The Australian Council of Trade Unions (ACTU) has produced a good research note arguing that the Commission of Audit should focus on ways to boost Government revenue rather cutting expenditure, in particular by reforming the inequitable and unsustainable superannuation system:
Australia’s governments, taken together, are smaller as a share of the economy than the governments of almost every other advanced economy in the world. Our governments’ total revenues (including taxes and other sources) come to 33.2% of GDP – smaller than any other OECD country bar Korea and Japan. Government revenues and spending in Australia are smaller, as a share of the economy, than those in any other English-speaking democracy, including the US…
In the terms of reference for the Commission of Audit, the Government said that “the size of the Commonwealth Government has expanded significantly” in the past 20 years. This isn’t true if you measure the size of government by its revenue or spending as a share of the economy…
The Government has told the Commission of Audit that “it is also essential that the Commonwealth government live within its means and begin to pay down debt.” This implies that the Commonwealth has not been ‘living within its means’ and that no efforts have been made to pay down debt. This is a false premise.
It is entirely appropriate that the Commonwealth allowed the automatic stabilisers to function in the wake of the global financial crisis, and also implemented discretionary fiscal stimulus, described as “one of the best-designed Keynesian stimulus packages of any country in the world” by Nobel Prize-winning economist Joseph Stiglitz. Doing so entailed the accumulation of some public debt, but this was far preferable to the alternative of accumulating larger numbers of unemployed people, with the social and economic costs that entails… Australia’s stock of net public debt is much smaller than that of most other OECD advanced economies, as shown in Figure 4…
The task of tightening fiscal policy has already begun. The Final Budget Outcome for 2012-13 shows that the fiscal position improved by 1.7 percentage points of GDP. This is the largest single-year tightening of fiscal policy for at least the past 40 years.
…to the extent that tighter fiscal policy is desired, this should be achieved through restoring tax receipts, not by reducing expenditure. The primary cause of our structural deficits is a fall in revenue (as a proportion of GDP). Reversing this revenue shortfall should be the focus of any attempt to close the structural budget gap. An adequate revenue base is needed to ensure that Australian governments can provide the quantity and quality of public services that citizens demand.
The Parliamentary Budget Office recent estimated that between 2002-03 and 2011-12, “the structural level of [Commonwealth] receipts fell by around 5 percentage points of GDP” while the structural level of payments (excluding GST) rose by around 1 percentage point of GDP. The bulk of the deterioration in the structural budget balance has therefore come about because of a decline in revenues, not an increase in expenditure. Of that decline in revenues, the PBO estimates that “over two thirds… was due to the cumulative effect of the successive personal income tax cuts granted between 2003-04 and 2008-09”…
The present system for taxing superannuation contributions is blatantly inequitable. An individual with an income of $60 000 faces a marginal tax rate of 32.5% (not including the Medicare Levy), and pays 15% on super contributions. This is a concession of 17.5 percentage points. A high-income earner on $180 000 or more receives a concession of 30 points.
The system will be rendered more inequitable as a result of the Government’s abolition of the Low Income Superannuation Contribution and rejection of the plan to reduce the super tax concession for individuals with annual incomes greater than $300 000. The LISC effectively refunds the tax paid on super contributions by individuals with incomes below $37 000. The abolition of this measure will mean that an estimated 3.6 million low income earners will pay 15% tax on their super contributions, while facing a marginal tax rate on ordinary income of 0% or 19%.
Treasury analysis shows that high income earners benefit far more than low-income earners from superannuation tax concessions (including those associated with contributions, earnings, and withdrawals).9 It shows that the top 10% of income earners received 38.2% of superannuation tax concessions in 2009-10. This is more than the share of the bottom 60%, combined. The bottom 10% received a negative share of the total, as they paid more on their super than on other income. The analysis also shows that the support given to high income earners in the form of superannuation tax concessions exceeds that enjoyed by lower income earners in the form of the age pension. The Treasury found that “the top 1 per cent of income earners received the most combined support,” taking both the age pension and super concessions into account.
Tax expenditures associated with super are estimated to be worth $31.8 billion in 2012-13, rising to $44.8 billion by 2015-16.10 Unions support the concessional taxation of superannuation, but these concessions must be sustainable and equitably distributed. This is not currently the case. The Commission must recommend reform to the size and distribution of these tax expenditures if it is to seriously grapple with the medium to long-term budget pressures facing the Commonwealth.
I agree with the thrust of the ACTU’s report. Australia’s Budget is suffering primarily from a revenue problem, which will likely get much worse as Australia’s population ages and proportion of workers supporting non-workers shrinks:
That said, I also believe that Australia’s system of government could be made more efficient. There is too much overlap between government departments (both state and federal) and, in my opinion – having worked in both the Australian and Victorian treasuries – too many back office bureaucrats.
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.
