Treasury admits super reform is inevitable

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By Leith van Onselen

It seems that along with Treasurer Joe Hockey, John Fraser is another unwilling participant in Tony Abbott’s “strategic” captain’s call not to touch Australia’s wasteful and inequitable superannuation concessions.

Appearing at the Senate estimates committee hearing in Canberra yesterday, Fraser all but admitted that superannuation reform is inevitable, given its growing costs to the Budget. From The Guardian:

Fraser noted that the growing cost of super concessions had “been pointed to in a number of publications” and the issue should be considered “in the longer term”.

“I have said in the longer term, and I don’t resile [from the view], that like many many other programs governments will have to address, and societies will have to address, the cost of programs,” he said.

“In the longer term, over the period to 2055, absolutely.”

Labor’s Senate leader, Penny Wong, asked Fraser whether the long-term fiscal position of the commonwealth would require examination of the growing costs of super tax concessions.

The Treasury chief replied: “Well any government that doesn’t have a process of review of their longer term commitments, I think, is letting the community down.”

I guess when you have Finance Minister Mathias Cormann sitting next to you during your testimony, you are going to temper your response somewhat.

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But let’s not forget what Fraser said in April when he argued that the interaction between superannuation, the Aged Pension, and housing tax breaks have created a labyrinth of middle-class welfare:

“It’s difficult not to speak about so-called middle-class welfare and the questions around retirement incomes, and the array of concessions and incentives around the age pension, superannuation and housing”…

“I was there in the major reforms of the late ’80s and early ’90s, and a lot of the planning we did at the time hasn’t proved to be correct – a lot has proved correct – but there are unintended or not forecast outcomes”…the time has come 25 years or so after those big reforms to have a more fundamental rethink about the interaction between superannuation and tax and the whole welfare system.”

Unfortunately, Fraser’s grand plans for reform – spelled-out beautifully in his speech to CEDA in March – have already been snuffed-out by Tony Abbott’s ruling-out of changes to superannuation, negative gearing and capital gains tax concessions.

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In turn, Fraser’s call to better target spending so that the vulnerable can be protected:

It is my strong belief that as a society we have a moral obligation to assist the worst off, including the disabled and those who are not in a position to provide a basic standard of living for themselves and their families.

The tax and welfare systems are a means of doing this but we must ensure that fiscal transfers are well-targeted…

… a very substantial amount was spent, including on untargeted transfers (so called middle class welfare) without sufficient regard to the future prospects for servicing those ongoing transfers.

Generous income testing arrangements for Family Tax Benefits in the early 2000s and access to million dollar contributions to tax-preferred superannuation through 2006-07 were notable examples of middle or higher income welfare that contributed to the problem.

Is a forlorn hope, as Australia’s massive tax concessions – particularly superannuation – continue to bleed the Budget dry, growing at around 10% per annum, most of which flows to high income earners (see next chart).ScreenHunter_7126 Apr. 21 13.46

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As I said last time, you would be hard pressed to find a bigger policy stuff up than Tony Abbott’s superannuation policy. Not just for the Budget and nation as a whole, but also the Coalition’s economic/Budget credentials, which will be undermined as long as it remains in office.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.