Hockey's Commission of Audit anything but responsible

Who in their right mind would hit anyone with an effective marginal tax rate of 94 per cent?

Australia’s top personal income tax rate has never hit 80 per cent. Labor’s resource super profits tax would have been 40 per cent applied to a 28 per cent company tax rate. Labor feared that any more would take away the incentive to mine.

Yet the Commission of Audit wants to hit Australians moving from the dole back into the workforce with an effective marginal tax rate of 94 per cent on wages of $19,0000 to $32,000.

This would stall their reward from work at close to $19,000 even as they took second and third part-time jobs.

It’s not as if the commission is unaware of the concept of incentives. It mentioned them more than 70 times in its report released last week. It even mentioned  “incentives to work”.

At the moment, financial incentives dive as earned income passes $18,000. That’s when the 19 per cent income tax rate comes into play as well as the 60 cents by which Newstart is withdrawn for each extra dollar earned. Where one member of an otherwise employed couple is on Newstart it can amount to an effective marginal tax rate of 79 per cent. It is a minimal return for extra work, but it is something.

At recommendation 27B the commission proposes boosting the withdrawal rate from 60 per cent to 75 per cent. It says it “represents a more appropriate targeting of safety net payments”. It would also represent an effective marginal tax rate of 94 per cent.

It would all but eliminate the immediate financial return for either person in that couple taking on extra work.

Whether the commission realises this is unclear. It certainly doesn’t mention it. Its chief concern is saving the government money. That's fine as far as it goes, but at times it goes in the opposite direction to what the government is trying to achieve.

The report begins with the commission’s 10 “Principles of Good Government”. There are exactly 10: Live within your means, protect the truly disadvantaged, respect personal responsibility; those sorts of things.

What there isn’t is an attempt to address the question of what government is for and what it is trying to achieve. It is trying to achieve a lot more than protecting the truly disadvantaged. Among other things to get people into work. And to keep them alive.

Which brings us to Medicare co-payments.

It proposes them as a cost-saving measure: “From an economic perspective health care is like any other good or service in that utilisation increases dramatically when the marginal cost approaches zero,” it says.

“There would be substantial benefit in addressing health costs if the community is more aware of the real costs of using the health care system.”

Doubtless true, in the short-term.

The Commission says it may “help to reduce demand for unnecessary or overused services”.

It would. But it would also cut demand for timely services that stop people becoming sick and save costs later on.

Most of the time when we go to the doctor we don’t know whether we are seriously sick. That’s why we go. Dissuading us from going when we think we are not particularly sick will at times also dissuade us from going when it turns out we are.

The massive Rand Corporation experiment in the 1970s funded tens of thousands of visits to the doctor at different rates. Some were charged large co-payments, some small ones and some none.

The Americans who were asked to pay did indeed visit the doctor less. But the study found that those who who stayed away were just as likely to have serious problems as trivial ones. In its words: “Cost sharing did not seem to have a selective effect”.

Neither the Rand experiment nor a later comprehensive study by Australian health economist Jeff Richardson represent the final word. But it would be nice to think the commission even read them, or even considered the impact of its recommendations on health.

It’s the same for the Pharmaceutical Benefits Scheme. Pushing up co-payments would save the government money. But the commission’s own talk about price signals suggests it would also dissuade people from obtaining prescription drugs. That would be a good thing if we overused them. It would be a bad thing if we needed them. It’s a question worth considering.

The tragedy of the commission’s report is that virtually none of it could be adopted without further consideration. It’s a list of ideas without an assessment of their consequences.

Governments need to be responsible. It’s unfortunate that the commission subtitled its report “Towards Responsible Government”.

In The Age and Sydney Morning Herald

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Radical, gutsy and quick. What to expect from the Commission of Audit

Saturday column

Joe Hockey’s new Commission of Audit will be the most comprehensive in almost two decades. It’ll examine everything the government does.

And what’ll it say?

Well if it’s anything like the last one established by Peter Costello 17 years ago it’ll recommend further inquiries.

Truely. Here are extracts from that last Commission of Audit report delivered to Costello in 1996:

. “The government should undertake a fundamental review...

. “The Government should review its policy...

. “The Government should initiate further work...

And so on.

Why did the Commission recommend further work rather than do it itself?

It didn’t have the time.

It kept saying so, using phrases like:

. “Because of the very tight deadline for completion of this report...

. “In the limited time available...

. “Because of this time constraint...

And so on.

Costello had given it just three months.

If there’s one lesson Hockey might have learnt from the last time the Coalition asked a Commission to examine its entire financial operation, it’s not to give it only three months.

Hockey has listened. He has given it three and a half.

The Commission’s first report examining the scope of government, the efficiency and effectiveness of spending, the state of the Commonwealth’s finances and the the effectiveness of budget controls is due on January 31.

That’s right, January 31. Even working through Christmas with “a lot of resources” the Commissioners will have to tackle really big questions at a breakneck pace.

Their second report, examining infrastructure and public sector performance, is due two months later.

The thinking behind the speed is impossible to fathom. Hockey himself wants the report to be “thorough and comprehensive”. The Henry Tax Review was given more than a year. I’ve a suspicion the lightning-fast timetable wasn’t his.

To keep to it the Commission will have to take shortcuts. The most obvious is to purloin the findings of its predecessor.

But some of those findings will unsettle the Coalition, if the not Commission itself...

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The first Commission was chaired by Professor Bob Officer, an expert in corporate finance from the Melbourne Business School. It took no prisoners. This one is chaired by Tony Shepherd, the president of the Business Council, which is a lobby group for Australia’s top 100 business leaders.

The Officer Commission wanted the government to “urgently review assistance to business and higher income earners”.

It fingered the export market development grants scheme (which survives to this day), the 150 per cent research and development tax concession (only recently closed by Labor) and the non means tested childcare cash rebate (which the Henry Tax Review also wanted means tested and still isn’t).

Its broader concern was that money was being shovelled to businesses and high income earners by means of scarcely visible tax concessions rather than direct payments. That’s how the government shovels outsized support to the superannuation accounts of high earners and the family homes of Australians who are already rich. By contrast measures that support poorer Australians are easy to see in the budget and always in the line for the cop. Just this week the government announced plans to axe the Low income Superannuation Contribution. The more expensive support delivered to high income super accounts was spared.

“The government should comprehensively review all existing tax expenditures programs,” the Commission recommended. It should convert those that were actually worthwhile into direct grants so the public could see where its money was going.

And that was just the start of its attack on privilege. It turned its guns on politicians themselves. Peter Costello was infuriated. Politicians super should be “structured in a similar way to arrangements for senior executives in the rest of the workforce”. It took eight years and campaigning by the new Labor leader Mark Latham for the Howard government to reluctantly act. It replaced the parliamentary super scheme with much like that applying to other other people, but only for new politicians. Howard, Costello and Latham himself continue to receive a super benefit costing around 78 per cent of their salaries for the rest of their lives.

The Commonwealth should abandon its support for private schools. The states could fund them if they wanted to (and there are good reasons why they might, every privately schooled student is a student less the states have to teach). In fact the Commonwealth would get out of school education altogether, keeping responsibility only for tertiary education which it wouldn’t directly fund. Instead it would fund scholarships which students could use to buy education from universities and TAFEs which full fees. Much of what the Commonwealth does in the field of health would be handed to the states as well.

And the Commonwealth would less fully fund pensioners. For obscure historical reasons their payments are linked to 25 per cent of male total average earnings. The government would instead linking them to a lower measure (median total male and female earnings) or lift them only in line with the consumer price index or not lift them at all except following regular reviews which would consider “all relevant circumstances, including budget pressures”.

The unemployed would get no joy from their campaign for higher NewStart benefits. The Commission saw sense in giving them a good deal less than the pension to make sure they weren’t lulled into staying unemployed.

And leaders such as Tony Abbott who wants to build “roads of the 21st Century” would be told bluntly Australia had enough infrastructure. There was “no evidence of overall infrastructure inadequacy”. (Although it should be noted that is a view the Commission might not hold if it revisited the question. What was true in 1996 might not remain true in 2013.)

The Officer Commission was radical, gutsy and quick - so quick it never got the chance to flesh out its ideas. Perhaps that’s why the Coalition has made its successor quick. It might be frightened of what it will find.

In The Sydney Morning Herald and The Age


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Well done Joe Hockey. The $500 billion debt limit

"The debt ceiling is like a personal credit card limit, only sillier"

It’s called “clearing the decks” and there isn’t a chief executive who hasn’t at least thought about doing it.

If you are appointed when things look dodgy, you act as if they are even more dodgy: you write off losses (in this case lift the debt ceiling) by more than you need to knowing you can blame it on your predecessor. If things turn out to be not that bad, you end up looking good. If things do turn that out bad, you won’t look that bad.

The government’s debt ceiling is like a personal credit card limit, only sillier. Unlike a credit card limit it need not take account of ability to repay. It is a political limit imposed at by the parliament rather than an outside constraint imposed by the lender. As such it is is vulnerable to politics as the United States discovered to its cost this month in a standoff which threatened to prevent the government borrowing the money it that it needed to function. Labor’s Wayne Swan had to lift the ceiling four times - to $75 billion, then to $200 billion, then $250 billion and finally to $300 billion. On some of those occasions his opposite number Joe Hockey made things difficult for him. “Enough is enough,” he said in May.

Hockey is treasurer himself now, and he doesn’t want to go through the torture of having to going back to parliament each time he needs a bigger limit...

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So he has asked for a very big one - $500 billion, the need for which he can blame on his predecessor. Hockey made the point that he is not proposing to lift the debt, merely the debt limit to give himself headroom free of political sniping should he need it.

His Commission of Audit is looking like a partly-owned subsidiary of the Business Council of Australia. It’ll be chaired by the Council’s president Tony Shepherd and its secretariat will be run by the Council’s director of policy Peter Crone. It’s an enviable double for the big business lobby group. It’ll be examining what fields the Commonwealth should abandon, what it should contract out and what it should privatise. They are topics the Council already has views.

In The Sydney Morning Herald and The Age


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Slimming down government. Why Abbott might be bolder than you think

What would Tony Abbott do? As with all potential prime ministers there’s no way to be sure. But thanks to an unusual instance of history repeating we’ve been given an unusually clear idea of what he’ll be told to do.

It is also what he wants to be told to do.

Abbott himself set up the link last March when he promised the “swift establishment of a Commission of Audit”. It will “examine the detail of what the Commonwealth government does and whether it could be done better and more cost-effectively”.

Implicit in such a task will be determining what the Commonwealth should not do - whether there are entire areas of government that should be abandoned altogether. We know this because it has already happened. The Howard government set up a Commission of Audit on taking office in 1996. The Commission’s impressively non-political report wasted not a second dealing with alleged failures of the previous government and instead turned its attention to the more fundamental questions of the what the government should not be doing, how it could perform its remaining roles more cheaply, and how it could stop the costs of its biggest payments from skyrocketing.

Its recommendations were timeless. That most were not accepted makes them no less relevant. In fact events since have made them more compelling.

Most of the time finance minister Penny Wong gives the impression things are under control. But she let down her guard briefly in the leadup to the 2011 tax summit telling delegates that “without action to curtail spending growth, the overall level of government spending under existing programs would, over the medium to long term, become unsustainable.”

The age pension is the government’s most expensive payment. Generously benchmarked to 25 per cent of male total average earnings, accessed at least in part by most retirees and set to balloon as the retired population grows, it was to climb from 2.7 per cent of the total value of Australian production to 3.9 per cent by the middle of the century. Spending on health was set to triple.

After this year’s budget the head of the Treasury secretary Martin Parkinson set out the problem starkly.

“We have a big gap between what the community demands of government and what it is prepared to pay,” he told business economists. “We have to think about savings, or new sources of revenue.”

The 1996 Commission of Audit was on to the problem early. Its report will be the first place Abbott’s commission looks...

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One of its simplest suggestions was to stop increasing the pension. It is traditionally lifted twice each year by either enough to keep it at the male earnings benchmark or by the increase in consumer prices, whichever is the greatest. The Commission suggested instead adjusting it only from time to time after reviews that would have to consider “all relevant circumstances, including budget pressures”.

Entire Commonwealth operations would be surrendered to the states. Health and aged care belong there, the report says. The states run the hospitals and their governments know the most about the quality of their aged care services. The Commonwealth would retain responsibility for Medicare and the pharmaceutical benefits scheme, but it would be more stingy, requiring all but the poorest to pay more to see the doctor and to pay more for prescriptions. Before surrendering aged care to the states the Commonwealth would defund the institutions, fund the users instead and jack up the users’ own (means tested) contribution.

Responsibility for education would go to the states, along with childcare. The exception would be tertiary education where Commonwealth would be notionally in charge but would be hands-off, funding the students rather than the institutions. It would hand out a limited number of scholarships to Year 12 students each year “redeemable at any accredited institution”.

The staff savings in the departments of health, education and environment (which would also go to the states) would be enormous. Targeted departments would be required to cut their running costs by at least 20 per cent over three years. All other departments (including the usually exempt defence department) would be required to cut their costs by 10 per cent.

The states would need more money. The 1996 Commission of Audit didn’t say much about where they would get it from but events since provide a ready made solution. The states have since been given the GST. They could lift it.

It would be tempting to think Tony Abbott wouldn’t necessarily welcome such a radical set of prescriptions. But it would be dead wrong.

When announcing plans for his own Commission of Audit last March he specifically charged it with examining questions such as “whether the federal health department really needs all 6000 of its current staff when the Commonwealth doesn’t actually run a single hospital”.

He knows what it will examine and he must know what it is likely to recommend. He is prepared to consider bold options.

In today's Sydney Morning Herald and Age


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