Ideas@TheCentre brings you ammunition for conversations around the table. 3 short articles from CIS researchers emailed every Friday on the issues of the week.
On Thursday, superannuation expert Jeremy Cooper tweeted that “the super concessional cap changes are about tax and tax alone. They do not stop people saving or (in 99% of cases) putting money into super.”
This is similar to the government’s claim that 96% of people are no worse off under the changes.
The trouble is that the tax concession debate should be a side line to the key problem with superannuation — the fact that so few people are able to support themselves in retirement off welfare — and the budget did basically nothing to help bridge the gap.
The government has lowered the threshold on the higher contributions tax rate, limited the amount of money that can be held in a tax free retirement account, capped lifetime non-concessional contributions, and lowered the annual concessional contribution limit. These initiatives are clearly just revenue raising.
They have also committed to a low income super tax offset, increased spousal transfers for low income spouses and allowing people on lower balances to roll-over unused concessional caps.
Whether or not you approve of these initiatives, from the perspective of self-sufficiency in retirement they clearly target the wrong group. People on low incomes throughout their working lives are invariably going to be on the pension for all or most of their retirement. Most would be better off free from compulsory superannuation altogether.
The budget needed to target incentives at those earning around and slightly above average income. With the right help they could be weaned off welfare, and we might finally combat unsustainable pension spending.
The government agreed that the purpose of superannuation is to supplement or supplant the pension. It would be good if their reforms had the same purpose.
Despite the Budget rhetoric, almost nothing has been done to stop the steep increase in Australia’s tax burden. We have tax cuts, but they are almost exactly offset by tax increases. As a result, the upwards trajectory remains: the tax to GDP ratio is forecast to go up by 1.4 percentage points over the five years from 2015-16.
The personal tax threshold of $80,000 is set to increase to $87,000, costing $0.95bn in 2017-18. However, this cut pales into insignificance with the $12.5 billion tax cut that, according to CIS modelling, would be required to fully address bracket creep in that year. As a result, the impact of bracket creep remains largely unaddressed. And there is no plan to address the ongoing impact of this tax hike every year such as through indexation of the tax thresholds.
The Budget makes a welcome commitment to reduce the company tax rate to 25%, which will ease our uncompetitive corporate tax burden. However, this cut is phased in over a 10-year period, and other countries are likely to reduce their company rates
over this decade as well. As a result, Australia’s relative position may remain unchanged. The company tax cut will primarily result in increased foreign investment and have a smaller impact on domestic investors, because of the imputation system. However, there are risks that the various new tax avoidance measures will dissuade the very investment that the tax cut is designed to attract.
Treasury modelling released with the Budget supports a central CIS argument: tax cuts provide the greatest economic benefits when they are financed by removing wasteful government spending, rather than by increasing other taxes. Yet the Budget takes the second funding approach, meaning the economic benefits of tax cuts are smaller than they could be. We have a right to be unimpressed.
The Budget measures aiming at solving youth unemployment are an improvement on previous programmes, but fall short of targeting the real causes of a jobless youth. As my research shows, instead of headline spending figures, we need a growth agenda to fight youth unemployment, which means meaningful economic reforms — including a smart workplace regulation.
On the bright side, the 2016 Budget ‘Youth Employment Package‘ deepens the federal government’s commitment to the investment approach to welfare. Through this new approach, actuarial valuation is used to determine the most effective forms of support to empower welfare recipients for a successful transition from welfare dependence to the workforce.
It is positive to see the new Youth Jobs PaTH (YJP) programme to provide young jobseekers a leg up in entering the labour market. Despite being branded by the federal government as an ‘innovative Prepare-Trial-Hire’ method, the YJP is in most instances an improved version of the National Work Experience Programme introduced during the Abbott leadership a year before.
Nonetheless, it should be stressed that the new YJP programme provides a much-needed boost to the initial employability skills training phase, and offers higher incentives for both workers and employers to get the most out of the work trial period.
On a more cynical note, and if history is any guide, there is nothing in this budget that has not at some extent been tested before — with paltry results. In particular, despite all the trumpetings, these budget measures still carry the same underlying misguided belief that the solution to a jobless youth rests on more government spending and micromanagement.
The biggest disappointment comes from the lack of commitment towards real economic reforms. In particular, there is no mention of addressing Australia’s complex workplace regulations structure, including prohibitive penalty rates that ultimately penalise the most vulnerable jobseekers. Instead of wage subsidies and other welfare handouts, Australia needs a more flexible workplace so Australians of all ages and expertise get the much-vaunted fair go.
More free markets, less interventionism: that’s what a truly liberal budget should be about.