Pearls and Irritations

There was a real risk that Tony Abbott and Joe Hockey believed their windy rhetoric of the last two years about debt and deficits. Having won the election they have had to face the reality that they have been grossly exaggerating our economic problems.

The real risk was that Tony Abbott and Joe Hockey would act on their own exaggerations and savagely attack the economy. Fortunately, the Budget tells a very different story. In terms of managing the macro-economy, the government has got it about right in the budget. It hasn’t cracked down in the way many feared.

But what the Budget has done is to inflict pain on the poor and the vulnerable in our society; the unemployed, young people, the sick and the poor. Unlike Robin Hood, Joe Hockey robs the poor to protect the rich. And more pain is to come for the disabled and pensioners. The $80 billion cutback in health and school funding for the states will also result in severe problems. State Premiers are already protesting. This hit on the states will probably force them to press for a broader and/or an increase in the rate of the Goods and Services Tax. Perhaps that is what Joe Hockey intends.

The most glaring example of cruel policies is the cut in our overseas development assistance program.  It is the largest single saving in the Budget. The political logic must be that the poor in the world that we should help can’t vote in Australia and can’t protest. They are an easy target, like vulnerable asylum seekers. As a wealthy country we should hang our heads in shame.

I have written before about the need to address our revenue shortfall and the enormous advantages that flow to rich taxpayers in Australia. Our tax as a percentage of GDP has fallen steadily since 2002 from 30% to 28%. This is well below the OECD average of 34% of GDP. We need to fix our revenue base and not punish the poor and vulnerable.

A major reason for our revenue shortfall is not so much our low tax rates but the high level of tax expenditures or tax deductions that we have. In 2012-13, Treasury reported that there were 363 ‘tax expenditures’ under our tax system. Those tax expenditures had a total value of $115 billion. These tax expenditures range across the field – deductions for charities, religious, scientific and community organisations. The largest of all tax expenditures is for superannuation. This ‘tax expenditure’ costs the Budget over $30 billion per annum. About 30% of these superannuation tax deductions or concessions go to the top 5% of income earners.

The IMF has reported that Australia forgoes more revenue as a proportion of GDP from tax expenditures than all other OECD countries. It is in this area of tax expenditures that we need to direct our attention.

Quite apart from the scale of these tax expenditures or deductions and loss to revenue, there is very little transparency. Direct welfare payments for example are easily identified. The IMF points out those tax expenditures are often granted as a result of secret lobbying. The IMF recommends regular and systematic reviews of tax expenditures in the same way we review direct government expenditures, like unemployment benefits. Parliament and the Parliamentary Budget Office would do a great service if they conducted and published such a regular review. If they did, a large number of these expensive tax expenditures like superannuation, negative gearing and subsidies for private health insurance would be brought to public attention and curbed or abolished.

The ‘welfare cheats’ and ‘dole bludgers’ which are so much part of the stock in trade of tabloid newspapers and talk-back radio are easy game. The real rackets are run by vested interests that reap enormous benefits from tax expenditures which are often largely hidden from view.

We badly need revenue reform and of tax expenditures in particular.

Taxes are the price we pay for a civilised society. We need to face up to the need for adequate tax revenue to ensure that all Australians can live in a civilised way.

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