Will Abbott tackle the grey gouge?

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By Leith van Onselen

Prime minister Abbott appears to be softening-up the electorate for cuts to entitlements in this year’s Federal Budget, claiming that “everyone” had to live within their means. From The Australian:

As the government heralds the end of an “age of entitlement” in federal spending, the Prime Minister acknowledged that individual benefits would be under scrutiny just as much as those going to companies…

“Everyone has to live within their means, whether it’s a company, whether it’s a family, whether it’s an individual, whether it’s a government. And that’s what this government is on about and that’s what our budget preparations are aiming for.”

Coalition members privately warn that some big spending items, such as the disability support pension, have to be tackled to keep outlays in check…

Mr Abbott’s colleagues continue to warn privately against his biggest spending measure, a paid parental leave schemecosting $9.8bn over four years to be funded by a new levy on big companies.

Labor has already positioned itself to target Coalition cuts to personal benefits by attacking a “secretive” review of the welfare system set up by Social Services Minister Kevin Andrews.

The big question here is whether the Abbott Government will have the guts to tackle one of the biggest and fastest growing areas of Budget expenditure: The Aged Pension?

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To only focus on the working-aged population, whilst ignoring the army of wealthy retirees receiving government support, would be both inequitable and inconsistent, and will place the Budget in a precarious position as the population ages.

To date, the rhetoric has not been good. Back in November, a spokesperson for Treasurer Joe Hockey rejected a call to to raise the retirement age to 70, suggesting that the Coalition is averse to making changes to Aged Pension arrangement. However, Hockey more recently refused to rule-out including one’s owner-occupied home in means testing arrangements, offering some hope for reform.

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The Coalition’s actions on superannuation concessions – another major drain on the Budget – have been more discouraging. Shortly after being elected, it jettisoned the former Labor Government’s planned changes to superannuation, which would have seen tax concessions reduced on super funds earning over $100,000 per year. It also cancelled the Low Income Super Contribution (LISC) – a policy that refunds the 15% tax on super contributions for workers earning less than $37,000 a year. Both actions will worsen the equity and sustainability of the system, since it ensures that the lion’s share of concessions from superannuation once again flow to the highest income earners – precisely the group that are unlikely to ever need the Aged Pension – whilst lower income earners will receive next to no tax benefit (and become even more dependent on the Pension).

An objective examination of the data shows that the aged are the group that have received the biggest increase in taxpayer support over recent years, with the Pension becoming much more than a safety net. Given that Australia’s population is ageing, with the share of workers supporting retirees set to shrink dramatically, reforms must therefore be made to ensure that the Pension only goes to those retirees most in need. In addition, Australia’s superannuation system must be reformed so that tax concessions are more evenly spread and balances are not exhausted too quickly.

Otherwise, the working-aged population will be left wearing the brunt of Budget expenditure cuts at the same time as it incurs the cost of supporting its relatively well-off parents.

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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.