Treasurer Joe Hockey has moved to soften-up the electorate for Budget cuts, arguing that without change, Australia is facing at least another decade of Budget deficits along with sharply rising tax burdens. From The AFR:
The average wage earner will have to pay 22 per cent more in income tax by 2023-24 if nothing is done to rein in spending, new figures from the government show. The estimate suggests an average fulltime wage earner, who by then will be earning $112,000, will have to pay 28 per cent in tax, up from 23 per cent now.
The calculation, released by Treasurer Joe Hockey on Sunday, assumes the government would do nothing about so-called fiscal drag, in which more taxpayers are bumped into higher tax brackets due to inflation or wage gains.
Mr Hockey warned that without dramatic policy changes to the budget, spending will outpace government tax receipts every year over the next decade, leaving the budget in deficit for a record 16 straight years…
Mr Hockey’s estimate assumes the economy will expand at its average pace during the coming decade.
Treasurer Hockey is right to warn about Australia’s deteriorating Budget position and the need for reform.
The fact remains that the revenue base is shrinking, as the large baby boomer cohort shifts into retirement. As such, the ratio of workers to non-workers is destined to shrink, irrespective of the rate of immigration:
Which will also cause the employment-to-population ratio and participation rate to trend lower:
The ageing of Australia’s population and the growing army of retirees also means the amount of health and aged-care expenditure will trend upwards, significantly increasing overall Budget outlays at the same time as the tax base shrinks:
Added to these demographic headwinds is the expected unwinding of Australia’s terms-of-trade, brought about by declining commodity prices, which will adversely impact, amongst other things, company tax receipts.
On its current path, the Federal Budget is on an entirely unsustainable footing, necessitating either: 1) large expenditure cuts; 2) rising taxes; or 3) some combination of the two.
My personal preference is to reform Australia’s retirement system, which is one of the biggest and fastest growing areas of Budget expenditure. It also happens to be the one area of the Budget where welfare is not well targeted to those most in need, with many relatively wealthy retirees drawing unreasonable tax concessions and benefits.
A sensible place to start would be to consider the following reforms to the retirement system, along with cutting back egregious tax concessions like negative gearing:
- Increasing the eligibility age for the Aged Pension to 70 years (from 65 currently and 67 from 2023);
- Increasing the access age to superannuation (from 60 years currently) so that it more closely matches the pension access age;
- Reducing the ability to draw superannuation as a lump-sum;
- Providing everyone with the same superannuation concession (e.g. 15%); and
- Including one’s owner-occupied home (or part thereof) in the assets test for the Aged Pension and/or reducing the eligibility thresholds for income and financial assets, so that welfare flows only to those in genuine need.
That said, even with bold reform in the above areas, the Budget is still likely to remain in structural deficit given the shrinking tax base and rising health expenditures, requiring increased taxes.
Raising the rate of GST and/or broadening its base is an obvious solution. Another option is to tax rents on land and natural resources via a combination of land taxes resource rent taxes. Both measures are highly efficient forms of tax, producing minimal distortions across the economy.
