NEWSFLASH! In September I will join The Conversation as its Business and Economy Editor. I have been honoured to work at The Age for the past ten years, originally alongside the legendry Tim Colebatch, and for the past four years as economics editor in my own right.

At The Conversation, my job will be to make the best thinking from Australia's 40 univerisites accessible to the widest possible audience. That means you. From the new year I will also write a weekly column.

On this site are most of the important things I have written for Fairfax and the ABC over the past few decades. I recommend the Search function. The site is a record for you, as well as me.

I'll continue to post great things from The Conversation and other places here, and also on Twitter and Facebook. Enjoy.

Tuesday, April 29, 2014

Tips for Hockey's budget: Spare health, hit super and pensions

Lifting the pension age and imposing a deficit reduction tax are just the start.

Here are the other things I would like Joe Hockey to announce on budget night in a bid to bring down the deficit.

1. Scrap the regularly scheduled increases in compulsory super contributions. The first of them, last July, increased employers’ contributions from 9 per cent of salary to 9.25 per cent. Another this July  will lift them to 9.5 per cent. Coming at the same time as the 0.5 percentage point jump in the Medicare levy it’ll rip billions out of the economy. But, unlike the Medicare levy, the lift in super contributions will cost rather than earn the government money. That’s because our pay rises will shrink to fund them - the figures show it has already begun to happen. Smaller pay rises will mean smaller increases in income for the government to tax.

In opposition the Coalition promised to pause the climb to 12 per cent for two years, boosting the budget by $1.5 billion. It should axe the entire process and save five times as much.

2. Adopt another of the Henry Review’s recommendations and tax all super contributions as income at the taxpayer’s marginal rate, replacing the tax concessions with a flat-rate refundable tax offset. Tax concessions cost $13.5 billion to $16 billion ayear. Most go to high income earners. The offset might cost half as much.

3. Make super cheap. The Grattan Institute believes we pay two to three times what we should in fees. It suggests the government tender out the right to manage all newly opened default accounts every two years. The rest of us would be invited to switch. To accelerate the process the government could make the funds invoice us rather than silently remove our money.  On conservative assumptions Grattan thinks the tenders could boost retirement incomes by 25 per cent.

4. End or severely wind back access to the Seniors Health Card. It is available only to those retirees too well off to qualify for a part pension; couples with combined incomes of more than $70,000 and assets of more than $1.1 million not counting their family homes. The Seniors Health Card has no effective income test and no assets test. It gives well-heeled retirees access to cheap medicine denied to less well off workers.

With the card comes the seniors supplement and associated carbon tax compensation. Abolishing those two would save $2 billion a year.

5. Tighten access to the age pension and increase it more slowly. Raising it in line with the consumer price index instead of male earnings would save $900 million a year, increasing by $900 million more each future year. At the moment pensioners get to cherry pick the highest possible increase in their income each six months. When wages increase slowly they get the CPI. When the CPI increases slowly they get the increase in wages. Other Australians don’t have that luxury.

6. Leave the carbon tax in place. The government has already committed itself to keep the income tax cuts that were delivered in compensation for the tax, so it may as well also keep the tax. It is due to shrink soon when it transforms into an trading scheme tied to the lower European carbon price. Leaving things as they are would save the budget $6 billion in four years, according to the parliamentary budget office.

7. Keep the mining tax as well. That it raises little money at the moment isn’t a fault, it’s a design feature. The up side is it’ll give the government more money when mining profits improve. Joe Hockey is alive to the argument. When Labor introduced the latest version of the mining tax it also introduced another measure subjecting onshore and previously exempt North West Shelf gas to the offshore petroleum resource rent tax. Hockey has kept that measure. He wants the money.

8. Build up the funds needed to cut company tax down the track. Right now foreigners are keen to invest in Australia. But they won’t always be, and as other economies recover they will begin cutting their own company tax rates. We need to be able to cut ours when needed.

9. Plan to raise the goods and services tax after the next election. It’s a fiction that all the states need to agree and a fiction that it all needs to be spent on the states. Lifting the rate from 10 per cent to 12.5 per cent would bring in an extra $6.4 billion a year. Some could go to the states. Extending the GST to education and health would net $3 billion a year.

10. Stop attempting to run schools. Close that part of the Commonwealth education department and stop distributing grants to both state and private schools. Give the states more money and let them decide how to run their schools and whether or not to support private schools.

11. Reconsider plans for a co-payment for free visits to the doctor. General practitioners are cheap compared to specialist and hospital services. If they can direct people away from more expensive services where appropriate or to direct them there quickly in emergencies the entire system will save money.

12. Announce a date for the end of fuel excise and the introduction of telemetric pay-as-you drive road user charges.

13. Limit negative gearing (saving $2 billion), restore full capital gains tax ($5 billion) and end the private health insurance rebate ($3 billion).

Bank the proceeds and use them to run down debt. Later they can be used to fund expected increases in health spending and to cut income tax.

Peter Martin is economics editor of The Age.

In The Age and Sydney Morning Herald
Read more >>

Sunday, April 27, 2014

What's worse for the budget? Super or pensions

Is the cost of the pension really soaring beyond control? Or is that just the sort of talk we hear in the lead-up to every tough budget? Isn't the cost of superannuation growing even faster? And why all the talk about super and pensions just after the Coalition won office promising no change to neither?

IS THE PENSION THE CAUSE OF JOE HOCKEY’S BUDGET WOES?

It doesn’t help. At present, the age pension accounts for 9.6 per cent of government payments. It is expected to climb to 10.6 per cent over the next four years but, after that, the Commission of Audit says it’ll stay steady at 10.6 per cent for the rest of the next decade.

SO IT’S NOT UNSUSTAINABLE?

Longer term it will climb much further. Over the next 40 years, the number of Australians aged 65 or over will double. And, on retirement, almost all will get at least a part pension or an associated benefit. Right now four out of every five retirees get a pension, and almost half of the rest get a Commonwealth health card and seniors’ supplement.

IS GIVING THE HEALTH CARD TO SO MANY SENIORS EXPENSIVE?

You bet. According to the Treasurer, nearly 80 per cent of spending on the Pharmaceutical Benefits Scheme is directed to Australians on concession cards.

WHO CAN GET A SENIOR’S HEALTH CARD?

Millionaires can get it – there is no assets test. The income test is one of the weakest ever devised. Singles earning more than $50,000 can’t get the card, nor couples earning more than $80,000, but superannuation isn’t counted as income meaning an Australian raking in as much as $100,000 or more a year from super (plus $50,000 from elsewhere) are still entitled to cheap medicines.

WHAT ABOUT THE PENSION? IS THAT EASY TO GET?

It is, if you put your money into your house. Couples earning up to $70,000 with up to $1.1 million in assets can get the pension, and their family home isn’t included when calculating assets, meaning they can use their assets into their homes and have $1.1 million to spare and still get the pension.

ARE WE GETTING THE PENSION TOO EARLY?

By historical standards, yes. When it was introduced in 1909 less than half of all newborn boys could expect to live until 65. Today half will live beyond 92. That’s a quarter of a century on the pension if the qualifying age stops at 67, something its designers never envisioned.

WOULD IT HELP THE BUDGET MUCH IF THE PENSION AGE WAS LIFTED TO 70?

Over time, yes. And it would help indirectly as well. Australians who are working longer feed economic growth for longer and pay taxes for longer. They will lift our standard of living.

BUT NOT EVERYONE CAN WORK UNTIL THEY ARE 70 CAN THEY?

Not everyone can work until the present pension age of 65. Many physically backbreaking jobs aren’t possible beyond 50. These people either change to less demanding jobs or rely on their savings and Newstart to tide them over. In extreme cases they go on the disability support pension. But most jobs aren’t like that. Thiry years ago one in every four Australians were employed in manufacturing and construction. Today it’s one in every six, and many of those jobs are becoming more mechanised.

AREN’T SUPERANNUATION TAX CONCESSIONS >BIGGER AND FASTER GROWING THAN THE PENSION?

On one measure they will become bigger in 2015, and they are much faster growing, climbing at the extraordinary rate of 12 per cent per year. That’s partly because the earnings in funds are compounding and partly because compulsory superannuation contributions are scheduled to climb over the rest of the decade.

It’s unclear why we offer concessions – lower tax rates on funds earned in super compared to wages, for example – to encourage something that is compulsory. If concessions were really thought to be necessary to boost private saving, they would be better directed toward voluntary extra saving. The Australia Institute proposes removing all tax concessions from super and instead giving every retiree an enhanced pension. It’s calculations suggest the switch would save the government an astounding $52 billion per year.

BUT WOULDN’T THIS PUNISH SELF-FUNDED RETIREES?

Only to the extent that government-funded tax concessions would be removed. And those concessions would be replaced by a decent government-guaranteed income on which they could build.

THEN WHY THE FOCUS ON PENSIONS RATHER THAN SUPER TAX CONCESSIONS?

Because tax concessions are invisible. They don’t feature in the Audit Commission's list of ''large and fast growing programs'' because they aren’t programs. And perhaps because superannuants are often better educated, more politically astute and in a better position to lobby than pensioners.

WHAT CAN WE EXPECT?

The first Commission of Audit report will be released on Thursday. It’ll provide clues. The budget is on May 13.

In The Age and Sydney Morning Herald
Read more >>

Thursday, April 24, 2014

The Grattan fix. How to stop fees eating up our super

Invisible fees are forcing Australians to pay twice as much as they should to their superannuation fund managers, cutting retirement incomes by 20 per cent according to a new study that recommends the government take control of default super funds and award contracts by tender.

Entitled The $10 billion super sting the Grattan Institute study says Australians pay $20 billion in superannuation fees, or $1100 per account per year - roughly twice as much as is charged in similar OECD countries.

The extra fees cuts retirement lump sums by more than 15 per cent and retirement incomes by more than 20 per cent.

Analysis of Australian Prudential Regulation Authority data shows the funds with the highest fees typically produce the lowest returns, even before the fees are taken out.

But because the fees are are automatically removed from compulsorily accumulated savings and not invoiced they are largely invisible, allowing funds compete on the basis of marketing rather than price.

Most Australians remain in the default fund assigned to them by their employers, allowing fund managers to promote themselves to employers and financial advisors rather than members in the knowledge they won’t face the fees.

Fewer than ­­2 per cent of Australians ‘shop around’ by switching funds for any reason other than changing jobs or being moved into a new fund by their employer.

“Most Australians are very trusting,” said the Institute's productivity growth program director Jim Minifie...

“They are never presented with a bill for what’s taken out of their accounts. They figure that if the government set up the system it must have put in place the checks and balances.”

The Institute’s assessment is backed up by the Treasury which this month described Australia’s super system as one of the world’s least efficient and most expensive. Of the fifteen OECD nations whose pension operating expenses it graphed in a submission to the financial system inquiry, Australia’s were exceeded only by those of Spain, Hungary, Mexico and the Czech Republic.

Dr Minifie said the new SuperStream rules for default funds will do little to change things.

“They prohibits commissions and cut back on administrative costs, but they does nothing to restrain fees,” he said. “The most expensive SuperStream product we found has an annual fee of 2.5 per cent.”

The Institute proposes removing from employers the power to select default funds and giving it instead to a government-appointed body which would conduct a tender for the right to manage all new default accounts for a period of two years. After ascertaining that the tenderers were appropriately qualified the Australian Office of Financial Management would award the tender on the basis of price.

“When Chile did this it got the fee for new accounts down to 0.4 per cent. We could get it lower given the size of our market,” said Dr Minifie.

To spread the benefits the Grattan Institute also suggests an initiative for the customers of other managers called “Make tax time super choice time”.

When completing online returns these taxpayers would be shown the fees charged by their fund also shown those charged by the default fund. They would be invited to switch at the press of a button.

“It’s similar to the Motor Voter in the US where Americans are prompted to sign up to vote when they renew their registration. The idea is to make it as frictionless as possible,” said Dr Minifie.

In The Age and Sydney Morning Herald


Related Posts

. Treasury: Super costs us three times what it should

. Why Abbott will have to clean up Labor's super tax mess

. Super is broken. Now the Coalition will have to fix it


Read more >>

Tuesday, April 22, 2014

Abbott's biggest broken promise - to build our cities well

Expect an avalanche of broken promises in the first Abbott budget four weeks from today, none of them as important as the promise he has just broken.

Broken promises are inevitable when an opposition comes in. It’s the first time it gets to see the books, and usually the first time it gets good advice. But none are as overarching as the promise Abbott broke last week.

It was a promise about the way he would govern - about the way he would make really big decisions, the ones that cost us billions.

With the experience of Rudd’s back-of-the-envelope $43 billion national broadband network fresh in his mind he promised that in future his government would require Infrastructure Australia to “routinely publish public cost-benefit analyses for all projects being considered for Commonwealth support”.

The cut in point would be $100 million. Any project worth more than that was to be assessed for cost-effectiveness before Abbott gave it a tick.

Infrastructure Australia was also going to rank projects in order of payoffs. The ones at the top of the queue would be the most deserving.

As Abbott and Hockey have repeatedly told us, governments can’t do everything. That’s why it is crucially important that it direct its limited funds to the projects that most boost productivity.

Then out of the blue last week he announced a second airport for Sydney. A few days earlier the Napthine government announced a rail link to Tullamarine. Abbott will have to stump up funds for that as well. He has promised to contribute 15 per cent to the cost of new projects funded from the sale of assets such as the Port of Melbourne.

The second Sydney airport can better be described as "roads to nowhere". There's no especial reason to think it will ever be built and if it is built there's no reason to think it'll have many customers. But the roads leading to it will be built. Abbott is starting on them first. Like Melbourne's East West Link they will move cars between suburbs rather than into the city.

Infrastructure Australia says East West Link has a direct benefit-cost ratio of just 0.8:1 meaning it will return a loss-making 80¢ for each $1 spent. The benefit-cost ratio of the second Sydney airport is unknown but is unlikely to be any better and there’s little evidence (yet) that a train to Tullamarine would achieve much more than the existing Skybus.

The proposed Melbourne Metro is much better. The rail extensions have a direct benefit cost ratio of 1.2: 1  meaning their benefits clearly exceed their cost. That’s because they will get people into the city.

Cities are where workers are at their most productive. They bump into each other, bump into workers from other businesses and are in easy reach of potential employers. A UK study found a 10 per cent increase in the proportion of workers packed into the city centre typically boosts productivity 1.25 per cent, an enormous figure given Australia’s current productivity improvements. The Rudd and Gillard governments were particularly resistant to the idea of bringing more people to city centres, having hitched their wagons to the NBN, one of whose claimed benefits was to take workers out of cities.

In its Productive Cities report the Grattan Institute outlines the experience of SKM, a global engineering consulting firm that used to be based in Armadale, just seven kilometres south-east of Melbourne’s centre. Doubtless a convenient location for many people, with good parking and on two tram routes, it cost SKM around 40 per cent less per square metre than office space in the city.

Yet when the time came to renovate or move, it moved to the city.

“A central location allows the firm to recruit from a deeper talent pool,” Grattan explains. “Previously, some skilled workers and top graduates from the west or north of Melbourne were put off.”

“Clients are far more likely to come to SKM at its new address,” it says. “Most external meetings can be reached with a brief walk or tram ride. These short trips in the CBD are much more productive than taxi trips from the old suburban HQ. In the rich, supportive ecosystem of the CBD, SKM employees say they often bump into professionals from other high-knowledge firms, building personal networks and sharing knowledge. Despite the cost, SKM has little doubt that the move made good business sense.”

Cities exist because they work. And they work best when workers can get into the centre.

Urban economist Edward Glaeser puts it more grandly in his book Triumph of the City. He says, like ants and monkeys, humans are intensely social and excel in producing things together.

“Just as ant colonies do things that are far beyond the abilities of isolated insects, cities achieve much more than isolated humans,” he writes. “Cities enable collaboration, especially the joint production of knowledge that is mankind's most important creation. Ideas flow readily from person to person in the dense corridors of Bangalore or London, and people are willing to put up with high urban prices just to be around talented people, some of whose knowledge will rub off.”

Glaeser says the central paradox of modern cities is that “proximity has become ever more valuable as the cost of connecting across long distances has fallen”.

Knowledge-intensive work is where big productivity gains come from. Our wharves are becoming increasingly more mechanised.-The employees who work out how to mechanise them work in cities away from the wharves, rubbing shoulders with others who can contribute to their ideas.

Pushing more knowledge workers into our city centre and in to each other is our best bet of producing more. Slow roads to the centre and a train system stretched beyond its limits slows that down. (As well as level crossings, replacing them with overpasses or underpasses turns out to be extraordinarily effective.) It is these things rather than "roads to nowhere" that’ll do the most to lift productivity and lift incomes.

That’s what Infrastructure Australia would have told Tony Abbott if he had kept his one really worthwhile election promise and asked.

In The Age and Sydney Morning Herald
Read more >>

Sunday, April 20, 2014

It's the small bribes that suck us in

The shocking thing about the gifts and favours uncovered by the NSW Independent Commission Against Corruption is that they are small.

Australian Water Holdings gave the Liberal Party $75,000 - a tiny sum compared to the $1 billion contract it was seeking. It sent the premier a $3000 bottle of wine. Its behaviour is typical. At the height of the ferociously fought battle over the plain packaging of cigarettes in 2010-11 British American Tobacco gave the Liberal Party $184,565. It did it in small parcels - $2200 to the NSW branch, $10,000 to the Victorian branch, a further $5500 to the NSW branch and so on.

Most political donations are even smaller. Away from politics they are puny. Doctors routinely get pens and free samples from drug companies. They cost the companies nothing compared to what’s at stake.

Yet they work. Equally shocking is the finding from laboratory experiments that small gifts achieve more than big ones. Truly.

A few years back professors Ulrike Malmendier and Klaus Schmidt from US National Bureau of Economic Research discovered that while a small gift persuaded the recipient to award contracts to the donor’s company 68 per cent of the time (instead of 50), a gift worth three times as much cut the response back to 50 per cent, which was no better than if there been no gift at all.

The finding has disturbing implications for legislators' attempts to wind back the impact of donations by limiting their size. It suggests they will achieve little.

The study is called You Owe Me. It could have been titled: ''When less buys more''.

Malmendier and Schmidt investigated a special situation, one in which a decision maker receives a gift intended to persuade him or her to select the donor’s product over another one for a third party. In the case of the government, that third party is the taxpayer. In the case of a doctor it’s their patient; in the case of a financial adviser, their client.

What’s special about that situation is that the cost of bad decisions isn’t borne by the person who makes them. It is borne by their client.

Malmendier and Schmidt deliberately designed their experiment to make it unlikely the gifts would have any effect at all. Gifts and bribes are usually thought to be influential only if the recipient knows they will see the donor again, or if the donor will find out whether or not they’ve selected the donor’s product.

In 15 rounds of experiments with 350 students they made sure neither condition applied. After the gift the recipient never saw the donor again and the donor never found out whether it had any effect.

And they made sure the recipients knew the gift is intended to influence them.

Yet they found the effects of small gifts were huge.

Even where the products offered by the donor were clearly worse than those offered by the non-donor the decision makers chose the the worse over the better product almost 50 per cent of the time, compared to only 10 per cent when there were no donations.

As the size of the donations increased their effectiveness waned.

Their explanation for the effectiveness of small donations is that they create a special bond, what they refer to as the “dark side” of our desire to be social. Put starkly, we find it hard not to be nice to someone who has just been nice to us, even if we know it’s a trick.

And we do seem to know. Asked whether the donors were trying to influence them or just being nice, almost all of the decision makers said the gifts were an attempt to buy influence. Doctors would doubtless say the same thing about gifts from drug companies.

Big gifts may be less effective than small gifts in part because they are so visible as to be unsettling. Few people like to admit to themselves that they being bribed.

The findings suggest that rules that require the disclosure of donations above a certain size are the wrong way around. They would have more effect if they focused on donations below a certain size. And making donations public has little effect. Another part of the experiment found the decision makers behaved in exactly the same way whether or not the client knew they had been accepting small gifts.

The implications go beyond politics.

Labor outlawed commissions for financial advisers in 2013. The Coalition plans to bring them back in a limited way by allowing banks to pay their staff ''volume-based'' bonuses of up to 10 per cent of their total wages.

It is an extraordinarily bad idea.

The small rewards the Coalition would allow may enable the banks to skew the recommendations of their staff more effectively than the big ones they would not. Small rewards are pernicious. They sneak in under our radar.

In The Age and Sydney Morning Herald
Read more >>

Tuesday, April 08, 2014

ISDS: The trap Australia and Japan avoided

So straightforward was Australia’s first trade deal with Japan that the Japanese thought it was a trick.

Twelve years after the war and with the Thai-Burma railway still fresh in Australians’ minds Australia offered Japan ‘'most favoured nation'' status for its exports in return for Japan giving its exports the same treatment.

Japan’s lead negotiator Ushiba Nobuhiko stayed in Canberra for six months going through the proposal line by line.

At one point Australia's exasperated lead negotiator Alan Westerman told him he was wasting their time. “I am telling you right now that Australia will remove all discrimination. Now let’s get on to what you will do and then let’s go and have a game of golf,” he said.

Ushiba Nobuhiko cabled Japan, they still thought the Australians were trying to trick them and Ushiba Nobuhiko was recalled. In his biography of trade minister Jack McEwen Peter Golding reports that eventually Ushiba Nobuhiko convinced his superiors that the Australians meant what they said and prime ministers Kishi Nobusuke and Robert Menzies signed the deal that went on to make both nations rich.

Japan’s present prime minister Shinzo Abe is Kishi Nobusuke’s grandson. The deal he will sign with Tony Abbott is in some ways similar to the simple one his grandfather signed 57 years ago.

It doesn't include an ISDS. The initials stand for Investor State Dispute Settlement procedures and they're everywhere. Conducted by specially-constituted often private tribunals, usually in secret, there have been 400 cases heard in the past 10 years. There have been 58 in the most recent year for which the United Nations Conference on Trade and Development has done the sums, although it says it can’t be sure because the mere existence of some hearings is kept secret.

One of them is against Australia. Philip Morris Asia acquired Philip Morris Australia in 2011 for the express purpose of using the ISDS provisions of an obscure Hong Kong Australia trade treaty, a process known as “nationality planning”. It says Australia’s plain packaging legislation deprives it of the value of its investment. Australia is attempting to have the case laughed out of court on the grounds that Philip Morris Asia only bought Philip Morris Australia after the plain packs legislation was already public (and for that reason) so it can’t say Australia’s action wasn’t expected.

But fighting the case is costing Australia millions and its mere existence is frightening poorer countries that might want to follow Australia's lead. Philip Morris has already lost its case under Australian law in the High Court. It is using rights not available to other Australian companies to get yet another bite of the cherry, this time in a tribunal that doesn't need to take account of precedents, doesn't need to publish transcripts and whose decisions are unappealable. The ''judges'' are also less independent than real ones. They take turns acting for (sometimes big-paying) litigants and sitting in judgement on them.

The United States loves investor state dispute settlement procedures. It has insisted on them in every one of the 14 free trade agreements it has signed and the 17 it wants to sign. Its companies use them to browbeat and potentially bankrupt governments that introduce environmental or health-related laws they don't like, a practice Australia's productivity Commission refers to as "regulatory chill".

Only one world leader has successfully stood up to the US over a demand for an ISDS. It was John Howard, who in 2004 told George W. Bush he wasn't having one in Australia's free trade agreement.

It has not hurt us at all. Indeed, when the Productivity Commission examined investor state dispute settlement procedures in 2010 it found no evidence that they boosted investment in nations likely to be sued. It recommended the government "seek to avoid" them in the future.

Labor banned them saying it would "not support provisions that would confer greater legal rights on foreign businesses than those available to domestic businesses".

The Coalition went to the election saying it would be prepared to consider them on a case by case basis. It has said yes to one with Korea, with what it said are safeguards for health and environmental legislation. But they were similar to safeguards that have failed to stop ISDS proceedings on environmental matters overseas.

It said yes in order to have something to trade away in return for more market access. The US wants one in the 12-nation Trans Pacific Partnership. Australia is under pressure to say yes to sell more sugar.

Other nations are saying no. Indonesia has just announced it will terminate all 67 of its treaties with an ISDS. France, Germany, Brazil and Argentina are thinking along similar lines.

And now Australia has said no to an ISDS in its free trade agreement with Japan. The agreement will be better and simpler because of it. Robert Menzies and Shinzo Abe's grandfather would be proud.

In The Age and Sydney Morning Herald
Read more >>

Sunday, April 06, 2014

There are worse things than a higher GST

So you’re frightened by the prospect of a higher GST? You shouldn’t be. The alternatives are worse.

One of them, outlined by Treasury secretary Martin Parkinson on Wednesday, is deceptively painful.

It’s doing nothing – just leaving the tax system on hold for 10 years and letting climbing revenues eat away at the projected deficits as inflation pushes more of our incomes into higher tax brackets.

It’s called “bracket creep”, although it can happen even if inflation doesn’t push your wage into a higher tax bracket. Every time your wage goes up, a greater proportion of it becomes taxed (above the tax-free threshold) rather than untaxed (below the threshold). It means that by doing nothing other than accepting ordinary annual wage rises, each of us is made to pay an ever increasing proportion of our income in tax.

It’s a sort of secret sauce for the politicians and officials who put together the budget. They can forecast ever-increasing revenue without needing to forecast anything unpopular. The latest projections assume 10 straight years of bracket creep, that’s 10 consecutive budgets without tax cuts. It’s something we haven’t had in generations.

Nine out of the past 10 budgets delivered tax cuts, one of them as compensation for the introduction of the carbon tax. That’s how dependent we have become on the annual or semi-annual ritual of higher wages, higher tax and then tax cuts that push our tax back down.

If the ritual was suspended for the next 10 years – and that’s what is planned to bring the budget under control – ordinary Australians would find themselves paying extraordinary amounts of tax.

Here’s what would happen to an Australian on $50,000. At the moment that person pays $7797 in tax, excluding the Medicare levy. That’s an average rate of 15.6 per cent.

After 10 years without tax cuts that person would be earning $70,500 and paying $14,459 in tax – an average rate of 20.5 per cent.

The purchasing power of that person’s wage would have done no more than keep pace, but the tax take would be dramatically higher.

Strangely enough, someone on a higher wage would suffer less. Someone earning $100,000 today will earn $141,000 in 10 years (assuming wage growth of 3.5 per cent). Their tax bill would edge up from 24.9 to 28.5 per cent.

But Australians on lower wages would get mugged. Someone earning $30,000 today pays 7.47 per cent of their wage in tax. In 10 years that person would pay 13 per cent. Their tax rate would almost double.

That’s the easy, apparently painless alternative to lifting the GST. That’s what will happen unless someone finds another way to bring down the deficit.

With such outrageous increases in tax would come tax avoidance, as it always does. People won’t respect laws they think are unfair. And low-income Australians considering whether to return to work or work extra hours would quite reasonably decide that it is not worth their while, or at least nowhere near as worthwhile as it was.

Lifting or extending the GST would also hurt low-income Australians, but it might not hurt them as much as would allowing inflation and unchanged tax scales to steal their wages.

As it happens, extending the GST to the presently untaxed categories of private education and private health wouldn't hurt very low earners little. It’s not where many of them spend their money but it is where most of the growth in spending is. The alternative to capturing it is to allow bracket creep to steal more and more of their wages.

Australia’s GST system works well, a lot better than doesour income tax system. Overseas experience suggests it could withstand an increase in its rate much better than could income tax. New Zealand lifted its GST from 10 to 12.5 per cent and then to 15 per cent with few complaints.

Of course, there are other alternatives.

The government could slash spending. But the really big government spending is on things we want, such as health, education and pensions. Or it could lift company tax. But if it did companies would relocate or be less keen to come here.

Or it could attempt to get at the billions we are missing out on from Apple, Microsoft, Google and the like who make money here but pay little tax. It’s trying, but it would be unwise to bank on success.

Or it could tax carbon emissions, resource rents and attack the obscenely generous superannuation tax concessions going to very high income earners. Oh wait, the last lot tried that and got voted out. So we better prepare for a higher GST.

In The Age and Sydney Morning Herald
Read more >>