No. 188

JOE HOCKEY’S CHOICE: HIGHER ENTITLEMENTS OR LOWER TAXES?

Stone the crows! We have no idea how to pay for what we want but can’t afford.

While he may not appreciate the compliment from the likes of the Crows, John Quiggin is a serious academic economist who also applies scholarship to social commentary, as in last week’s populist pronouncement against financial engineering.[i] But he is not especially original when it comes to confronting hard truths, which lead to cruel conclusions, which are as unpalatable as they are unavoidable.

Last week, Professor Quiggin hopped into John Daley and the Grattan Institute for suggesting that applying the GST to fresh food was one necessary expansion of the tax base if we are to avoid $60bn federal deficits within the decade.[ii] Not on, according to Quiggin, because it would hit harder at taxpayers in the second quintile (those in the bottom 20 per cent would be compensated through the social security system) than those in the fourth or fifth. Far better, he argues to take back the Howard era tax cuts from the top 20 per cent.[iii]

At which the Crows (in their reactionary way) just caw! For a start, the top fifth already pay 60 per cent of all income tax.[iv] (The top 10 per cent pay just under a half!).[v]  If we really wanted to soak the rich we could confiscate all the income of the 94,000 top taxpayers and only raise $59bn.[vi] This is a bit more than a quarter of annual Commonwealth spending on health, social security and education.[vii] And it’s the same as the sum needed to avoid annual deficits throughout the next decade.[viii]

Clearly, we are not going to tax our way out of strife. Hiking taxes like this would create avoidance and evasion to an extent understandable only to those people who know what a wet Slutzkin was. As the Australian Council of Social Services explains in its submission to the Commission of Audit, Australia “must restore government revenues to pre GFC levels” (a cute call for tax hikes) but also “keep expenditures below this level as a short term goal whilst the economy is growing at or above trend.” The way to do this, according to ACOSS, is to tax but also not spend, at least on “poorly designed programs”.[ix]

Thus, ACOSS urges an end to child and heath care rebates, superannuation tax concessions and preferential treatment for home sellers and property investors. They have a point – just not the one they are making. We will need to end lurks and perks, not to fund payments to the poor but to fund the health and welfare costs of Australians who assume the Commonwealth will always provide – which is just about everybody. According to the Bureau of Statistics, in 2009-10 Australian households as a whole took $91 a week more from the Commonwealth than they paid in tax.[x]  It’s an income transfer, but not quite as ACOSS envisages.

Mr Daley points to where the savings to fund the health and welfare costs of an ageing population can come from. An older start date and asset tests for the aged pension, negative gearing and super concessions could save the state $50bn.[xi]

Could but probably won’t, at least while serious economists and everybody who thinks somebody else can pay the nation’s welfare bills will vote their own interest. Notice how quick a spokesman for Treasurer Hockey was to rule out Mr Daley’s suggestion about increasing the aged pension to 70?[xii] The Treasurer was a bit bolder when the Grattan Institute made its annual recommendation on the pension last year, saying a debate was needed. But, being in government makes a bloke cautious. [xiii]

Understandably so, as Monsieur Hollande will attest. French social spending accounts for 32 per cent of GDP, close to a third more than the OECD average and with a deficit of 4 per cent of GDP, now spending cuts are required. But the socialist president is loathe to lean on the public sector unions who expect subsidies for sleeping in feather beds – Paris train and bus drivers, for example, can retire at 50, rising to 52 in 2017. [xiv]

The problem is that this means more taxes, at least for the minority who pay most of them. While only half of households pay income tax, in France everybody pays social service levies and people are jacking up at hikes to keep the system solvent. [xv] Farmers (quelle surprise!) through riding instructors to soccer players are also protesting at specific tax rises.[xvi]

So what’s monsieur le president to do? The people kick up over tax rises but they would kick his presidency down if he reduced health and welfare spending to the level there is the money to pay for.

We aren’t in the same bateau yet – but we will be if we assume that taxes can always increase to cover growing welfare spending. There are always new needs to be met. There is no disputing the case for the National Disability Insurance Scheme in pointing out that it will require $8bn in new federal funding by 2018-19.[xvii]  ACOSS points to other areas where increased outlays are essential, on schools in low income communities, on indexation for the dole and Family Tax Benefit A – with indexation tied to wage movements rather than the CPI, on training and job seeking support for the long term unemployed, on public housing and energy subsidies and on funding for dental and mental health.[xviii] I’m guessing that the cuts ACOSS endorses would not pay for all of these programs, but if they did the health and welfare lobby would quickly come up with some more.

The solution is obvious – let the electorate decide whether we want ever more targeted health and welfare spending paid for by cuts to super and ending investment tax breaks and longer working lives. It’s a fair question and one which we will have to answer sooner or later – increasing income taxes will only take us so far.

Somehow I can’t see voters being too pleased with the government that asks it – but sooner rather than later somebody in government is going to have to ask it.

As Joe Hockey put it from the safety of opposition:

The bottom line is that our communities need to make a tough decision. We cannot choose both higher entitlements and lower taxes. We must make a decision one way or the other. We can take more and more of our citizen’s money and spend it for them, or we can take less of it and rationalise government services. But it is a decision that must be made …and soon.[xix]

Over to Joe.

 

ENDNOTES


[i] John Quiggin, “Wall Street does not earn its keep,” Salon November 29 @ http://goo.gl/T3nVWZ recovered on November 30

[ii] John Daley, “Balancing budgets: tough choices we need,” Grattan Institute, November 30 @ http://goo.gl/t8sDXE recovered on November 30

[iii] John Quiggin, “Grattan on growth,” @ http://goo.gl/QxWtYW recovered on November 30

[iv] Australian Bureau of Statistics, “Government benefits, taxes and household income,” June 29 2012 @ http://goo.gl/I8kXdj recovered on November 30

[v] Adam Creighton, “Rich are paying their fair share and then some,” The Australian, February 2

[vi] Australian Tax Office, “Per centile distribution by taxable income 2010-2011,” @ http://goo.gl/Ljhacd recovered on November 30

[vii] Australian Government, “Budget 2013-14 Australian Government taxation and spending,” @ http://goo.gl/47A4Nd recovered on November 30

[viii] Daley, ibid

[ix] Australian Council of Social Service, “Balancing the budget: Submission to the Commission of Audit, November 2013,” http://goo.gl/OPl8Jv recovered on November 30

[x] Australian Bureau of Statistics op cit

[xi] Daley, “Balancing budgets: supporting analysis,” @ http://goo.gl/8WsL36 recovered on November 30

[xii] Dan Harrison, “No plans to raise pension age further, says Coalition,” Sydney Morning Herald, November 22

[xiii] ABC News, “Hockey wants a debate about raising retirement age,” June 8 2012  @ http://goo.gl/zMCu7i recovered on November 30

[xiv] “Must we work harder,” The Economist June 22, William Horobin, “France says it will miss budget deficit targets,” Wall Street Journal September 11

[xv] “Why do the French tolerate such high taxes,” The Economist September 24

[xvi] Nick Miller, “France in revolt over planned tax eco tax rises, Sydney Morning Herald, November 16

[xvii] Simon Cullen, “Early figures show NDIS costs blowing out by 30 per cent,” ABC News, November 22 @ http://goo.gl/7VZarj recovered on November 30

[xviii] ACOSS ibid

[xix] Joe Hockey, “The end of the age of entitlement,” April 17 2012 @ http://goo.gl/XTx9iD recovered on November 30

'2012