Australia has an unfair, warped and immensely costly approach to incomes policy and the coming budget is the ideal time to start the long process of fixing it.

One incomes policy change is already factored into this year’s budget: further tax cuts from 1 July, which will mainly favour people earning over $80,000. Further tax cuts kick a year later, again with the benefit primarily going to high income earners.

Some economists have called for the abandonment of the tax cuts, which are already legislated. That simply won’t happen. One of the reasons for Kevin Rudd’s immense popularity is that he is trusted, and he is trusted because he made such an obvious point of fulfilling his election commitments.

There are other longer-term reasons for keeping the tax cuts. As economic growth resumes and this Government grows older it, too, will lost its fiscal discipline, exactly as the Howard and Keating Governments did. Governments in the long run can’t be trusted with taxes, and the only way to really keep them under control is to keep taxation to a minimum. As neither of the major political parties, it seems, would ever agree to end the scam that is fiscal drag, embedding tax cuts at every opportunity is the next best strategy.

The tax cuts, however, do strengthen an already compelling case for reducing the absurd generosity of our tax and transfer systems to high-income earners.

First, access to Family Tax Benefit B should be significantly curtailed. Even after the $150,000 means test Labor introduced last year, it is still available to the majority of high-income earners. In fact, the means test was deceptive — it will only yield savings of $130m next year when the overall cost of the benefit will be well in excess of $4 billion. Reduction of the means test threshold to $100,000 (indexed) would yield significantly greater savings — more than enough to fund the $530m cost of the parental leave scheme recommended by the Productivity Commission. This would partly replace one benefit that encourages women to stay out of the workforce with another that provides an incentive for higher female workforce participation.

Access to the Baby Bonus should also be subject to the same threshold. The $150,000 means test was a better earner for the Government — it is expected next year to save $100m out of a total cost of over $1.4b. A $100,000 threshold would garner several hundred million dollars more in savings.

But all this is small beer compared to our truly warped superannuation system, which, mostly out of sight of the public, delivers massive benefits to high-income earners – primarily males, who have not had their working lives broken up by parenting. In 2009-10, the Government will forego just under $25 billion in tax through superannuation concessions, the bulk of which go to high-income earners. According to Treasury, the loss to taxpayers increased by a third in one year, from $22b to $30b, as a consequence of the Howard Government’s decision to scrap taxes on payouts, establish new contribution limits and tax contributions and earnings at 15%.

While there’s plenty of speculation about changes to superannuation taxation in the budget, it’s hostage to the Henry tax review, which isn’t scheduled to report until the end of the year. The review’s terms of reference also prevent it from considering the tax-free status of super payouts although, as the Australia Institute’s recent superannuation paper noted that still leaves both superannuation contributions, and super fund earnings, as taxation points to use. The Institute — in only the most recent calls for reform from the Left and the welfare sector over many years, argues there are a number of reforms that could both make superannuation more equitable and add considerably to government revenue. They range from minor amendments to remove only the most egregious abuses (taxing fund earnings, ending salary sacrificing into super), which would yield about $5b per annum, to major reforms that would tax contributions at marginal tax rates and yield up to $20b pa.

Equally as valuable as budget savings, serious reforms would stop the slide in credibility of superannuation. The fees debate between industry and retail funds, the collapse of earnings in the last twelve months and perceptions that the whole system is rigged in favour of the wealthy have all combined to undermine the public’s perception that compulsory super is good for Australia and good for them.

While super is closely linked to retirement income policy, that hasn’t stopped the Government charging ahead with a commitment to increase the pension rate. The aged pension is one of the biggest items in the budget, clocking in at $25.4 billion this year, and even small increases for the 2.1m people eligible for a full or part pension have big fiscal impacts now and on future generations – a $10 a week across-the-board rise would cost around $2b.

The key question the Government should be considering on retirement incomes is why we have the same pension age now as we did in 1909, when hardly anyone actually made it to 65 (the female pension age is rising so that in 2014 it will be 65). The Harmer Review discussion paper invited comment on the pension age issue — hard to avoid, really, when other countries are moving to increase their pensionable age and Australians are nearly the longest-lived people on the planet. Any decision will have no immediate budgetary (or political) impacts because it would have to be implemented over an extended period — CEDA recommends raising the age to 67 between 2015 and 2022, although Seniors Australia have argued for an increase to 75. The usual objection to an increase — that unemployment is high amongst older workers — won’t bear scrutiny once the economy returns to more normal growth levels: Australia still has a long-term problem with insufficient numbers of workers which will cause major fiscal problems in the 2020s and beyond.

Each of these issues, however, requires some element of political courage. Reducing access to middle-class welfare will inevitably yield press articles about comfortably-off families claiming they “don’t feel rich” on $120,000 a year and who are angry at losing benefits. Downward envy might start rearing its ugly head; one of the few benefits of middle-class welfare is the political buy-in it gets for welfare for those who genuinely need it. And the superannuation industry is very well-resourced and will argue that governments should stop making changes to super. Well-heeled executives will cry “populism” (definition: any policy you object to that seems to have widespread support); we’ll get a re-run of the Fringe Benefits Tax campaign when the rich briefly went to the barricades in the 1980s for the right to a long taxpayer-funded lunch.

And in reality this government has a terrible track record of making hard, politically-costly decisions. It’s one of the reasons why Kevin Rudd remains so popular. But it’s time Rudd turned his undoubted political skills to driving serious reform that makes enemies but will have long-term benefits for Australia.

Tomorrow: Health

Peter Fray

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