The Australian Government is on track for more than 25 years of deficits. Teenagers starting high school today have never seen a budget surplus and probably won’t until they are well into adulthood.

The challenge is structural. Spending has grown because of rising community expectations, an ageing population, and the growing costs of providing labour-intensive services. But this increase in spending has not been matched by growth in the tax base. Indeed, the growing cost of income tax concessions and poor design of other taxes has eroded our revenue-raising capability.

The result is a persistent structural budget deficit. Official estimates suggest the structural deficit is about 2 per cent of GDP, or almost $50 billion each year in today’s dollars. But using more realistic estimates of spending – including in defence, health, and support for the vulnerable – suggests a figure of more than $70 billion a year in today’s dollars by the end of the decade.

Continually adding to national debt by running sizeable deficits asks future generations to foot part of the bill for today’s spending and may reduce the government’s room to respond to future shocks.

Now is the time to start the heavy lifting of budget repair.

Pursuing policies to boost growth is critical. Grattan Institute has previously published many recommendations on how we can ‘grow the pie’. But higher growth will not alone close the gap. Given the scale of the challenge, governments will need to both cut spending and boost revenue.

There are no easy solutions, but this report puts forward a menu of ‘least bad’ options to reduce spending and boost revenue without hurting economic growth. Some of our options would even boost economic activity.