Progressive Money

Economics in the Real World · scenario 1 of 10 · about 12 min

“How will Australia pay for Medicare?”

Why people make this argument

For almost everyone, spending has to be paid for: a household from wages, a business from sales, a state government from taxes and borrowing. Budget papers and election costings use the same language, and Medicare has its own named tax, the 2 per cent Medicare levy, which makes the link look direct.

The strongest version of the question is not really about cash. Medicare's costs rise as the population ages and new treatments arrive, and something has to give: other public spending, private spending through higher taxes, or price stability. Asking 'how will we pay?' is a way of insisting that those trade-offs are faced honestly rather than wished away.

Ideas you'll need

What isn't in dispute

The Medicare levy is 2 per cent of taxable income for most taxpayers, on top of income tax. It does not cover Medicare's full cost: the Parliamentary Library put levy revenue at $10.3 billion in 2013–14, against Medicare spending of about $19 billion, with the rest drawn from general revenue. Both figures are much larger today, so treat that comparison as dated.

The PBO projects Medicare Benefits Schedule spending rising from 1.2 to 1.3 per cent of GDP over the decade to 2035–36, mainly because of ageing. The Commonwealth issues the Australian dollar and cannot run out of it, but its spending must be authorised by laws passed by Parliament.

How mainstream economists would analyse it

Mainstream economists would not say the levy 'pays for' Medicare in any strict sense either: Commonwealth revenue goes into one pool. Their point is that spending has to be consistent with the government's budget over time. If Medicare grows faster than revenue, the gap is met by borrowing, which adds to debt and interest, by cutting other spending, or by raising taxes. That is why Treasury and the PBO project health spending years ahead and watch whether debt is stable as a share of GDP.

Many add that taxes do a real job here. When the economy is near capacity, more health spending without more tax competes with private spending and adds to inflation. So on this view 'how will we pay?' is shorthand for 'what will we give up, and is it worth it?'

How MMT economists would analyse it

MMT economists say the question aims at the wrong constraint. The Commonwealth pays Medicare benefits by crediting bank accounts in a currency it issues, so it cannot fail to pay for lack of money. As Randall Wray puts it, taxes are not needed to 'pay for' spending. Their jobs are to keep total spending within what the economy can produce, to redistribute, and to discourage harms.

The real questions, on this view, are whether there are enough GPs, nurses, specialists and clinics, and whether extra spending would push up prices or pull workers from other uses. The levy should be judged by its effect on demand and fairness, not by whether it 'covers' Medicare. Warren Mosler, discussing the US, adds that a single public insurer can cost the economy less in real terms by cutting private administration.

Your turn

Your turn: A talkback caller says Medicare will soon be unaffordable because the levy no longer covers it. Explain what they have right, what they have wrong, and what question you would ask instead.

Show a model response and the rubric

The caller is right that the levy covers only part of Medicare's cost, and that costs are rising as the population ages. They are wrong to treat the levy as a separate fund that must balance: Commonwealth revenue goes into one pool, and the Commonwealth issues the Australian dollar, so it cannot run out of money to pay Medicare benefits.

That does not make Medicare free. A mainstream economist would say rising costs must be met over time by higher taxes, cuts elsewhere or more debt and interest. An MMT economist would say the binding limits are doctors, nurses and clinics, and inflation if spending outruns them. Both agree taxes matter for inflation and fairness.

So the better question is: does Australia have, or can it train, the health workforce to meet demand, and what mix of taxes and other spending keeps inflation in check? I am assuming the Commonwealth keeps borrowing in its own currency. Persistent health-price inflation or workforce shortages would strengthen the resource concern; rising interest costs crowding out other priorities would strengthen the budget concern.

A strong response

  • Separates the levy, which covers only part of Medicare, from whether the Commonwealth can pay
  • States the institutional facts accurately: one pool of revenue, spending authorised by Parliament, a currency-issuing government
  • Identifies real-resource limits, such as health workers and facilities, and inflation as genuine constraints
  • Gives the mainstream concern about long-run budget sustainability and interest costs fairly
  • Says what evidence would change the conclusion

There is no single right answer. Reach your own conclusion, and be ready to say what evidence would change it.

Limitations and counterarguments

The MMT reframing is easily misheard as 'cost doesn't matter'. Health care uses real resources that could go elsewhere, so in a fully employed economy more Medicare means less of something else, even if the trade-off is not financial. Inflation in one sector can also be hard to read: health prices can rise because of fee setting or shortages rather than total demand.

The mainstream framing has limits too. Treating the levy as if it funded Medicare can make the program look 'in deficit' when it is not a separate account, and a focus on the budget can push aside whether spending now saves costs later, for example by keeping people out of hospital. Whatever one's theory, Australia's fiscal rules and the PBO's costings are real institutions that shape what governments can promise.

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