How to sell the nation on Budget reform

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By Leith van Onselen

Former federal Labor MP, Craig Emerson, has penned a good article in The AFR imploring the Abbott Government to engage the electorate honestly on Australia’s deteriorating economy and finances, and urging the Coalition to dump unfair Budget measures in favour of slashing benefits to the well-off:

Tony Abbott and Joe Hockey should… apologise for breaking promises and bring down a fair budget. In fact, the Prime Minister should deliver an address to the nation in which he announces, or at least foreshadows, a paring back of generous superannuation tax concessions for the wealthy, a tightening of eligibility for the age pension, the adoption of the previous government’s anti-avoidance measure for car leases, cracking down on international profit shifting and scrapping the extravagant paid parental leave scheme. The GP co-payment and deregulated university fees should be shelved, pending independent inquiries into the fiscal sustainability of the health and higher education systems. A temporary fuel excise increase could be contemplated, though the risk is that this would further damage consumer confidence.

Blaming the Senate isn’t a viable economic strategy. Levelling with the Australian people and exercising restraint with equity is both good policy and good politics.

Emerson’s approach is sound. The key reason why the May Budget has been rejected by the electorate is because it is fundamentally unfair, primarily attacking lower and middle income earners, along with the young.

This view is perfectly encapsulated by the Freedom of Information (FOI) request lodged by Fairfax Media, which revealed Treasury modelling showing the measures introduced in the May Budget would be highly inequitable and punish lower income workers:

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The combined effect is that an average low income family loses $844 per year in disposable income (earnings after tax and government payments) due to the budget. Middle income earners forgo $492; while a high income family is down by $517.

At the same time, the May Budget left Australia’s world-beating and poorly targeted tax expenditures (concessions) untouched.

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These concessions – which primarily benefit older, higher income earners – include such things as superannuation concessions, capital gains tax concessions, negative gearing, fringe benefit concessions on company cars, among other things, starve the Budget of crucial revenue and are broadly inequitable.

Earlier this year, the International Monetary Fund (IMF) released a report which estimated that Australia has the highest tax expenditures in the OECD when measured against GDP (see next chart).

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The IMF defined tax expenditures as:

…government revenues foregone as a result of differential, or preferential, treatment of specific sectors, activities, regions, or agents. They can take many forms, including allowances (deductions from the base), exemptions (exclusions from the base), rate relief (lower rates), credits (reductions in liability) and tax deferrals (postponing payments).

It also argued that tax expenditures should be reformed since they:

…can have major consequences for the fairness, complexity, efficiency, and effectiveness of not only the tax system itself but, since they often serve purposes that might be (or are also) pursued through public spending, of the wider fiscal system.

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While the overall cost to the Budget from these tax concessions is likely exaggerated by the IMF, since it does not account for changes in behaviour that would likely occur in the event that these tax concessions were closed, it does highlight that the federal government is forgoing an extreme amount of revenue. Any genuine attack on entitlements and Budget repair job must, therefore, tackle these lurks head-on.

Tightening the Aged Pension also makes good sense. It is one of the largest and fastest growing areas of the Budget, and very poorly targeted.

As noted by Treasurer Hockey on Budget night, “currently, an individual with a home and almost $800,000 in assets still qualifies for the age pension; a couple with a home and almost $1.1 million in assets also qualify for the age pension”. This level of taxpayer support is clearly more generous than necessary and allows precious tax dollars to flow to those that are not in genuine need.

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The paid parental leave (PPL) scheme should also be scrapped. As argued by Ben Phillips from NATSEM, PPL is regressive because “the more you earn the more you get”. It also offers “no obvious benefit for workforce participation”, not to mention undermines the Government’s message on ending the age of entitlement.

If the Abbott Government is serious about making the Budget sustainable, it should place equity considerations front-and-centre, and tackle the massive tax concessions that erode the tax base and make the tax system less progressive, along with tightening means testing of the Aged Pension.

Otherwise, richer older Australians will continue to receive a free taxpayer ride, while poorer segments of society (and the young, in particular) are required to shoulder the burden of Budget cuts.

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A reform-minded government would also champion fundamental tax reform that broadens the base and shifts the tax burden away from labour and onto more efficient and equitable sources (e.g. land, resources and consumption), raising productivity in the process.

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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.