Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

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.

Puncturing our naive bubble

02 May 2014

cowan-simon This week, the Commission of Audit (CoA) delivered five kilograms of uncomfortable truths. The message is simple: government has been living beyond its means, providing benefits and services that cannot be supported by our taxation base. And now, the free ride must end.

Despite our strong economy, Australia has run a string of consecutive budget deficits. The CoA predicts we'll make at least 16 deficits in a row if we don't change, and these deficits will all occur before the full effect of our ageing population hits the budget. Australia is facing a future fiscal crisis, and as the CoA has made clear, we are not prepared.

The savings proposed by the CoA are worth between $60 and $70 billion per year and are overwhelmingly driven by the need to target our services at those truly in need and ensure that those who can pay their own way do so. The message is changing the way that Australians relate to government.

In healthcare, introducing a co-payment on Medicare services (similar to the one recommended in our Emergency Budget Repair Kit), will shift some of the costs off our front-loaded health system. In addition, means testing Medicare (another CIS recommendation) will constrain some of the recent explosion in health costs.

The proposed reforms to Family Tax Benefits are also aligned with suggestions in our Emergency Budget Repair Kit: abolishing the poorly targeted Family Tax Benefit Part B while refocusing Family Tax Benefit Part A on those with incomes below the average. It is also heartening that the CIS' ground-breaking work on the NDIS is being heeded. We must ensure that this important scheme is fiscally sustainable and delivered well.

The CoA's reforms continue: corporate welfare is savaged (as we have long advocated); while the proposed pension and superannuation reforms start to address some of the flaws in Australia's current retirement planning.

The CoA report sets out the kind of savings necessary to get the budget back onto a sustainable footing. The reaction has been predictably over the top.

But we need to be clear about the alternatives. Finding $70 billion in taxes would involve doubling the company tax take, or increasing the GST to well over 20%, or increasing income tax rates (likely by more than 50%). The argument that there are tens of billions of dollars just waiting to be found by making the rich pay their share, or in the chimeric world of tax expenditures, is flawed.

The CoA makes clear that business as usual is not an option. We now have a choice: smaller government or bigger taxes. We can only hope the Treasurer picks the right option in the upcoming budget.

Simon Cowan is a Research Fellow at The Centre for Independent Studies.

 

Finding savings in education

Jennifer Buckingham

02 May 2014

jen-buckingham Of the eight ideas proposed in the latest TARGET30 report, the idea to charge high income parents a fee to attend state schools has attracted the most criticism.

The people who opposed this idea are mostly those who ‘give a Gonski’ and support massive additional public spending on schools. Yet both of these proposals require parents to pay more for public education. The former asks parents who can afford it to make a direct contribution to their own child’s school, which offers them some say in how it is spent, while the latter requires parents to pay more tax, which just gets absorbed into the ‘system’.

A rough calculation of ‘Gonski’ funding is that it would need increased taxation equivalent to $277 every year for every man, woman and child – $1,108 for a family of four. This is the average sum; high income families would perhaps pay twice as much. The extra tax burden would increase in perpetuity, because we all know that government funding for schools can only ever go up. Compare this with the suggestion of $1,000 a year, only for the time families have children in school, and you have to wonder what the fuss is about.

The most common argument against the idea is that since parents of state school students already pay taxes, they shouldn’t be expected to pay school fees as well. When the tax-paying parents of students in non-government schools, who receive a fraction of the government funding available in state schools, make the same argument it is roundly rejected by public education advocates.

Likewise, the claim that abolishing funding for non-government schools would save taxpayers’ money is easily refuted. It would have the opposite effect. If government funding to non-government schools were abolished, and just half of the students in non-government schools moved into the state school sector, the additional yearly cost to taxpayers would be in the order of $4.6 billion.

The key point of the report however, was that government funding for schools has been rising consistently for decades, with no improvement in student outcomes. Funding is projected to double (in today’s money) by 2025. The report argues that before more funding is committed to schools, the way we spend the current budget must be reviewed.

Finding savings in education budgets is not just about the bottom line, it’s also about putting our resources where they can do the most good.

Jennifer Buckingham is a Research Fellow at The Centre for Independent Studies, and author of School Funding on a Budget.

 

Burned by the deficit levy to save the debt village

02 May 2014

jeremy-sammutMany organisations on the centre-right have expressed strong opposition to the idea of a deficit reduction levy that has been floated as part of the pre-federal budget softening up period.

The opposition has been motivated by sound principles: the way to reduce the deficit is to reduce the size of government by cutting spending, especially when the Abbott government went to the federal election promising 'no new taxes.'

It is therefore easy to understand the exasperation with the thought of yet another impost on the 'rich' on top of the already substantial tax burdens imposed on individuals and corporations.

Unfortunately, the Prime Minister also promised no cuts to health, education and pensions. The fiscal position, however, means that budget repair cannot occur without breaking these election pledges.

The government clearly understands that they face a political, not just a budgetary challenge, and it seems to think that, realistically, the 'pain' will need to be shared on both the tax and spending side.

The government has risked alienating all those who support the no tax position. The only way it can recover its standing is to prove that it is not just another higher tax and spending outfit.

If the government is able to say that it is taking a balanced approach on both the expenditure and revenue sides of the budget, it may be likely to be more inclined to act on some of the more difficult spending cuts recommended by the Commission of Audit's report.

Let's hope the government can clearly distinguish the difference between tactics and strategy. A temporary tax rise in the form of a deficit levy could be a useful tactical ploy that advances the overall strategic objective of substantial cuts to spending and reigning in national debt.

Genuine budget repair will be the ultimate test of the government's political strategy. A pass mark for the Abbott government will depend on whether Joe Hockey's first budget cuts as deep and hard as the first Costello budget in 1996.

Dr Jeremy Sammut is a Research Fellow at The Centre for Independent Studies.