Figures released by Price Waterhouse Coopers (PwC) this week say Australia is on a debt trajectory to owe $1 trillion by 2037.

It has been a week of bad news for the government – with interest rates again slashed by the RBA, unemployment hitting a 12 year high, housing prices skyrocketing to exclude most first home buyers, and the budget deficit reaching $40.4 billion ($10 billion more than Treasurer Hockey’s forecast in May).

The release of these figures from PwC then did little to lighten the government’s mood.

The main driver behind such an unimaginable debt, say PwC, are due to an aging population.

Paul Abbey, a tax partner for PwC explained to “There will be changing dynamics in the outlays the government faces in terms of the health system and the ageing of the population. Contributions from the older populations will decline as people age – they contribute less, but cost the government more.”

And this aging population is increasing as medical and lifestyle changes allow more of us to live longer.

Furthermore, it seems the profits from mining will no longer be able to support the country. Mr Abbey continues: “If you’ve got a government that has a significant deb, then a large part of the budget is being used to service that debt. You’ve got no capacity to get the debt down and you have the risk, from a budget perspective, of spiralling out of control; especially if you have to borrow more money just to service the interest payments.

“Eventually, you get to the point where your ability to deliver government services is hampered. Like Greece, where there are constraints from the creditors as to what government can spend on.

“It takes the demand out of the economy – there will be less consumption and less production. And you’ll get yourself into a very difficult situation for a long period of time.”

PwC estimate Australia’s debt to GDP ratio (currently 12 – 15 per cent) will exceed 50 per cent within two years.

“The US debt level is about 70 per cent of GDP, while Japan is in excess of 100 per cent, as is a lot of Europe,” said Mr Abbey. “A lot of countries, especially in the OECD, have particularly high debt levels. Globally, governments are spending more in delivering services to voters and the voters’ expectations are greater than what governments can deliver.

“Right now we are not at a crisis point, but we’re on a crisis trajectory. The current ratio of 12 to 15 per cent is manageable, we can get it down; but our trajectory is the problem. We’re on the cusp of moving to a poor position.”

Mr Abbey said the government needs to strenuously pursue tax reform, support economic growth, productivity, and labour participation to change this fiscal trajectory.

The government has already announced a tax white paper intended to investigate tax reform. However, the paper has been delayed pending the submission of an intergenerational report. This report, it is suggested, may provide the Abbott Government with tools with which to build its case for tax reform.

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