The giant money-pot Hockey can't see

For two days, the debate has raged over how gloomy Treasurer Hockey is going to fix the shocking budget mess outlined in the Mid-Year Economic and Fiscal Outlook. What can he slash – or what taxes can he hike – to make a budget surplus appear on the distant horizon?

Reserve Bank boss Glenn Stevens doesn’t think looking for large spending cuts is the right path. He demonstrated his comfort with the current level of federal debt by telling the House of Representatives economics committee yesterday that the “debt dynamics we face” were not reason enough for a program of austerity.

The taciturn Stevens was positively chipper compared with many commentators at present. He sees a falling dollar as a natural way to boost the budget bottom line. Exporting firms in particular will see profits rise, bringing a recovery in corporate tax receipts.

Moreover, as The Australian’s David Uren argues today, the government just can't address the budget deficit only on the spending side. He writes: “It cannot cut its way back to surplus because the gap is too large. Slicing $40 billion or $50 billion off government outlays would be equivalent to abolishing all health spending, the age pension or the Defence Department.”

Interesting that he mentions the defence budget, because within a few years that will be the quantum of money available to fix the budget – but only to the Treasurer and Prime Minister with the political guts to claim it.

To understand where that money is and why it should be considered to help balance the revenue side of the budget, it’s necessary to put two arguments – often made by the same people – side-by-side.

The first relates to private education. The political left often argues that if you take your child out of public education, you should say goodbye to public funding for their school. Fortunately, more centrist thinkers hold sway, and this is not the case.

Defenders of the private system being given the same base level of funding as the public system make one very strong point regarding the tax system. Once you have paid your ‘progressive’ tax rates, to then lose a public benefit (education funding) means you are working for a progressive-progressive tax system.

That is, you’ve paid your higher share of education costs by being in the top tax bracket, so why should you then have to pay again from scratch for your children’s education?

Isn’t it much more transparent to have a debate about what a progressive tax structure is and then just stick to it? If a top tax rate of 42 cents, say, is too high, and a bottom tax rate of, say, 20 per cent too low, then the debate should be about making them 40 and 22, for instance.

At least that way we know who is paying tax, and how fair (or penalising) the tax system is.

‘Progressive-plus’ tax is just confusing and unfair.

Now, let’s apply the same thinking to uncover a giant pot of money for Joe Hockey.

The truth is the progressive tax rates we all (broadly) agree on are undermined dramatically by the current system of superannuation tax concessions.

That is, a high-income worker earning over $180,000 who pays 45 cents for each dollar above that rate, can stash extra money into their super account and pay just 15 cents tax.

The same deal applies to a low-income worker earning between $18,200 and $37,000, and paying 19 cents on the dollar. They can put all their spare dollars into the super account and pay just 15 cents tax.

You don’t have to be an accountant to spot that high earners get a 30c/dollar tax concession, whereas the worker on the bread-line gets only a 4c/dollar concession.

But the situation is made worse by the fact that the low-income worker just doesn’t have any spare dollars to put away.

Moreover, as younger, less-well-paid workers have much longer for their invested super to produce returns, it is they that should be encouraged to save more for retirement – not a 55 year-old, whose super has just a few years to produce a return before they will be forced to draw it down and spend it.

And what does this have to do with the defence budget? Well that’s roughly the size of the tax concessions being doled out – $32 billion this year, rising to $45 billion by 2016.

Alan Kohler's calls this week for income tax to be raised (No crisis, but taxes still need to rise, December 18; Income tax has to go up, December 16) are addressing the right side of the budget – the leaky sieve known as ‘revenue’.

But the biggest leak, super tax concessions, turns our transparent, progressive tax scale into a joke. It’s a ‘progressive-minus’ tax scale.

The only thing stopping Hockey stemming this massive leak is the fact that older voters, who get the greatest benefit from laundering their income through this system just before retirement, are most likely to vote for the Coalition.

That’s where political leadership comes in. 

The health budget is ballooning year after year – one of the reasons that Hockey said “doing nothing is not an option” for the budget.

A political leader as skilled as John Howard would make this connection in the minds of older voters. You can’t have your super concessions and current levels of health funding.

But is Hockey or Abbott up to the job of explaining that to the electorate and reclaiming at least part of those concessions to shore up the budget?

We shall see. But Hockey really did get one thing right – doing nothing isn’t an option.