Saturday 26 August 2023

The Intergenerational Report illuminates some serious equity and tax reform issues that are going to blow up.

Extract from ABC News 

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Politics sometimes contains what might be described as blank spots: policy problems that everybody tut-tuts over but never suggests doing something obvious to fix.

Take intergenerational equity. It's been back in the news again this week (if it ever actually went away) because of the release of the latest Intergenerational Report (IGR).

Former Treasury secretary Ken Henry on Friday railed against what he called the "intergenerational tragedy" of the fact that the IGR threw into sharp relief that future federal governments' reliance on income tax was going to become overwhelming.

"It's the young people who are going to be the workers of the future," he told ABC RN.

"People who are weighed down with HECS debt, who are going to have to repay a mountain of public debt, who are dealing with the consequences of climate change … [and] who are facing diminishing prospects of ever being able to afford a home of their own.

"These poor buggers are also going to be the ones who are facing ever-increasing average rates of income tax."

He's hardly the first person to note the gross intergenerational inequity in the way our system now operates, whether that be because of HECS debts, housing affordability or likely tax bills.

But have you noticed how no one seems to ever say: "Gee, maybe we should be trying to do something to fix the intergenerational inequity? Maybe there is something we could be doing in the tax system to shift the dial?"

This should be a significant issue, you would think, not just in terms of equity but tax system efficiency, given the distortions the current tax system encourages.

We're getting older, more reliant on government services

Even as we talk about how the future of government budgets is shaped by the fact we are all getting older and more reliant on government services, the fact that we have a system where retirees drawing down on super pay no tax of any description gets blithely overlooked.

It's not just that they aren't taxed on their super earnings. That means they aren't taxed as much on their other income either, since their taxable income is so low to start with.

That includes how much capital gains tax they might pay on an investment property. Why would you sell an investment property (if you are in a position to hold on to it) before you retired, if the alternative was to only have to pay CGT when you are on a much lower marginal tax rate?

(And we won't even start on the various tax issues around self-managed retirement funds, here.)

But, just saying, there seems to be something politically gross about the contrast now between old people paying little or no tax, particularly given the call they might be making on government services, and young people being overburdened with tax.

One of the findings of the latest IGR is that superannuation has reduced the national pension bill — which is good, because that was the original intent of the policy. So it isn't necessarily super that is the problem here.

But it is just a pointer to how — however reluctant politicians may currently be to address tax reform — there are some glaring issues out there that are inevitably going to blow up, particularly as the demographics of the electorate — and their views on a wide range of issues — morph away from the baby boomers who have done so well out of political largesse over the past couple of decades.

Australia's population set to age significantly in coming decades(Tom Lowrey)

A resetting of the discussion at big picture levels

The IGR's observations about the success of superannuation policy is just one of the things worth noting about what has happened in the 20-odd years since the first IGR, in addition to anything it might say about where things are headed.

For example, the first IGR in 2002 foreshadowed total government spending would be of the order of 34 per cent of GDP by around 2040, whereas it has in fact tracked pretty flat and is now expected to be only slightly higher than current levels of about 26 per cent by that time.

That suggests some considerable spending reform in the intervening period in areas like the cost of the medical and pharmaceutical benefits schedules that have curbed previously anticipated blowouts.

The IGR says that "spending on health and age pensions as a share of GDP was lower in 2021–22 than projected at the time of the 2002 IGR as a result of non-age related costs of health being lower than expected and having a younger population than projected, but payments like aged care were higher".

However, "programs like the National Disability Insurance Scheme were not anticipated in the 2002 IGR and have significantly affected payments projections".

But it is at the biggest of big picture levels that the 2023 intergenerational report should really be resetting the discussion, not just the question of how we divvy up the taxing and spending between generations, or what the relative share of income tax to other taxes will be.

White Australia's economic history has been built on growth — surges of growth driven by massive inflows of people and money going back to 1788. The blips on the horizon have really only come about when we have temporarily choked on it all — as we did in the 1980s and for that matter in the 1990s.

But what this latest report is telling us is that the economy will be slowing for the next 40 years, as will our population growth.

Economic growth is expected to average just 2.2 per cent a year in real terms compared by 3.1 per cent over the past 40 years.

The transformation of the resources sector

Australia's population is also projected to grow more slowly over the next 40 years — at an average of 1.1 per cent a year, compared to 1.4 per cent over the past 40 years, with the population projected to reach 40.5 million in 2062-63.

Migration will continue to contribute to population growth but is projected to fall as a share of the population.

On top of all that, the mining investment boom of the early 2000s has passed as the Chinese economy has matured and we are set for a profound change in our resources sector. We always seem to have something to dig out of the ground — now it is rare earths.

A large truck carrying iron ore drives up a hill
The decline of traditional big mining commodities is yet another huge shift about to happen in Australia's economy.(ABC News: Michelle Stanley)

But the transformation of the resources sector — and the decline of traditional big mining commodities — is yet another huge shift about to happen in the economy.

Think for a moment about how these changes play on both the economic and political landscape: how housing, for a rapidly growing population, has acted as a driver of activity in the economy; about how the big miners have been such powerful political players in debates like climate change, as just two examples.

The IGR paints a picture of an Australian landscape working in a very different way to ones we have seen in the past.

There is no room for blank spots.

Laura Tingle is 7.30's chief political correspondent.

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