Medicare is growing at an unsustainable rate, the government has been saying for over a year. Medicare spending had more than doubled from $9.8 billion in 2004 to just over $20 billion this year — an average annual growth of around 8%. Unsustainable? Well, let’s assume so, for the sake of argument.
Health Minister Sussan Ley also wants the Pharmaceutical Benefits Scheme, which has grown by on average around 4% a year to over $9 billion this year, to be made “sustainable”, andshe is setting up for a stoush with the drug companies over it.
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They’re not the only “unsustainability” around, though. Last year Kevin Andrews said our welfare system was “unsustainable”, particularly the disability support pension and Newstart. In the last decade, the DSP has grown at around 7% per annum and cost $16.7 billion this year. Newstart has grown at just over 5% in the last decade and now costs around $9 billion. Unsustainable? You be the judge.
And in March, Andrews’ successor, Scott Morrison, said the age pension was “unsustainable”. The age pension has grown at just under 8% over the last decade. It’s the biggest of all: this year it will cost $42 billion.
So many unsustainable programs.
Two other areas don’t get mentioned by the government in the unsustainability stakes and have now been ruled off-limits: concessional tax rates on superannuation contributions, and concessional tax rates on super earnings. Together, they far exceed all but Medicare and the age pension: in its most recent tax expenditures statement, Treasury calculates the Commonwealth will lose nearly $30 billion from those two concessions alone, $27 billion of which could be regained if the concessions were removed. Both concessions have grown strongly in recent years. According to Treasury tax expenditure statements, since 2004, the cost of super tax concessions has grown by just under 9% on average a year, even faster than the age pension and Medicare, and despite the hammering that the financial crisis inflicted on superannuation earnings.
That growth is set to accelerate. According to the government’s own budget figures last year, the super earnings concession will grow by 46% over the next four years to $27 billion; the concession on employer contributions will grow by 25% — growth rates that put super tax concessions streets ahead of any other contender in the Unsustainability Stakes. The expected cost of super tax concessions in 2017-18 will be $49 billion, according to last year’s figures (we’ll get an update on Tuesday), meaning that they will be second only to the age pension, which will also reach $49 billion that year, from a much higher base.
Why is the age pension, growing more slowly, unsustainable when super tax concessions aren’t? And why are programs like the Disability Support Pension or Newstart or the PBS unsustainable when they’re both much smaller than super tax concessions and growing more slowly? The difference, of course, is that super tax concessions flow much more strongly to high-income earners, whereas low-income earners are the main beneficiaries of Medicare, the PBS, the DSP and the age pension.
Scott Morrison, in selling his pension changes this week, has argued in effect that it is better that the government reduce funding to high-income retirees through more rigorous taper rates for the pension while allowing them to “keep their own money” on super. As Phil Coorey pointed out in the AFR, the net effect ends up being similar for high-income earners. And the comparability extends to who’s funding it — whether their income comes from the pension or from super earnings on which lower tax rates apply than the rest of us pay, high-income retirees are being subsidised by lower-income taxpayers. But the government has decided to simply ignore the much faster growing area of super concessions as part of its plan to appear the party of lower taxes. Like the end of the “age of entitlement”, “unsustainability” doesn’t apply if you’re a mate of the government.
The losers in the long-run are the taxpayers and treasurers of the 2020s, who if no action is taken will be losing money to high-income earners at a rate that will easily eclipse the age pension and any other programs. And all for some cheap partisan advantage from a beleaguered Prime Minister.