Tuesday, February 17, 2015

Budget 2015. Will Hockey ramp up tax on super contributions?

Joe Hockey may have just let the cat out of the bag.

The treasurer has an awful problem. Government revenue is falling well short of expectations and is about to slide further. Since his May budget the iron ore price has slid 40 per cent. The oil price, which sets the price of exported gas, has slid 50 per cent. The lower dollar will nowhere near offset the hits to export income and the hits to tax revenue. They are yet to reach the budget.

Already, as Hockey puts it, "the government is spending $100 million more than it collects every day. It has to borrow that $100 million per day just to pay its bills".

The $100 million figure comes from dividing the forecast budget deficit by the number of days in a year. It's accurate, and unless Hockey comes up with something clever it's about to grow.

He can't hack into it by slashing spending on education and health as he tried last time. His prime minister won't let him. Abbott says "with the wisdom of hindsight" Hockey's first budget bit off more than it could chew.

And in any event the economy is weak. It's the wrong time to rip money out of it.

Nor can he do it by further trimming the public service. Finance department chief Jane Halton went out of her way on Friday to debunk what she said was a myth: the idea that "if we just get efficiency of government working well, we could actually manage all of this".

The cost of running the government is on track to slide by a third over a decade, and it's not that big anyway in relation to total government spending.

The really big dollars have to be found where the government hands out money and where the government forgoes money by handing out tax concessions.

The really big dollars are in superannuation...

The government's latest Tax Expenditures Statement puts the cost of just one of the two big superannuation tax concessions at $16 billion per year, set to grow to $19 billion in 3 years time.

It's the concession that taxes super contributions at just 15 per cent instead of the employee's marginal tax rate.

(The other big concession, the lower tax rate on earnings within super funds, costs $13 billion. The treasury says that cost is set to double to $26 billion in 3 years time.)

By way of comparison the government spends $20 billion per year on Medicare.

The easiest concession to axe would be the one on contributions. It'd be simply a matter of collecting the tax from employers through PAYE at standard rates instead of from funds at 15 per cent. No-one's take home pay would be cut. The employers would take the tax out of the money they set aside for contributions to super.

Hockey would have made billions (a fair proportion of the Medicare budget) without ripping anything much out of the economy.

This column put forward the idea in December. Its beauty is its simplicity. Everyone would be taxed at their standard tax rate, and the tax would be collected where tax is usually collected, from employers through PAYE.

But it took the great simplifier, broadcaster Alan Jones, to put the case at its simplest.

Here's what he said on Q&A last Monday night:

"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... Now, someone somewhere along the line has got to say, look, in an ideal world that would be terrific, but we ain't in an ideal world."

At the time the government minister on the program said only that super would be considered in the forthcoming tax review. But on Friday on ABC radio Hockey said more. Asked about what Alan Jones had said he referred not to the forthcoming tax review but to the Murray financial system inquiry already concluded, and to the May budget.

"We have obviously got a report from David Murray about the banking system and about retirement income; we are considering that," he said. "I am not ruling anything in or out. I am not playing those sort of games but we are looking far and wide for the opportunity to get the budget back to the point where we, as a nation, live within our means."

I read that as confirmation that Hockey is looking at superannuation tax concessions in the context of the May budget.

Murray endorsed the recommendation of the Henry Tax Review that super contributions be taxed as ordinary income, offset (for contributions or up to $25,000) by a flat rebate of 15 per cent; meaning that high earners would no longer get obscenely bigger concessions than low earners.

Labor ignored the recommendation. It had designed the system that taxed super unfairly. Only at the eleventh hour when it was about to lose office did it attempt modest modifications.

Hockey can't overturn Labor's tax system just yet. In 2013 he promised no change to super for 3 years. That commitment is about to expire. He can announce changes in this year's budget that will take effect from late 2016 and begin booking the much-needed extra revenue.

I think he might.

In The Age and Sydney Morning Herald

Related Posts

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

. Advice for Hockey: Slug super and fix the budget in one hit

. Superannuation. The financial system inquiry is talking about a revolution