Budgets reveal a government's priorities.
On 3 April, Treasurer Wayne Swan and Superannuation Minister Bill Shorten said Labor would no longer give priority to providing over $438,000 a year in government assistance to retirees with an annual tax free income of $1 million from super while an age pensioner gets $21,000. Instead, Labor will not tax the first $100,000 of this retiree's income, and apply a highly concessional rate of 15 per cent to the other $900,000.
The ministers did not say so, but their new priority would assist this retiree with tax concessions worth about $330,000 a year — a little under 16 times the size of the age pension, rather than 20 times as it was previously.
This might seem a strange priority for a Labor government that is trying the stop the budget sliding further into deficit. But Labor won't even introduce the enabling legislation before the September election. As a result, a new Coalition government will almost certainly continue to give this retiree $438,000 a year in budget support.
As it finalises the 14 May Budget, Labor is struggling with a $12 billion write down in anticipated revenue for 2012–13 after Treasury bungled the forecasts. The ensuing deficits will be even bigger because what Labor has committed to spending exceeds even the wildly overblown forecasts for the carbon and mining taxes. The expanding deficit, although still relatively small, can't be justified while normal economic growth is occurring.
Labor could make huge saving by cutting back on government assistance to those who can fend for themselves. But it has chosen to switch large numbers of single parents off the parenting payment of $341.70 a week and onto Newstart (the dole) at $268.90 a week for those with dependent children. Most single parents have part time jobs, yet the government has cut their relatively low payment to give others an incentive to follow suit.
The Business Council of Australia has observed, 'Entrenching people in poverty is not a pathway back into employment.'
The maximum rent assistance for single parents on Newstart is $72 a week. Yet a recent Anglicare survey found that steep rises in rent mean that less than one per cent of rental properties are affordable for singles on social security benefits. Again, this is a matter of priorities.
But no increase in rent assistance is expected in the Budget; nor any change in tax policy to lift the subdued growth in the supply of new residential buildings that is one reason for the decline in housing affordability.
The supply problem is partly due to the way negatively geared investment properties get the same favourable tax treatment regardless of whether they are established or new dwellings.
The latest tax statistics show that taxpayers claimed net losses of almost $8 billion on rental properties in 2010–11. Construction of new dwellings could be boosted (and the deficit reduced) if tax deductions on existing rental properties could only be claimed after rental income exceeded the losses, while losses on new homes could still be offset against other income.
There are many other options for achieving a surplus without harming the economy or basic social safety nets. One of the simplest has strong economic and political advantages. When Swan announced a staged increase in compulsory super contributions from 9 per cent of salaries to 12 per cent, he said it would not go ahead unless fully funded by the mining tax. Given that this funding won't materialise, Swan should scrap the increase.
Politically, letting voters keep an extra 3 per cent of future salary rises would ease cost of living pressures. It would also give them more freedom to allocate their income in ways that best suit them, such as paying off a mortgage, bringing up a family, and covering education and child care expenses.
The Productivity Commission has explained that compulsory super imposes a dead weight cost on the economy by distorting the allocation of resources towards the finance sector. In essence, it is a form of industry protection that artificially inflates the size of this sector at the expense of the rest of the economy.
The 9 to 12 per cent increase also has a heavy budget impact. When fully implemented, Treasury conservatively estimates the additional cost of the associated tax concessions, plus two related measures, will be about $5.5 billion in 2020–21.
Scrapping this increase should be a prelude to reversing the Howard Government's decision to distort the tax system by making all superannuation earnings and payouts tax-free in the drawdown phase after age 60. This creates a savage imposition on the sharply declining proportion of people in the workforce.
Until Labor or the Coalition drops this damaging mistake, hard pushed workers will have to pay for decades to provide government services for retirees who will often be better off financially than a lot of younger people who subsidise them. Rectifying this mistake is not an act of class warfare; merely a standard requirement of responsible budget management.
Walkley award winning journalist Brian Toohey is a columnist with the Australian Financial Review.