The true cost of increasing super

TALK about letting the cat, well-fed at that, out of the bag.

In an unexpected burst of candidness, Assistant Treasurer Bill Shorten has admitted the increase in the compulsory super guarantee levy paid by bosses might come out of wages.

That's kind of a relief because the consequences of paying it any other way could be awful.

More super will also be anti-inflationary, though he lost me there. When the guarantee was introduced in the '90s prices didn't go up, his argument goes, because more went into super, so less was spent.

He's half right. The unions did sacrifice wage rises for super, which kept a rein on prices by holding down labour costs, as did the rising productivity from the economic reforms of the time such as slashing tariffs, but I haven't heard them volunteering to do it again. Maybe I haven't been paying attention.

Has anybody asked the Qantas unions? I don't think so.

As soon as the extra super becomes law, no red-blooded or, if you prefer, bloody minded, union is going to deduct it from a wage claim. There's no incentive to ask for less when you're getting something you're entitled to anyway.

The truth is that bosses will pay the increase from 9 per cent of your salary to 12 per cent by 2020, not the mining tax or anything else.

So the question is whether they pass it down as lower wage increases and fewer jobs, or up as higher prices.

The answer will depend on the state of the economy at the time.

If it's weak, as seems likely the way the European debt crisis is going, fingers crossed the result will be lower wage rises rather than fewer jobs. As always in economics, squeeze here and it pops up there.

Indeed, on the government's logic we'd be better off not getting a pay rise at all because then we'd spend less, prices would drop and we could afford more.

Sure.

But there's another side to the guarantee increase that could prove even more damaging. It will cost the government $2.4 billion over three years - and who knows how much by 2020.

Hang on, how can that be when bosses will be paying?

Well, the government loses some loot, too, because it will only be collecting tax at the rate of 15 per cent instead of up to 46.5 per cent if you got it in your pay.

This is a tax cut that you never see.

That hole in the budget will supposedly be plugged by the mining resources tax, which, incredibly, is costing more than it will raise. Besides, it's still money that can't be used for reducing the deficit.

Thankfully, the government seems determined in sticking to its promise of turning the budget deficit into a surplus next year, despite being given an easy way out by business groups worried about the jolt to the economy of cutbacks.

It sounds like a vicious circle. The reason the deficit is getting bigger is weaker economic growth.

The more the government cuts spending or increases taxes, the weaker the economy will be.

But it ignores one thing. As the GFC proved, a falling dollar would come to the rescue.

More to the point, the European debt crisis shows perception is everything.

It's not as if we're debt innocents, either. After all, we're in the top 20 of foreign-debt owing countries.

At least ours has been run up by banks rather than spendthrift governments but, even so, they've used it to finance some of the world's most expensive real estate.

And we have to make room for the capital-intensive mining mega investment boom.

There's a global fight for funds and cash-strapped markets aren't going to lend to Australia if there's any hint of fiscal laxity.

That's why the super increase will come at the cost of either future wages or jobs and, eventually, a horror budget.