Effective aged care reform requires smart thinking, not just a spending spree

The kneejerk media and political reaction to the report of the Royal Commission into aged care released this week is to accept it has made the case that many more billions of dollars need to be spent and to move straight to the question of where those billions should come from. Higher personal income tax is squarely in the frame. 

None of this is surprising. In making recommendations that involve vastly more public expenditure, this commission has acted in the tradition of royal commissions and other inquiries into any public policy failing. And it is not unusual for income tax to be the first port of call for more taxpayer money. 

There is a long history of calls for increased income tax — usually dressed up as a ‘levy’ — for worthy causes. There was the gun buy-back levy in the aftermath of the Port Arthur massacre in 1996; the East Timor (defence expenses) levy, proposed and legislated for 2000-01 but not implemented when the budget situation unexpectedly improved; the flood levy in 2011 to cover increased Commonwealth expenses in response to the Queensland floods; an increase in the Medicare levy in 2014 to help finance the NDIS; the budget repair levy on the top income tax rate for three years from 2014; and another increase in the Medicare levy for NDIS funding in 2019, which was cancelled when the budget situation improved and the Turnbull government decided it made better sense to cut income tax.  

As is apparent from this history, both Coalition and Labor governments have the levy fetish, and it tends to come into play when they are trying to cut a budget deficit but have a worthy cause to finance. The same conditions apply now with aged care — the cause is worthy, but the deficit is bigger than ever. Taxpayers had better watch out. 

But the starting point is wrong. It should not be a presumption of massively increased funding. The government first needs to examine the commission’s recommendations, decide which are most worth pursuing and ensure existing levels of public funding on aged care are being put to the most effective use before adding more. 

If, as is likely, more funding is needed — if only because of population ageing — there should not be a presumption that this will come from personal income tax. The Royal Commission’s view is muddied by a disagreement between its members, but at least one commissioner favours a levy on personal taxable income. Imposing such a levy is just dressing up an income tax increase by giving it another name.  

A 1% levy for aged care would be indistinguishable — in its effects on disposable income and incentives — from a one percentage point increase in all marginal rates of personal income tax. The same is true of the existing 2% Medicare levy, which renders the true marginal rate faced by the largest number of taxpayers 34.5%, not the 32.5% politicians like to claim. The Henry tax system review saw the Medicare levy as a pointless complication and called for its abolition, with Medicare being funded from general revenue like other public services. 

Reducing personal income tax has been a centrepiece of the current government’s platform, and they have economic logic on their side. The Australian tax system has long been recognised as relying too heavily on income tax, and years of bracket creep have raised the effective burden. It is a major source of disincentive in the tax system.  

So why increase it further with another worthy-cause levy? Imposing an aged care levy would be a clear reversal of the current government’s strategy of easing the personal income tax burden in stages up to 2024-25. A 1% levy would be raising close to $10 billion a year by then and negate more than one-third of the full tax cut. It does not make sense for tax policy to be working in different directions at the same time. 

This is not to deny that financing any significant increase in overall public funding of aged care presents a huge challenge at this time of large deficits and rising public debt as far as the eye can see. In this sense, we appear to be repeating the history of the decade beginning in 2010, when fiscal policy aimed to restore balanced and surplus budgets after the hit from the global financial crisis but governments kept signing up to new spending monuments such as the NDIS, Gonski-inspired school funding and enhanced child care subsidies.  

In the current decade, the task of balancing the budget is much more difficult, but there will be new spending monuments — not only aged care, but also enhanced JobSeeker and child care, submarines and other defence kit — while the NDIS continues to ramp up. And that’s just what we know about now.   

In this climate it is more important than ever to temper expectations of massively increased aged care funding. The Royal Commission has made many recommendations that would lead to increased demands for funding, but that doesn’t mean the government has to accept all of them, or that existing funding can’t be spent more effectively, or that funds can’t be reallocated from other government programs.  

And the Commission has no special contribution to make on the matter of financing its recommendations. Its terms of reference did not even specifically invite recommendations on funding. This is a matter for government, which should dismiss any notion of increasing income tax and examine other options including larger user contributions.