Funding Costello's future

by Michelle Grattan

May 11, 2005

If this is indeed Peter Costello's last budget, he's going out on one that, to reprise Paul Keating, brings home the bacon. He's smiling on taxpayers; lecturing single mums (for the economy's and their own good); and showing us all that he can be simultaneously reformer and giveaway man.

It is a good budget for a treasurer with aspirations: big, packed with measures, going well beyond election promises. It's diverse, with some hard-to-sell aspects but a lot that's appealing.

Costello has brought down the ultimate counter-intuitive budget. The usual pattern is to have the hand-outs before the election and the belt-tightening after it. At least in part, this is an election budget without the election.

Costello (and John Howard, of course, because he has told us he owns these budgets too) is throwing around money after the election with almost the enthusiasm the PM displayed in his pre-election spending. "It's great to be able to cut tax," Costello said, but assured us it was only after doing the right economic things.

Far from Labor's dire warnings that the $66 billion pre-poll spree would be unsustainable, we're getting another instalment. It's made possible by the unexpectedly big revenue growth - brought about by the best terms of trade for three decades, booming company tax collections flowing from strong profits, and very healthy personal income tax receipts.

This is despite economic growth slowing to 2 per cent this financial year, rising to only 3 per cent in 2005-06. It is not entirely clear how Treasury failed to anticipate this surge of money - it must be relieved its error was on the conservative side.

Once the Government knew it would be awash with money, tax cuts followed inevitably. John Howard always said any leftover funds would be given back to taxpayers. The pressure from business and back bench made that a certainty, although only a few months ago it looked an impossibility.

The numbers are staggering. The Government is able to provide $21.7 billion in personal income tax cuts over four years, $2.5 billion to abolish the super surcharge, and $1.8 billion tax cuts for business - all this while still expecting surpluses of about $8 billion to $9 billion annually over the forward estimates.

The dramatic change in outlook is shown by one comparison: last budget Treasury estimated the surplus for 2005-06 would be $1.6 billion; now it's anticipated at nearly $9 billion.

The tax relief is being sold by Costello as reform that takes Australia's tax system from below the OECD average to better than average. This, combined with the business changes, undercuts party and business pressure, although the demands will never be satisfied.

Importantly, the tax relief allows the Government to keep to its goal, operating since the GST package, that more than 80 per cent of taxpayers will continue to face a top marginal tax rate of 30 per cent or less. It can also boast that by 2006-07 the top marginal rate will apply to only 3 per cent of taxpayers.

Costello was always determined that welfare reform should be a centrepiece of this budget. The Government makes significant progress, although stepping back from its earlier, more ambitious proposals. While critics will complain, single mothers and new applicants for the disability support pension are given fair notice of a tougher, work-oriented regime. There is total "grandfathering" for existing DSP recipients; single mothers at present on the parenting payment will stay on it (rather than going to the dole) if they can't get work. A lot is being spent on incentives. It will be eight years before savings from the changes outweigh the spending accompanying them.

Of course, some people will feel prodded, but if you think it is important to get more people into the workforce, that is inevitable. Low unemployment has enabled the Government to move on welfare. The big question, however, is still how many of these people will actually get jobs. The Government hopes to move 190,000 into work by 2008-09. Costello admits the measures could increase unemployment. One reason the Government didn't crack down harder was it was advised many people would simply go into the dole queue.

Depending on where they're coming from, critics will say that the Government went too far or not far enough on welfare, but it was always going to be a balancing act. Others will say Costello has failed to do enough on skills and neglected infrastructure. The Government, however, would dispute the claimed crises.

One budget mystery is why, given its money, the Government decided to trash its election promise (and Health Minister) and cut the Medicare safety net. Costello explains it as sustaining an expanding health budget for an ageing population, but it was a macho gesture that cost the Government a lot of credibility. The ageing population and Australia's need to insulate against a squeezed workforce and increasing proportion of older people continues a theme Costello began with his intergenerational report in 2002's budget. "This is a budget for the future," Costello declared.

[...]

freediver wrote on Jul 25^th, 2010 at 11:10am:


Whilst I agree that it is not a measure, I would also claim that my intend in my post was not to measure, but to identify trends... which is the intent of the ABS table. You are therefore adopting a straw-man approach by identifying that which was not intended in my post.

You speak of an opposite trend to that which the ABS table identifies as 'Equivalised Disposable Household Income'. You need to clarify that and provide evidence to support that clarification.

||In the last four decades all the tax-changes have been for the benefit of the top 20% of the population.
e.g.
1)Death Duty abolished in the 1970’s  

EVERYONE DIES - not just 20%
The only fair thing in life.

2)Estate Duty abolished 1979
The only good thing is, the dying cannot take their riches into the grave.


ALMOST EVERYONE leaves an estate - not just 20%
The word almost is very true.

3)Gift Duty abolished  1979

DO YOU REALLY WANT THAT INSANE TAX BACK?
Was fairer than most rich people would admit.

4) Probate abolished in the 1970-1980’s in all states

BRING BACK DEATH TAXES!!! YAY!  are you serious?
yes, very serious

5)Huge tax concessions for super.

BECAUSE IT IS IMPORTANT THAT THE GOVT BE THE SOLE PROCIDER FOR RETIRMENT and ensure that the budget is unable to cope with that drain. or you could be clever and promote retirment savings with incentives! guess which one we chose?
The government gives the very rich as much in tax concessions as it pays out on total age-pension

6) Last but not least, now tax-free super for the over sixties, if paid from a taxed super fund.

DONT FORGET TO BE A REAL SCUMBAG and make it harder for our retirees or near retirees.
Before I would use words like that, I would look in the mirror.

7)Tax rates have progressively been reduced

HOW sad! we have to pay less tax! I personally am devastated that my tax has been reduced at the same time as australia has gotten richer. TAX ME HARDER!!!
Most of the riches have gone to the upper 20%

8)Dividend imputation introduced. When the company pays 30% tax and the shareholders receive the imputation credit, it is almost a zero numbers game, eg: company pays tax and the Government returns most, if not all back, to the shareholders.
How many countries have Dividend imputation?
The UK has recently abolished it.

DIVIDEND IMPUTATION is an extremely equitable tax regime as it ensures that earnings are taxed ONCE. surely that is not only fair but mandatory. so your alternative is that the company pays 30% on the profit and then the receipient pays tax on it again??? why not just confiscate profit altogether and then we can stand araound and sing marxist songs in the Workers Paradise?
Yes, the company pays the tax and the government returns it back to the shareholder.
By the way I do hold some shares.

||

longweekend58 wrote on Jul 24^th, 2010 at 5:58pm:

And if you have a Self Managed Super Fund with a million dollars worth of shares, and it is a so called taxed, and one is over sixty, he/she pays no tax and gets a cheque for the dic=vidend imputation

Retirees elect a government for a bigger house

    * Mike Steketee
    * From: The Australian
    * March 20, 2010 12:00AM
HERE'S a question for an election year: what's government for, anyway?

To judge by the tenor of the public debate, it is to look after those who can look after themselves. To misquote John F. Kennedy, ask not what you can do for yourself, but what government can do for you.

People worry that their superannuation savings will not be adequate. Past generations expected to rely on the age pension in retirement, together with a few assets and, if lucky, a modest superannuation payout, often taken as a lump sum to clear the mortgage or go on a trip. Not any more. Just as we cannot live in a house that is not three times as large as that of our parents, we must have a retirement income just as large as our previous salary, and expect the government to provide this.

Discussion about superannuation typically is framed in terms of the "limits" set by government. The complaint is that the 9 per cent of income required to be taken in compulsory superannuation is too low.

So are the extra voluntary contributions that attract a tax concession. As Michael Dwyer, head of First State Super, said in last week's Inquirer cover story, many people, particularly women, want to catch up on their super contributions in later years. "They want to put as much money as they can into super because they know they have nowhere near enough to retire on, but they can't."

Here's a tip: they can. Dwyer's problem is that last year's budget reduced the voluntary contributions, taxed at only 15 per cent, that those under 50 can put into super from $50,000 a year to $25,000, and for those over 50 from $100,000 to $50,000. But there is nothing to stop people putting in as much additional money as they like. They just have to pay normal tax on it. It is not as though the limits on tax concessions are stingy. Who has a spare $25,000 to $50,000 a year lying around? The 5 per cent of taxpayers on incomes above $100,000 in 2005-06 made 24 per cent of the concessional contributions to superannuation, according to a paper released last year by the Henry tax review and, because they receive the biggest deductions, they sucked up 37 per cent of the total tax concessions.

Projecting forward to this financial year, Treasury estimates that those on incomes between $140,000 and $200,000 made an average contribution to superannuation of about 15 per cent -- that is, six percentage points above the compulsory level. And why wouldn't they when they have to pay only 15 per cent on the contributions rather than a marginal tax rate of 41.5 per cent or 46.5 per cent.

A common assumption is that these tax concessions pay for themselves through savings on the age pension. They don't, not by a long shot, thanks particularly to how far up the income scale the Howard government extended the pension. The proportion of people over 65 receiving the pension is expected to hardly fall from the present 80 per cent over the next 40 years. The only real change is that some will move from a full to a part-pension.

Paul Keating, who introduced compulsory superannuation when he was treasurer, this week called the halving of the cap on voluntary contributions that receive a tax break as a "dreadful decision", "shocking" and, in case his Radio National audience missed the point "bad, b-a-d, bad". His aspiration is to increase what he says is already the fourth largest pool of savings in the world, thereby reducing our reliance on overseas borrowings. It was the government's job, he said, to raise confidence in the superannuation system. Wasn't the tax benefit generous, asked Fran Kelly. "It's not generous enough." replied Keating, because to live as well in retirement as when working required 70 per cent of previous income and "what this system is giving is 40 per cent".

No it's not. Treasury calculates that, for a person who works for 35 years, the age pension and 9 per cent superannuation provide a so-called replacement rate -- retirement spending power compared with previous income -- of about 75 per cent for those who were on three quarters of average earnings and falling to 40 per cent on 2 times average earnings. But that only covers the minimum compulsory superannuation contribution. Adding the average additional contributions that employees make through salary sacrifice lifts the replacement rate slightly to 80 per cent for the first group, while for the second it leaps to 95 per cent.

Still, Keating demands that the compulsory superannuation level be raised from 9 per cent to 12 per cent. Australia has always borrowed heavily overseas to finance our capital requirements. It might be nice if we could rely more on domestic savings, but at what cost? Tax concessions for superannuation cost $24 billion last financial year, are projected to increase to $32bn in four year, and will keep rising steeply as the population ages.