Budget Repair Measures: Tough Choices for Australia's Future

37 Pages Posted: 26 Feb 2016

See all articles by George Kudrna

George Kudrna

University of New South Wales (UNSW)

Chung Tran

Australian National University (ANU) - School of Economics

Date Written: February 1, 2016

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.

Keywords: fiscal deficit, public debt, fiscal consolidation, welfare, over-lapping generations, dynamic general equilibrium

JEL Classification: C68, E21, E63, H55, J26, J45

Suggested Citation

Kudrna, George and Tran, Chung, Budget Repair Measures: Tough Choices for Australia's Future (February 1, 2016). Tax and Transfer Policy Institute Working Paper - 2/2016, Available at SSRN: https://ssrn.com/abstract=2735966 or http://dx.doi.org/10.2139/ssrn.2735966

George Kudrna

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Chung Tran (Contact Author)

Australian National University (ANU) - School of Economics ( email )

Arndt Building 25B
Canberra, Australian Capital Territory 0200
Australia

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