The Tough Choices Needed To Repair The Federal Budget

The choices made in the next two weeks leading to the federal budget will have a long-reaching effect on all in Australia.

Much has been revealed on the underlying principles which will be used to make decisions for the Abbott government’s first budget: greater use of means testing; greater use of co-payments and cost contribution; adoption of ‘user pays’ models; assistance which helps the jobless move to employment and restoration of “work for dole”; and reduction of assistance to industry.

The Mid-year Economic and Fiscal Outlook 2013-14 costed by Treasury predicted the overall deficit to be $107 billion for a four-year period.

The government now talks about $123 billion of deficits and this number will likely change again when the Commission of Audit releases its report on Thursday along with 86 recommendations.

However, even then it may not be clear which recommendations the government will move on.

Treasurer Joe Hockey says it’s a report to government and not one by government.

Some recommendations will be accepted, others rejected and some considered in greater detail.

And those recommendationswon’t be known until budget night.

However, KPMG, in its traditional pre-Federal budget briefing, has selected what it considers to be the 10 tough measures the government needs to look at now and in the future.

The list is a paired down version of the Grattan Institute’s list of 20 choices we need to make to balance the budget.

KPMG’s briefing note:

“Some are clearly politically impossible to achieve. Others could be embraced. The table below provides brief comments on 10 of the 20 measures proposed by the Grattan Institute. These are the areas to watch, not necessarily for Federal Budget night, but over the next 5 years.”

Each of these 10 choices are ‘big’ in the sense that they made a difference of more than $2 billion a year:

Extend GST base to private spending on fresh food, health, education, childcare and water. Cost estimate: $13 billion. Needs to be part of a wider tax reform post next election. There will be regressive elements of such a package which will need to be dealt with through compensation. However, some items are less regressive than might be thought (fresh food). There are also generational equity issues with older Australians spending a greater portion of their income on health.

Raise age pension and super access age to 70. Cost estimate: $12 billion. Note impact outside forward estimates. Likely to have a positive impact on participation rates for older Australians. However, many would consider they are worse off through a delay in retirement, particularly those with physically demanding jobs.

Include owner-occupied housing in the age pension test. Cost estimate: $7 billion. Early introduction possible, but unlikely. Reduce the inequity of those who rent and those who own in retirement. Encourage older people to downsize. Trust planning techniques to get around the rules would need to be countered by an anti-avoidance regime.

Remove payroll tax threshold. Cost estimate: $6 billion. Agreement from States required. While it decreases economic distortions between those below and those above the threshold, it will add to the compliance costs for small business and may have a negative impact on employment.

Reduce transport infrastructure costs through more appropriate projects. Cost estimate: $6 billion. Wider cultural matter impacting Federal and State Governments. Australia’s infrastructure costs are high by international standards for complex reasons. However, it is increasingly believed that we “gold-plate” infrastructure and do not build at the appropriate size or design (tunnels where above ground roads could be built). Determining which infrastructure to invest in is a strongly political process.

Abolish CGT discount. Cost estimate: $5 billion. Needs to be part of wider tax reform. May discourage investment and increase the level of reliance on capital taxation which is already high in Australia. Consideration would need to be given to those who are already negatively geared as a transitional equity measure.

Tax super earnings for over 60s as for others. Cost estimate: $3 billion. Needs to be part of wider tax reform. Likely to impact better off retirees. May lead to increased claims on the Age Pension. This should be considered in the context of wider superannuation review, but bearing in mind that superannuation has been modified significantly in recent times, suggesting a period of stability is appropriate.

Halve the fuel tax credit. Cost estimate: $3 billion. Early introduction possible, but unlikely. Fuel tax credits take the sand out of the gears for business inputs particularly exporters. The impact will be greatest when the cost of producing goods, plus a normal rate of return, is close to world prices. In this circumstance denial of half the fuel tax credit could be quite damaging to miners, particularly in a period of lower commodity prices.

Fuel excise indexation. Cost estimate: $3 billion. Early introduction possible, but unlikely. In 2001, the fuel excise was frozen at approximately 38 cents a litre. As a result it is a diminishing tax base in real terms over time. This measure would uplift fuel excise based on inflation.

Remove negative gearing. Cost estimate: $2 billion. Needs to be part of wider tax reform. Reduce housing as an investment option and increase investment in other assets. Housing prices are likely to fall in the short term. There is a debate about long term impacts and the level of home owners and renters in society. Consideration needs to be given to those that are already negatively gearing to ensure an equitable outcome during a transitional period.

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