The AFR’s Brian Toohey over the weekend posted a interesting article articulating some of the longer-term structural headwinds facing government finances and the need for meaningful tax reform if the government is to mitigate an “ageing tsunami”:
…the tax system is badly broken. It can’t generate enough revenue to deliver long-term structural surpluses that underpin a successful society. While there are good opportunities for targeted spending cuts that don’t damage the economy’s productive base or the basic social safety net, solid demographic figures suggest this is unlikely to be enough to restore a viable surplus.
In 1970, the ratio of Australians of working age able to support services and subsidies to those 65 or older was 7 to 5. Today, the ratio is 5 to 1. By 2050, it will drop to 2.7 to 1, placing an unconscionable burden on the workforce. Simply boosting labour market productivity can’t offset the big increase in the cost of services and subsidies for older people.
Perversely, the present arrangements will let a lot more people spend as long in retirement as they did in the workforce. Yet, thanks to former treasurer Peter Costello, the existing tax system will allow more people to retire at 60 and pay no income tax for another 30 or more years. Many will be better off financially than those slogging away in a workforce that is far smaller proportionally than it is now, let alone in 1970.
…growth will run into stiff headwinds as more baby boomers retire. Neither Labor nor the Coalition shows any inclination to tackle this looming fiscal tsunami. Both are preoccupied with patching up the existing budget structure and defending components that make it harder to achieve a surplus…
A recent PwC study recommended broadening the tax base and tightening means tests to cut budget support to those who can fend for themselves…
Like other reformers, PwC supports greater reliance on taxes that do the least economic damage. This means increased consumption and land taxes, and reduced corporate and personal taxes, stamp duties, and possibly payroll taxes…
Serious reform requires federal leaders to tighten means tests and broaden their own tax bases much further than they even hint at post election.
Spot on. A glance at Australia’s long-term demographic data and projections from the United Nations shows that the proportion of workers to retirees is set to plummet over coming decades as the large Baby Boomer cohort shifts into retirement (see next chart).
The implications for Australian government finances are immense. Not only will governments have a much smaller pool of workers with whom to collect taxes from, making it much more difficult for the Government to raise the required amount of tax revenue. But they will also have to contend with rising health and aged-care expenditures, significantly increasing overall Budget outlays.
It’s not as if these ageing pressures have come from ‘left-field’. Demographic shifts are fairly easy to predict from decades out. As such, it is an indictment that no side of politics has to date engaged meaningfully on this issue or commenced a frank and honest discussion on society’s expectations of government and the costs of meeting those expectations. Meanwhile in the election campaign we have one side of politics madly cutting taxes and the other madly pursuing a fear campaign over tax hikes. Go figure.
