In a speech yesterday at the Australian National University, former Australian Treasury secretary, Dr Ken Henry, and former Liberal leader, John Hewson, warned of a looming “crisis” in Australia’s taxation system unless there was widespread reform. From The AFR:
“There will be a day of reckoning”.
…we are getting closer to the point that we can say the crisis is imminent because so little progress has been made in addressing the challenges”…
The former Liberal leader and architect of the Coalition’s first GST package, John Hewson, told the conference the previous Labor government started to introduce 40 of the Henry tax review’s 138 recommendations and the Abbott government “has quietly unwound seven recommendations without significant public comment linking them to the review’s recommendations”…
“The need to reform the tax/transfer system should now be an urgent priority,” Dr Hewson said.
“I believe this situation now calls for a big package, calling for some big and decisive new thinking.”
He said both the Abbott government and Labor had ruled out changes to GST, housing tax breaks and superannuation, which put politics in the way of economic reform.
Henry and Hewson are both spot on: Australia likely facing decades of Budget deficits unless major reforms are made to the way that taxes are collected, as well as entitlement spending and superannuation.
The fact of the matter is that Australia’s revenue base is shrinking, as the large baby boomer cohort shifts into retirement. As such, the proportion of workers to non-workers is destined to shrink, irrespective of the rate of immigration:
This phenomenon will also cause the employment-to-population ratio and participation rate to trend lower:
The ageing of Australia’s population and the growing army of retirees means more than just a shrinking tax base from having a smaller pool of workers with whom to collect taxes from. The higher proportion of retirees and older aged Australians will increase the amount of health and aged-care expenditure, significantly increasing overall Budget outlays:
Added to these demographic headwinds is the ongoing unwinding of Australia’s terms-of-trade from 140-year highs, along with headwinds in the form of declining mining-related capital expenditures, which will detract from Australia’s income/GDP growth and employment, again placing pressure on government budgets via lower personal and company tax receipts and GST, as well higher welfare payments (see below charts).
In fact, today The Australian reports that recent falls in the iron ore price could potentially add $10 billion to the $123 billion of deficits the Abbott Government faces over the next four years, with each US$1 fall in the price of iron ore wiping around $300 million of revenue each year from the Budget.
According to the Grattan Institute, in a decade the collective budget deficit for Commonwealth and state governments could be as large as $60 billion in today’s dollars!
They argue that major inroads could be made, for example, by:
- broadening the GST to fresh food, health and education (raising $13 billion a year);
- increasing the age at which people can access the Age Pension and superannuation (eventually raising $12 billion a year);
- capping concessional superannuation contributions to $10,000 a year, instead of $35,000 currently (raising $6 billion a year); or
- including the family home in the means test for the pension (raising around $7 billion per year).
Other options for reform include changing superannuation concessions, so that they are spread more evenly across the income spectrum, as well as reducing the ability to draw superannuation as a lump-sum. The rate of GST could also be raised (not just broadened) and a broad-based land tax could be introduced and negative gearing cut.
None of these (or other) Budget reforms will be easy, but they are vital to Australia’s long-term prosperity and to ensure the integrity of the Budget.
