Much of the focus in the current discussion about Australia’s budget deficit is centred around spending cuts. Yet the real problem, as Treasury secretary Martin Parkinson made clear recently, lies on the revenue side.
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While there have been signs in recent days that the government may be considering raising some taxes and charges, it would have to ensure these are based on people’s ability to pay.
Some charges flagged so far, such as a $6 GP upfront fee or a fee for non-urgent visits to public hospital emergency departments, would severely affect people on the lowest incomes.
Despite the misperception, Australia is a low spending, low taxing country by OECD standards, and two-thirds of the current budget deficit has come about by weaker tax collections, not higher spending. Compared with the decade before the Global Financial Crisis, federal budget revenue has fallen by $45 billion a year in today's dollars and spending has increased by $30 billion.
Most of the damage was done by the eight successive income tax cuts during the 2000s - which were unaffordable, shrinking revenues by around $30 billion a year and leaving the budget too reliant on taxes from booming mining profits and sharemarkets.
Treasurer Joe Hockey is walking a tightrope as he prepares to deliver his first ever budget. On one side, he will be urged to cut quickly to get the pain out of the way early. On the other side is a chorus of warnings that deep budget cuts would stifle public confidence and economic recovery.
The path that will lead him across the rope without a nasty fall is to make modest savings now and signal structural reforms that have a bigger impact on the bottom line over time. As he rightly acknowledges, the success of this strategy depends on the government’s ability to bring the community with it on budget reform: to convince people, as the Hawke government did, that restraint is needed and that it will be shared equitably.
In 1996, the then Coalition government tried to get all the bad news out of the way in one tough budget. Instead of changing the way programs were targeted, structured and delivered, the government put the brakes on the fastest growing programs, through drastic cuts in areas such as Medicare rebates, hospital funding, grants to universities, employment programs for people unemployed long-term, and public dental services for people on low incomes.
The downfall of such an approach was that as housing and mining booms re-filled the budget coffers over next decade, many of the cuts were restored and spending on the same programs grew more rapidly than before. Meanwhile affordable essential services were put further out of reach, especially for people on low incomes; and the failure to restore budget cuts affecting employment programs and dental care meant the budget "pain" was felt disproportionately by those on the lowest incomes.
As the Treasurer knows all too well, significant reform takes more than a single budget. It is true that the challenge is formidable, but it’s not an emergency. With a cool head and sound judgment, we can steer the nation’s coffers on to a sustainable path without inflicting unnecessary cuts that would ultimately cost us more in the long run.
Instead of expecting those at the bottom of the income ladder to meet the costs of budget repair, we should adopt the proposals in the Henry review that close off tax avoidance opportunities for those at the top end, such as the unfair superannuation tax arrangements, tax breaks for negatively geared investments, and the use of private trusts and companies. These recommendations would improve fairness and economic efficiency at the same time.
Another area, receiving much media attention in the past week, is the access to the age pension for people with significant assets and the need to increase the preservation age of superannuation. While the pension is a vital shield against poverty for older people on low incomes, it is no longer well targeted to those who need it. For instance, couples with a million dollars in financial assets should not receive a part-pension - but the rate of the pension for those who do need it must be high enough to prevent poverty.
Before we can even consider raising further the age to receive the age pension, the preservation age for superannuation must be increased so that it is the same as the pension age, and we must lift the abysmally low Newstart Allowance, to prevent plunging many more people into poverty.
Ultimately, the government will need to re-focus spending and tax concessions based on needs rather than unrealistic expectations. It should restructure programs so that services are provided more efficiently, with more emphasis on prevention: that will save us more down the track.
As ACOSS has previously made clear, “it must target payments to people who really need them, not make people at the bottom of the income and wealth scale struggle to survive day to day on even less income or work longer by increasing the retirement age”.
The success of the government’s effort to put our national budget back on a sustainable path will be limited if the focus is solely on cutting spending and taxes while neglecting the issue of diminishing revenue.
Dr Cassandra Goldie is CEO of the Australian Council of Social Service.
