Without real reform, Hockey’s budget pain will be for nothing

Peter Costello is right to discredit the government's proposed GP co-payment. Far more rigorous reform in healthcare, aged care and tax is necessary to avoid long-term fiscal catastrophe.

Treasurer Joe Hockey believes the federal government has an overarching plan that will balance the books and avoid a fiscal crisis. Unfortunately, the steps taken in the budget are inadequate and will fail to address our most pressing fiscal challenges. In light of that, the Coalition should take the advice of former Treasurer Peter Costello and dump the $7 GP co-payment.

A lot has been written about the fairness of the budget but relatively little attention has been given to whether it will meet the Coalition’s two fundamental goals: returning the budget to surplus and avoiding a long-term fiscal crisis.

The first goal is relatively easy: drastically cut spending or raise taxes and you’re well on your way. But the second goal is worthy of greater consideration and it’s the goal that has given the Coalition a three-month headache.

The main problem is that addressing our long-term fiscal challenges involves making decisions that will be politically unpopular. The 2014-15 budget barely scratched the surface of necessary reform and yet almost every suggested measure has faced considerable opposition in the Senate.

The long-term sustainability of the budget comes down to three fundamental issues: tax reform, healthcare spending and aged care/pension expenditure. Everything else is just window dressing.

The Productivity Commission estimates that by 2059-60, federal government spending on aged care, pensions and healthcare will rise by 5.7 percentage points of nominal GDP. Based on the current state of our tax system, this will put incredible pressure on the federal budget.

By comparison, spending on education and other measures -- including other types of welfare -- is set to fall relative to nominal GDP.

Graph for Without real reform, Hockey’s budget pain will be for nothing

There is a range of ways to approach this problem and the policies proposed by the Coalition should be measured against how well they address our long-term vulnerabilities. Obviously this measure shouldn’t be the only consideration -- fairness and equity must also be considered -- but it should be a key metric against which the Coalition is judged.

The Coalition chose to introduce a $7 GP co-payment, cut welfare -- primarily impacting younger Australians -- and inflict a temporary tax hike on wealthy Australians.

A co-payment, although unpopular, should have a modest effect on the demand for healthcare spending. But the key question is whether this is desirable. Are everyday Australians well placed to assess their healthcare needs?

With an ageing population, we do need to ease some of the pressure on our health system. A co-payment is one method to achieve that, although it may have some undesirable side-affects, such as people delaying procedures or failing to immunise their children.

A better method is to address inefficiencies within the system. According to the Productivity Commission, there are around 200 procedures in Australian hospitals where the cost can vary from half to around one-and-a-half times the average cost, depending on the hospital undertaking the procedure.

Favouring evidence-based procedures and applying industry best practice would go some way to improving health outcomes and cutting costs. The federal government won’t win any votes from such an approach -- the public might not even notice the improvement -- but it remains the single best way to deal with mounting pressure on our health system.

In that light, the Coalition would do well to take the advice of Costello and cut its losses. As Costello says, “The $7 co-payment … it’s just not going to happen.”

The Coalition has also failed to adequately reform welfare spending, with a focus on measures that will cut spending modestly in the near term but do little to address our long-term vulnerabilities.

Rather than address the real problem facing welfare spending -- an ageing population -- the Coalition decided to slash welfare spending for the unemployed and young families. Based on the high level of unemployment, particularly among younger Australians, this seems a dubious approach.

Furthermore, welfare spending, excluding the age pension, is not really a problem in need of solving.

Greg Jericho at The Guardian put together an excellent article last week which breaks down Australia’s welfare spending. Australia has actually become less welfare dependent over the past decade -- which is not surprising given our strong economic performance -- with only 3 per cent of households receiving a majority of their income from welfare over that period.

The age pension is the main source of welfare dependency and is set to rise significantly as a share of nominal GDP. The federal budget contains few measures to reign in the age pension and does nothing to enhance our superannuation system.

The pension will now be indexed against inflation, which brings it in line with other forms of welfare. But pensioners certainly won’t suffer any of the draconian measures applied to other welfare recipients.

Finally, tax reform remains a pressing issue and the Coalition’s temporary tax hike on wealthy Australians will do nothing to address our long-term fiscal challenge. As with the government’s approach to welfare reform, it is proposing short-term fixes to long-term problems, and such an approach will be found wanting.

Hockey and the federal government might have a plan to avoid a fiscal crisis but their key policy measures fail to address those concerns. At present, they have spent a lot of political capital in pursuit of a range of policies that are largely inadequate. They’d be better served by following Costello’s advice: scrapping the $7 GP co-payment, and reloading for battles that are worth winning.

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