There’s a lot of concern today that the Abbott Government will abandon its fiscal repair job, leaving the Budget and the Australian economy more vulnerable to future shocks.
As H&H points out today, Treasurer Joe Hockey has reportedly told his Coalition colleagues to hold their nerve over the Budget by warning that it will not return to surplus if the government abandons the controversial policies still stuck in the Senate:
“There is no growth solution which will fix debt… If we don’t find savings, we will never get back to surplus”…
“The only way to get back to surplus and start paying down the debt is to earn it”…
A similar theme is on display today from former Treasurer, Peter Costello, who has warned that retreating from the Budget repair job will ultimately “completely break the budget and the country”:
“We have to do this because the situation is going to get more challenging, and unless we get our expenses and revenue back in equilibrium now, those changes will completely break the budget and the country in the years ahead”…
The Australian’s Paul Kelly has also given similar warnings today arguing that the worst mistake the Government could make would be to abandon the fiscal repair job.
To a degree, all parties are correct. The Budget is facing very real medium to longer-term pressures as the once-in-a-century mining boom unwinds and the population ages. This means that the Budget will remain permanently in structural deficit unless action is taken on both the revenue and expenditure sides.
However, the debate should not be about whether or not to have budgetary reform, but rather ensuring that reform is undertaken in an efficient and equitable manner – in a way that fairly shares the burden of adjustment.
The glaring inconsistency in the Abbott Government’s approach is that it sought to make major cuts to the expenditure side of the Budget in areas like welfare, education and health, but left untouched Australia’s world-beating tax concessions and upper class welfare – policies that overwhelmingly benefit higher income earners and distort the progressiveness of the tax system. This left the electorate with the perception that the Budget was fundamentally unfair, contributing to the demise of its key measures in the Senate.
The biggest and fastest growing areas of Commonwealth Government expenditures, and the areas where arguably the greatest inequities exist, are Australia’s superannuation and Aged Pension systems.
Superannuation has 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 also 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?).
These concessions cost the Budget many billions of dollars (although the exact cost is uncertain), and they are clearly skewed towards the wealthy and high income earners, undermining the progressiveness of the tax system.
There are also broader macroeconomic reasons for clamping down on these tax lurks. Negative gearing, capital gains tax concessions, and superannuation concessions all hugely mis-allocate capital across the economy into pre-existing assets. They have encouraged excessive speculation, record high mortgage debt, unaffordable housing, a higher than necessary Australian dollar, an uncompetitive non-mining tradable economy, and a never-ending current account deficit (despite the biggest mining export boom in the nation’s history).
The end result has been the financialisation of the Australian economy, whereby the financial sector has become far too large and a parasite that has created structural imbalances and damaged Australia’s longer-run productivity (see next chart).
Any genuine attack on “ending the age of entitlement” and improving the competitiveness of the Australian economy must, therefore, tackle Australia’s tax lurks head-on, in the interests of equity, efficiency and Budget sustainability.
There are is also good reasons to curb the Aged Pension system, which is far too generous to those with substantial assets.
That the biggest asset most households retiree with – one’s principle place of residence – is essentially excluded from their capacity to fund their retirement makes little ethical or budgetary sense. It is especially unfair to expect younger generations, who are struggling under the weight of the high mortgage debt legacy they inherited, to bare the full cost of their parents’ retirement.
As noted by Paul Howes last year:
The age pension is the single most expensive item in the federal budget at $36 billion a year, 9 per cent of all public expenditure.
And while it is asset-tested, that test does not apply to the principal residence…
This is unsustainable and it is unfair. Welfare should only go to those who need it…
For younger working Australians the deal’s even more insulting: We need to tax you to pay people who, thanks to home ownership, have the kind of wealth you may never attain, largely because you can’t afford a house.
Joe Hockey made similar arguments 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 pension support is clearly more generous than necessary and allows precious tax dollars to flow to those that are not in genuine need.
Again, 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.
Alan Jones put it best when he said the following on Q&A this week:
The notion that someone like me should be getting concessions – I pay 48 cents in the dollar tax but if I put my super in, I pay 15. I get a 33 cents in the dollar concession. Superannuation concessions are costing the Government $49 billion a year. If someone is in a $3 million home with $100,000 in the bank they get the full aged pension. Now, someone along the line has got to say, look, in an ideal world, that would be terrific, but we ain’t in an ideal world.
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.
There are ways to fix the Budget in an equitable and efficient manner. However, it will require a change in the Government’s approach from cutting direct expenditures to the young, families, and the vulnerable, towards slashing distortionary tax concessions, cutting upper-class welfare, and more efficient taxation arrangements.
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