Parko slams both parties’ Budget ineptitude

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By Leith van Onselen

Former Australian Treasury Secretary, Martin Parkinson, has given both major parties a strong dose of Budget medicine, slamming them for putting populist politics ahead of the nation’s finances and economy.

Appearing at a conference at the Australian National University (ANU) yesterday, Dr Parkinson warned that Australia’s economic growth is under threat, and that serious reforms are needed to restore the federal Budget back to health and to boost productivity and growth, but lamented that neither side of politics seemed up to the challenge.

From The Canberra Times:

“We find ourselves in a position where everything is seen through a prism of fairness, where the notion of fairness is vague,” Dr Parkinson said.

“We need to have a much more mature debate, and I hope we can get there, because if we don’t then we may well have quite a different set of circumstances.”

“Once you get into this debate where you see everything through the prism of fairness, what is your default? … [Does it mean] I can never take a dollar away from anyone? So if I want to take away the generosity of tax concessions for the high end in superannuation but if that’s now unfair then I can never do anything?” he asked…

Dr Parkinson said Australians needed to be debating a whole series of measures that have been ruled off limits.

“Nothing can be taken off the table, that’s the problem,” he said.

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Dr Parkinson’s frustrations are understandable. In the year leading up to his departure as Treasury secretary, he gave a series of speeches warning that Australia’s tax system is becoming increasingly narrow and unsustainable, with too much reliance on less efficient personal and company taxes (see next chart). As a result, the economic cost of raising taxes from Australia’s current tax mix is also increasing.

ScreenHunter_4151 Sep. 11 14.04

Dr Parkinson has also warned that without fiscal reform, bracket creep (aka “fiscal drag”) would push ordinary taxpayers into higher tax brackets, dramatically increasing their average tax rate, particularly for those at the lower end of the income distribution, and making the tax system less progressive (see next chart).

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ScreenHunter_4152 Sep. 11 14.09

According to Dr Parkinson, someone on average full time earnings would be pulled into the third tax bracket, with a marginal rate of 37% (or 39% including the Medicare levy), from 2015-16. And over the decade ahead, the average tax rate paid by that individual is expected to rise from 23% to 28%, an increase of more than 20%.

Yet, despite these stark warnings, we have witnessed the Abbott Government ruling-out reform to Australia’s world-beating and overly generous tax concessions, such as superannuation, negative gearing, and the capital gains tax discount, and Labor opposing sensible reforms to the Aged Pension.

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In turn, both parties are happy to see the tax burden on younger Australians to rise inexorably, instead of sharing the load more fairly across the entire community.

What is of most importance with tax reform 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 and corporations) towards taxes on land, resources, and consumption, along with adequate compensation for the poor (in the case of raising/broadening the GST). It also requires reforms to the above mentioned concessions, which cost the Budget many billions of dollars in foregone revenue and are skewed towards the wealthy and high income earners.

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 over the long-term.

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Dr Parkinson is right to be frustrated. Good to see him calling Australia’s politicians to account.

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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.