Audit puts axe in PM's hand

Radical reforms to health and education will be outlined today in a searing assessment of federal finances that also calls for the family home to be included in the asset test for the age pension.

Action on the asset test is a key recommendation in a far-reaching review that identifies huge cuts to “middle-class welfare” to prevent budget spending climbing to $690 billion within a ­decade.

Tony Abbott will also be urged to scrap federal agencies and ­delegate more services to the states as part of a blueprint from his commission of audit that is ­already sparking resistance from key cabinet ministers.

The closely held report stops short of calling for the dismantling of federal health and education departments but warns of a massive cost to taxpayers from the duplicated effort between Canberra and the states.

In a deeply controversial finding, the commission identifies billions of dollars in savings from including the family home in the eligibility test for the age pension, arguing it is unfair for ordinary workers to subsidise pensions for the wealthy.

The Australian has learned that senior ministers have already dismissed the idea of including the family home in the assets test as politically impossible, forcing them to search for savings and revenue measures elsewhere.

While the report does not recommend an end to negative gearing of investment property or curbs on superannuation tax breaks, the government has also rejected those reform options in the May 13 federal budget.

Cabinet ministers have instead decided on deep cuts to benefits that go to those on middle incomes, but have stopped short of the most difficult audit recommendations in areas such as the disability support pension.

The budget challenge is set out in a five-volume audit report that projects an increase in federal spending to $690bn in 2023-24 — equivalent to 26.5 per cent of GDP and the highest level since 1986 — without drastic cuts.

The commission, chaired by former Business Council of Australia president Tony Shepherd, maps out a path to repair the budget by selling federal assets to pay down debt, cutting into benefits and retreating from non-essential services.

Behind the 86 recommendations is a broad criticism of the inexorable growth of the federal bureaucracy to duplicate state functions, adding to the burden on taxpayers and slowing the economy.

The Education Department should be scaled back to let states run schools with less intervention, although the national curriculum and national testing should be retained.

Health administration should be left to the states wherever possible so that scarce funds could be targeted at frontline services, the report suggests.

Spending on indigenous programs was also being duplicated and could be left to the states in some areas, it says.

Those findings have triggered concerns among some federal ministers but have struck a chord with Mr Abbott, who has countered calls for more spending by noting that the commonwealth employs no teachers and runs no hospitals.

As expected, the report supports a wider GST to help ease financial pressure on the states but this is to be referred to the federal government’s tax inquiry and may be put to voters at the 2016 election.

Action on the duplication between Canberra and the states are likely to be referred to the Prime Minister’s white paper on the state of the federation.

A tax hike is also certain as senior ministers lock-in an increase in the tax rate for those earning $80,000 or more on the grounds there is no other way to ensure equity in the overall budget package.

Wealthy Australians who do not receive government benefits could not be asked to “share the burden” by losing payments, The Australian was told, so the best way to be fair was to add a 1 per cent tax on earnings from $80,000 to $180,000 and a 2 per cent tax on earnings above $180,000. A worker on $100,000 will pay $200 a year in extra tax, or 1 per cent of earnings over the $80,000 threshold.

A worker on $200,000 will pay an extra $1400 in tax: 1 per cent on the first $100,000 in earnings over the $80,000 threshold and then 2 per cent on the remaining $20,000 above that level.

Mr Abbott emphasised the need for fairness as he confirmed a backdown on his signature paid parental leave policy to reduce its income threshold from $150,000 to $100,000.

The scheme will not be means-tested but no parent will get more than $50,000 for 26 weeks of leave, the amount due to a worker on $100,000.

“A lot of things have to be adjusted and everyone is going to have to do his or her bit to deal with the problem that we have inherited — to deal with the debt and deficit mess that Labor left this country with,” Mr Abbott said yesterday.

“We were elected to fix a problem. Fix it we will, but above all else we’ve got to do it in ways that are fair and that’s what the government will ensure in these final 10 days or so of budget preparations.”

Bill Shorten used the backdown to accuse Mr Abbott of inconsistency while maintaining the wider attack on the government for planning an expensive parental leave scheme while also lifting tax rates.

“Australians know that giving tens of thousands of dollars to people who don’t need tens of thousands of dollars of taxpayer money, and at the same time proposing a new tax for the hardworking middle class of Australia, is a terrible idea,” Mr Shorten said.

“So in the last 24 hours the Prime Minister’s broken his promises, he’s proven he is not a man of his convictions and he certainly hasn’t walked away from his dumb, crazy idea to tax millions of hard working Australians.”

The Australian was told yesterday the tax increase has been decided in principle, although the details were yet to be finalised. Some cabinet ministers insisted they were taken by surprise when news of the idea leaked on Sunday.

The tax hike will raise about $2.5bn a year and will be roughly equivalent to the removal of benefits to those on lower incomes.

Limiting the measure to those on $180,000 or more would only raise about $1.3bn a year.

While Mr Shorten has vowed to vote against the tax increase, his position could mean he is left defending lower taxes for millionaires and many others who earn far more than Australia’s average full-time income, which is about $75,000 a year.