governments currently face a short-term election cycle and tax rises or spending cuts represent economic suicide due to the 24-hour news cycle and vicious nature of keyboard warriors on Twitter, the fundamental economic principles of scarcity and opportunity cost cannot be ignored. Now is the time for smaller government, smaller bureaucracies and spending restraint. This is especially true for Australia, where a resources boom and record low levels of unemployment mean that instead of finding ways to spend increased income, governments, both state and federal must use these funds to pay off debt and invest in technologies that will allow for growth and automation to prepare us for a better future.

Jasper Arthur is an SRC Director of Student Publications and Member of the University of Sydney Conservative Club

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