Australian Treasury Secretary, Martin Parkinson, has once again outlined in no uncertain terms why fundamental budgetary reform is essential, and how Australians seem to be suffering a “reality gap” in failing to understand why current Budget settings are unsustainable. From The Age:
”For the last three years I have been saying there is a gap between community expectations and what government can realistically do and there needs to be a frank and community-wide discussion to reset expectations”…
“…there is a gap between what citizens want from government and what they are willing to pay for”…
”If you agree that you have to engage in fiscal consolidation and your concern is that its outlays that have grown ahead of everything else, then, inevitably…those groups in the community that get most of the expenditure are likely to bear the most significant part of the burden”…
Dr Parkinson also lamented the failure of the ”political class” to convince the community about the need for budgetary reform.
Obviously I agree wholeheartedly with Dr Parkinson’s view that current budgetary settings are unsustainable. Commodity prices and the terms-of-trade are falling, crimping the tax take from profits, and workforce participation is entering a structural decline, brought about by the large scale retirement of the baby boomer generation. Added to the decline in revenues, expenditures are also set to rise significantly on the back of higher aged-related spending.
However, cutting direct expenditures is only part of the solution. The Government also needs to shore-up its revenue base by closing Australia’s inefficient and inequitable tax tax expenditures, which are the highest in the developed world.
On this front, there is a very strong case to limit superannuation concessions, which have increasingly become a mechanism for richer older people to avoid paying tax, rather than a genuine means for Australians to pay for their own retirement and avoid drawing on the Aged Pension. There are very good reasons to quarantine negative gearing losses, so that they can only be applied against income from the same asset, as well as removing the capital gains tax concession on investments (why should they be taxed at a lower rate than income?), and tax benefits on ‘company cars’ used for private use.
These concessions do cost the Budget many billions of dollars in foregone revenue, and they are skewed towards the wealthy and high income earners, undermining the progressiveness of the tax system.
I also don’t agree with Parkinson’s implicit assertion that taxes cannot also be raised. Tax revenue is required to fund the public services that the community both expects and needs. And I personally wouldn’t care if taxes were increased a little if it meant that important social programs remained (or were expanded), along with the provision of well-targeted infrastructure.
Of primary importance is ensuring that the tax base is broadened and built around more efficient and equitable sources. This requires a shift in sources from productive effort (e.g labour) towards taxes on land, resources, and consumption, along with adequate compensation for the poor (in the case of raising/broadening the GST).
An adequate tax take is a vital element for a civilised society. And a high tax take is not an issue provided it is raised in an equitable and efficient way, along with well-targeted expenditure.
But simply relying on never-ending increases in personal income tax via bracket creep, while the base of workers shrinks as the population ages and the proportion of retirees rises, is neither efficient, equitable or sustainable in the long-term.
