Joe Hockey embraces the Age of Entitlement

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ScreenHunter_39 Oct. 17 10.14

By Leith van Onselen

If anyone wants an example of why politics is mostly form over substance, look no further than Joe Hockey’s actions on entitlement spending.

Earlier this year, Joe Hockey gave a speech entitled “The End of the Age of Entitlement”, which lamented the blow-out of entitlement spending by governments:

“As the electoral pendulum has swung between socialist and conservative sides of politics, the socialist governments – often winning electoral success thanks to the funding from unions – have created a huge array of entitlements for selected classes of individuals”…

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Hockey then went on to detail how governments will need to wind-back entitlement spending in order to return their budgets to a more sustainable footing.

In many ways, it was a great speech by Hockey and one that I broadly agreed with.

In Australia’s case, entitlement spending blew-out under both the Howard and Rudd-Gillard Governments, where we witnessed a ballooning of payments to a wide range of constituents, including middle-class families, the aged, and wealthy retirees. Among other things, we saw baby bonuses handed out, increases in family tax benefits, aged pensions, and generous tax breaks for superannuation, which have now placed the budget in structural deficit.

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The situation is particularly acute when it comes to aged pensions and superannuation tax breaks, where Australia now finds itself in the unsustainable situation where benefits to households aged over 65 years of age have ballooned just as their incomes and wealth have grown, which will place undue pressure on the Federal Budget as the baby boomer generation retires and the share of workers in the economy shrinks.

Given Hockey’s strong words on entitlement spending, and the demographic tsunami facing Australia, one would have thought the superannuation system would have been high on his list for reform. Not so, with Entitlement Joe this morning announcing that the new Coalition Government will jettison the former Labor Government’s planned changes to superannuation, maintaining generous tax breaks for around 16,000 wealthier Australians whilst cutting tax concessions for 3.6 million workers on lower incomes.

Treasurer Joe Hockey and Assistant Treasurer Arthur Sinodinos announced the changes following an audit of 96 unresolved tax and superannuation reforms dating back to 2001. The Treasurer described the reforms as “undeliverable” and committed the Coalition to stability in the superannuation system.

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Whether the Coalition can maintain the superannuation system in its current form, given pressures on the Budget, is debatable. But if successful, it would certainly worsen outcomes for everyone else.

The continuation of the existing superannuation rules by Hockey would significantly exacerbate inequities in the superannuation system, since under the flat (15%) tax, an even greater share of tax concessions – a direct hit on the Budget – would flow to those on higher income earners, whilst lower income earners will receive next to no tax benefit.

The sustainability of the superannuation system would also be reduced under the Coalition’s policy. It is the lower end of the tax scale that are most likely to be reliant on the pension in old age, yet they will have less incentive and opportunity to build-up a retirement nest egg following the announced changes.

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In the end, the policy change announced by the Coalition would result in a superannuation system that costs the Budget even more money – mostly via the huge concessions granted to higher income earners – whilst doing little to relieve the strain on the aged pension, since those most likely to require the pension in old age will receive an even smaller share of the superannuation concessions.

It’s enough to make a cynic like me suspect that Hockey’s bluster over entitlement spending is just hollow rhetoric designed to mask an assault on government support for the poor, whilst maintaining benefits to his rich constituents.

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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.