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