Here's why you should listen next time an Australian politician says the tax system needs reform

Photo: Scott Morrison MP/ Facebook.

Tax reform is something Australians need to understand and needs to happen if the nation is going to retain some semblance of its current standard of living as the population ages and takes up an increasing share of government revenue.

That’s the message former Treasury Secretary, and current NAB director, Ken Henry told Leigh Sales on the ABC’s 7.30 last night.

Asked what message he’d give prime minister Malcolm Turnbull and treasurer Scott Morrison, Henry endorsed their more optimistic outlook but added “it’s a good time to be optimistic, because that’s what’s going to be required. The challenges are actually quite immense.”

When pressed on the challenges, Henry identified the slow growth of living standards in the future as one issue. However he spent most of his time explaining the fiscal position and what’s driving its deterioration. And, the need for tax reform.

He said that the government’s $40 billion deficit, which represents 2.5% of GDP, is actually a pretty poor performance.

“This is many years after the Global Financial Crisis has passed and we have, of course, for many years had the tailwinds of strong Asian growth. So that’s an issue and we haven’t demonstrated a capacity to deal with it,” Henry said.

That’s important because Henry says the 2002 Intergenerational report “said that without significant changes in government policies, in particular to boost labour productivity and also to boost participation in the workforce, the budget deficit was going to grow – well, actually, at the time it was budget balance – we said a deficit of five per cent of gross domestic product is going to emerge over the next 40 decades.”

In 2015 terms that 5% equates to $80 billion a year. To put that in context Henry says:

That’s about $70 a week for every man, woman and child in this country. And the reason I put it in those terms is because if we don’t do something, we are going to have to raise taxes by that much over the next several decades in order to fund that increase in government spending that is being driven largely by demographics.

Cue the intergenerational warfare.

But as John Daley, the Grattan Institute’s CEO, highlighted at the Customer Owned Banking conference in Darwin earlier this week, older Australians have captured the lion’s share of the benefits of the economic boom of the past decade and the outlook for wages growth and living standards of younger Australians is far less positive than it was for their parents at the same age.

Henry said this revenue shortfall “as a consequence of population ageing and so on, which is another five percentage points of gross domestic product. It’s on top – double – what we’re presently confronting.”

He added:

We don’t have the tax system to be able to increase revenue by that much. Rather, we have a tax system which apparently is generating a smaller proportion of gross domestic product as government revenue, as the years go by.

The task of tax reform now is incredibly, incredibly difficult but also incredibly, incredibly important.

Henry said we are going to have to embrace reform and crucially highlighted that “this tax reform package is going to have to be revenue positive, not revenue negative. It’s going to have to boost the budget surplus. We’ve never done this before.”

So as uncomfortable as it might be, for the good of the nation and the next generation, the government and Australians are going to have to have a conversation about tax reform and we are going to have to agree to pay more tax, the former treasury boss says.

You can watch the full interview here.

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