Published by The Australian, Saturday 16 May
Open any newspaper this week and you will see analyses of how the budget affects the Jones family or Rosie’s bakery. These stories add a human face and help readers engage with what otherwise can be a dry flurry of facts and figures. Yet while this type of analysis identifies the immediate “winners” and “losers”, the real costs of this year’s budget are more insidious.
This budget is all about the short term — both politics and economics. Politically, a budget with no nasty surprises and modest wins for families, small business and farmers should help Tony Abbott and Joe Hockey keep their jobs. Economically, measures such as tax cuts for small business will provide a modest short-term boost to economic activity. At best, it may provide a one-off boost to gross domestic product of 0.2 percentage points, although the effect is probably smaller.
Meanwhile, the real work of structural budget repair has been put off for at least another year, which just defers (and increases) the ultimate burden.
When governments kick the can down the road, the losers are young Australians. Each time the government runs a deficit, it creates a liability to be met by future taxpayers. This particularly harms younger people, the ones with their peak tax-paying years ahead of them. Each $40 billion deficit generates a $10,000 future tax bill for an average young household.
The Australian government has been running deficits around this mark for the past six years, with at least another four to come. If he truly believes budget deficits are “intergenerational theft”, perhaps Joe Hockey should be turning himself in to the authorities.
Even if the budget forecasts are right and the government returns to surplus in five years, young people will take a hit from the fiscal profligacy of the past decade. It should be manageable if real incomes grow quickly, but what if things don’t go to plan? To return to surplus without policy heavy lifting requires a lot to go right.
Growing personal income tax receipts account for most of the forecast increase in government revenue, rising from 10 per cent to 12 per cent of GDP between 2013-14 and 2018-19. This relies on a quick economic recovery. Nominal GDP growth is forecast to increase from 1.5 per cent in 2014-15 to 5.5 per cent in 2016-17, implying both a return to the solid real GDP growth of the early 2000s and an end to falling minerals prices. It also assumes the government will resist the inevitable (and not unreasonable) demands for personal tax cuts as a person on average full-time weekly earnings moves into the second-top tax bracket some time in 2015-16.
The government also backs itself to maintain unusually strong spending discipline. Apart from new spending on the National Disability Insurance Scheme, real expenditure growth in almost every category is forecast to be almost zero until 2017-18. This would require remarkable restraint given it has typically been more than 3 per cent each year. It also would be surprising given that much of the commonwealth’s spending is locked in by legislation and depends on the number of people who are eligible. And it would be particularly remarkable in a period that spans an election year.
This budget is like the past five, which have all forecast significant improvements in the budget bottom line. Like the end of the rainbow, these have failed to materialise as we drew near, always receding further towards the horizon.
Drifting back to surplus is not a strategy that can claim a lot of success to date. Why should we believe that this time is different?
The case for acting sooner rather than later is magnified by the longer-term structural pressures on the budget from an ageing population. Remember the Intergenerational Report? Although unnecessarily politicised, it highlighted the challenges to the economy and the budget from an ageing population.
People over 65 are, on average, net takers from the budget; they receive a lot more in welfare payments and other government spending than they pay in taxes. This is paid for by net contributions from working-age households. This “generational bargain” is longstanding but will come under increasing pressure as we have fewer working-age Australians to support those in retirement. Today, there are 4.5 Australians between the prime working ages of 15 and 65 for every person over 65. By 2055, that number will have almost halved to 2.7.
The pressures due to the ageing population have been exacerbated by policy decisions across the decade that have reduced taxes and increased spending for older Australians. In 2009-10, households over 65 received $9400 more in real net government benefits — cash assistance and benefits in kind minus taxes — than the same group six years earlier. The increases were primarily the result of higher health spending per person, and decisions to broaden age pension eligibility and increase the pension rate faster than average wages. These transfers were not funded by higher budget contributions by other age groups. Instead, governments ran budget deficits.
Tax changes for older households were also particularly generous. Even though participation rates have risen and real incomes have grown, an average person over 65 pays less income tax than a person in same age group 10 years ago. Taxes on superannuation payouts were abolished in the Howard government’s 2007 budget. And unlike the rest of the population, people over 60 drawing down on their superannuation pay no tax on super earnings, regardless of how much they earn. At the extreme, a recent Association of Superannuation Funds of Australia report showed there were 475 retirees with super account balances greater than $10 million, receiving average income streams of $1.5m a year, almost tax-free. The tax-free status of super earnings is imposing a growing cost on the budget as the baby boomers retire in greater numbers, with higher super balances than previous generations. Most of the benefits accrue to the wealthiest retirees.
So if we’re worried that budget forecasts turn out to be as unreliable as the past five budgets, what should we do? It seems very unfair to load up the burden on younger taxpayers through bracket creep today and deficits that effectively impose higher taxes tomorrow.
A good place to start would be to tax super earnings at 15 per cent for over-60s in same way as under-60s. This would reduce the cost of concessions by more than $4bn in 2015-16, rising substantially as the superannuation system matures, materially improving the structural position of the budget. Yet the government has ruled out any adverse changes to superannuation, this term or next. Instead, it will ask Australia’s young to continue subsidising the old and rich.
Greater inroads have been made on age pension spending but the changes do not go far enough. The age pension costs $44bn a year, about 10 per cent of all commonwealth spending. It is growing much faster than the economy, with spending increasing by 5 per cent a year in real terms for the past decade.
The problem is too many people are eligible for the pension. The Intergenerational Report forecast that 67 per cent of people of age pension age will receive a pension in 2055, down by only 3 per cent from today’s figure of 70 per cent. So after 80 years of compulsory super and generous tax concessions, the only meaningful impact on pension payments will be to shift some people from the full to the part-pension.
Making real inroads will require a change in mindset for Australians and their leaders. The age pension should be a welfare safety net for the most vulnerable rather than an entitlement for taxes paid.
The government has taken some steps to narrow eligibility. The proposal to increase the age of access to the age pension to 70 by 2035 is a good one but it lies becalmed in the Senate. The changes to the age pension asset test proposed in this budget — increasing the asset thresholds but also increasing the rate at which pensions are withdrawn for people over the threshold — will improve the targeting of pension payments.
Previously a couple with more than $1.1m in assets outside the family home could receive a part-pension. Under the new test, it’s $820,000. The asset test changes ultimately will save less than the abandoned proposals to index pensions to the consumer price index rather than average weekly earnings, but better targeting is preferable to cutting payments for the most needy.
Unfortunately, the change that could make the biggest difference to the sustainability and fairness of the age pension system — including the family home in the asset test — remains off limits. The present system allows people to qualify for the pension regardless of how much wealth is tied up in their homes. Including owner-occupied housing in the pension asset test could improve the commonwealth’s budget position by about $7bn a year.
Pensioners with expensive homes but limited incomes should be allowed to continue to collect the age pension until they die, at which time the commonwealth could recover the cost from their estate. The scheme, if designed well, would have almost no effect on retirees — instead, it would primarily reduce inheritances.
Making changes to retirement incomes policies now is our best chance to future-proof the fiscal situation, yet as economists, think tanks, social welfare and industry groups increase their calls for a rethink of these policies, our politicians are hastening their retreat.
Politically, we have a stalemate. Labor is not yet willing to back the Coalition’s changes to pension eligibility because it thinks the pension is sustainable. And the Coalition is exploiting Labor’s modest proposal to wind back superannuation tax concessions for the most wealthy by pledging not to make any future changes to these arrangements. This reticence is unsurprising. Politicians follow the votes and Australia’s median voter age is nudging 50. Voters at or near retirement are likely to be strongly resistant to polices that reduce superannuation and pension entitlements.
So in the words of Hockey: “How are our children going to be able afford the future?” If we are not willing to change the tax and benefit settings for older Australia then we continue to add to the burden of public debt and interest that future generations must pay. The alternatives are to tax workers more or reduce the benefits and services they receive. The government made this choice implicitly with this budget. Increased personal income taxes, primarily as a result of bracket creep, account for almost all the forecast budget repair. The impact falls squarely on middle-income earners.
This is why young people are the real losers from a timid, short-term budget. When you kick the can down the road, today’s young are the only ones left to pick it up.