Plug generation gap now

The Intergenerational Report offers the Liberals a chance to espouse smaller government, writes Des Moore

Australian Financial Review, 12 June 2002.

Peter Costello’s decision to have Treasury produce a formal Budget paper on the outlook over the next forty years is an important initiative with potential political and economic implications. By providing an in-depth analysis relevant to major public policy questions, the Intergenerational report (IGR) offers a basis for developing a future Liberal strategy to espouse seriously the cause of smaller government via budget reforms. With the Opposition scrabbling to work out what its role should be, opportunity calls.

The basis would be the report’s estimate that the continuation of present budgetary policies would almost certainly require taxes to rise by 5 per cent of GDP by 2042. Remarkably, this has produced an academic analysis seriously suggesting such a major tax rise —equivalent to increasing income tax now by about 40 per cent - is nothing to worry about because higher living standards will make it affordable.

While these academics will presumably not be standing for political office, their conclusion shows the IGR raises major issues that are both controversial and current. Strangely, some economic analysts continue to see the budget principally as a macro instrument for influencing aggregate demand, although one or two mistakenly allocate that role entirely to the Reserve Bank. But the budget may now be more important as a micro-economic instrument and the IGR analysis demonstrates its policy potential for determining the role of government.

One approach would simply continue existing policy on health and social security benefits to the various income groups and adopt the no-worries academic thesis regarding eventual tax increases. An alternative would progressively reduce the eligibility of higher income groups for such benefits, thereby avoiding any need for higher taxes.

Economic benefits aside, such action would improve equity by focusing government welfare where it should be - mainly on lower income groups. Indeed, a progressive reduction in welfare recipients should accompany higher living standards.

Unfortunately, the opposite has happened under the Howard government and its predecessor. More than 22 per cent of the working age population now receives benefits compared with "only" 15 per cent at the end of the 1980s. But even more questionable is the extent of benefits to higher income groups. Why, for example, is the gross income of the two higher income quintiles now supplemented annually by around $35 billion in benefits, including $12 billion for health?

The present budget includes reforms needed to reduce unwarranted taxpayer outlays. Even so, the proposals for increased pharmaceutical fees and eligibility tightening for disability pensions are extremely modest, the dirigiste responses by Labor and the Democrats notwithstanding.

The higher pharmaceutical fees would still leave such services and benefits increasing at over 5 percent a year in real terms over the next three years. As benefits to health card holders increase at a similarly rapid rate, the Democrats’ claim that the poor would suffer seems particularly thin. Assistance to people with disabilities also increases even though the eligibility tightening would exclude from disability pensions those able to work more than 15 hours a week. These pensions remain more generous than unemployment benefits, encouraging the unemployed to continue persuading doctors of their inability

to work.

In this first post-election year, the government should have used the IGR as a basis for suggesting more such proposals — and made them more restraining. A tough budget would certainly have gone much further than simply keeping total spending in 2002-03 at the same real level as last year, when real growth was more than 4 per cent.

True, total budget spending is pushed up marginally by the 5 per cent real increase for defence. However, the forward estimates do not even meet the Government’s commitment to increase real defence spending by 3 per cent pa and the defence allocation has not prevented continued strong growth in other discretionary spending. Total spending in the IGR problem areas of health and social security increases nearly 3 per cent in real terms, as does spending on education.

This relaxed approach to expenditure is reflected in the increased burden of taxation under the Howard Government. The Commonwealth is the main culprit in the rise in total taxation from about 30 to 31 per cent of GDP since 1995-96, which brings us to about the OECD average, once compulsory superannuation is included as a de facto tax.. The IGR provides the Government with a chance to reverse this trend to bigger government. [Omitted from published article: A first step would be a paper canvassing the options for at least preventing a tax increase of 5 per cent of GDP].