by Ben Spies-Butcher and Adam Stebbing
Each election year both sides of politics make their claims for economic responsibility. In 2010 the Coalition focused on government debt, while Labor placed a self-imposed limit on new public spending. Many people may not realise that Australia’s debt is already very low by international standards, and our taxes are below those in most rich countries.
Despite this, there is still plenty of room to improve the federal government’s financial position. But we heard little this election about the most wasteful and inequitable government spending. We could be saving billions each year, while providing greater support to those on low incomes and reducing the cost of living – but to do so will require considerable political courage.
In this chapter we examine three of the most important areas of social spending – retirement incomes, housing and childcare. We also put forward some general rules for getting better value for public money: increasing the accountability of public spending; making funding direct to service providers; and simplifying consumer choice.
The story so far
Getting value for our tax dollars is important to all citizens. But public debate on this issue is often based on ideology and double-speak. While governments from both sides of politics talk of cutting spending, they have consistently increased backdoor tax rebates and loopholes that give most to rich. In housing, superannuation and elsewhere our governments now spend as much through complex and unfair tax schemes as they do in direct support through more targeted spending initiatives.
While the Howard Government claimed fiscal responsibility, it consistently increased spending in some of the least efficient, but most electorally beneficial ways. Free market think tanks called this ‘big government conservatism’, as spending on the baby bonus, private schools, private health insurance and families all increased in ways that maximised the cash paid to the (often well off) individual, but minimised the level of services delivered per government dollar.
Labor has slowly begun to wind back some of the worst excesses. But in many areas it has continued to build on dodgy foundations. It has added to the inefficient childcare rebate, rather than taking the opportunity for genuine reform. It promises to extend superannuation in a way that guarantees even more public support for those on the highest incomes, rather than reforming the system to genuinely support low and middle income workers. And it has left in place tens of billions in tax concessions that actively undermine broader economic objectives in housing policy. By making public spending simpler, more direct and more accountable there is significant scope for savings.
Areas needing reform
1. Pensions and retirement incomes
The retirement incomes system has particularly wide ramifications for the value we get from our public money because the government offers considerable financial support to both its major arms – the aged pension and superannuation. While Australia is well positioned to deal with the effects of an ageing population, it does increase the urgency of ensuring that our policy settings are both equitable and efficient. The government has made some progress on retirement incomes policy, but much more remains to be done.
Current government policy
The age pension is the major retirement income policy, providing at least some assistance to 78 per cent of the population aged 65 years and over in 20081. Funded out of tax revenue, the pension cost around $27 billion in 2008-092. Long overdue, the government increased the weekly full rate of the age pension by $32.49 for singles and $10.14 for couples3. It also simplified pension allowances, by incorporating the GST pension supplement, as well as the pharmaceutical, utilities and telephone allowances into a sole pension supplement 4.
The government has placed additional pressures on workers, particularly those who undertake manual work, by increasing the qualifying age for the pension to 67 years by 20205, a measure that is difficult to justify on financial or equity grounds.
Superannuation provides a secondary source of retirement income to more than 90 per cent of employees6. It is supported by the government through the Superannuation Guarantee (SG) that directs nine per cent of wages into super and by generous but extremely unfair tax concessions that reduced tax revenue by $24 billion in 2008-097– costing almost as much as the age pension.
These concessions reduce the fiscal sustainability of the Budget. They cost the Budget two per cent of GDP each year, but are expected to reduce spending on the pension by only 0.2 percent of GDP in 2050 – meaning we spend $1 of public money on super for every 10c we expect to save on the pension.
The government has taken small, but important, steps to reduce the inequities of the super tax concessions: it reduced the annual contribution limits that the tax concession applies to $25,000 for those younger than 50 years and $50,000 for those who are older8; and it has improved their overall equity with its proposed 15 per cent rebate (up to a ceiling of $500) for those with annual incomes under $37,0009. And, improving fairness and simplicity, the government also banned commissions for financial advisors and required funds to provide a low-cost default super option to consumers10.
However, the government also reduced the benefits that low-income earners receive from the co-contribution super scheme, lowering the matching rate from 150 per cent to 100 per cent from 2009 to 201211. And, the proposal to increase the Superannuation Guarantee to 12 per cent creates greater inequity because it will amplify the problems already present in concessional tax arrangements. Thus, it will effectively increase support to high-income earners.
The Inequity of the Tax Concession for Superannuation Guarantee Contributions
In its reply to the Henry Tax Review, the government announced that it would increase the Superannuation Guarantee from nine to 12 per cent of wages and introduce a 15 per cent rebate for the super contributions of those earning less than $37,000 p.a. Table 1 compares the current tax arrangements with those proposed by the government.
Table 1. The Current Tax Concession for Superannuation Guarantee Contributions and the Rudd-Gillard Government’s Proposal
Under the current tax arrangements, individuals pay a flat rate 15 per cent tax on their super contributions; tax payers earning $35,000 p.a. receive no benefit from this concession, while those earning $250,000 p.a. receive $6,750 per annum of government assistance. This concession is inequitable in both monetary and proportional terms. Although they provide some benefit to lower income-earners, the government’s proposals maintain the inequity of the existing tax concession and, by increasing the Superannuation Guarantee to 12 per cent, boost the monetary benefit received by those on the highest incomes.
Make Super Fair
The super tax concessions’ fairness could be enhanced by heeding advice that the Rudd-Gillard Government received from a range of sources, including the proposals of the Henry Review and our paper for the Centre for Policy Development12 found in Table 2. While the Henry Review recommended a flat rate 20 per cent tax discount for super contributions up to annual limits, our Centre for Policy Development report proposed a 20 per cent rebate for those earning up to $80,000, with a taper that reduced the rate of the rebate by one per cent for each additional $1,000 of income. Both of these proposals, particularly that of the CPD report, would improve the equity of the super tax concessions.
Table 2. Proposals for Reforming the Tax Concession for Super Contributions
|Henry Tax Review||CPD Proposal|
|Income ($)||Marginal Tax Rate||Tax Discount (%)||Tax Discount ($)||Tax Discount (%)||Tax Discount ($)|
|60 000||30||20||1 080||20||1 080|
|100 000||38||20||1 800||0||0|
|250 000||45||20||4 500||0||0|
|500 000||45||20||9 000||0||0|
Support for super avoids many budgetary oversights and long-term projections, such as the Intergenerational Reports, making it harder to assess the value the public is getting for its money. Concessions given to superannuation should come under the same scrutiny as public spending on the pension.
Using savings for nation building
One aim of super is to enhance national savings. If that is the goal and tens of billions of public dollars are spent on the effort, it is reasonable that a more direct link be made by requiring super funds to make a small investment in government bonds to make funds more available for public infrastructure and nation building.
Making super simple
A key problem with super for workers is its complexity. Creating a default public super fund would help people manage choice, particularly for young and casual workers who move between jobs and industries.
Housing policy has one of the largest impacts on the federal budget of any social service. However, its impact is often overlooked because the bulk of support comes through concessional tax arrangements, similar to those supporting superannuation. In the past support for both public housing and home ownership have broadly met the needs of the community. But gradually spending on public and affordable housing has decreased while support for purchase by owners and investors has increased. The result is rising house prices, leaving many behind.
There are now 105,000 homeless in Australia. Another 445,000 low-income families are in housing stress in the private rental market. High house prices and rising interest rates mean hundreds of thousands of low-income owner-occupiers are also in housing stress13.
Ironically, it now appears that government spending on programs meant to improve affordability (like the First Home Owners Grant) is actually exacerbating the problem. Rather than increasing the supply of housing as population increases, these types of policies tend to increase the price of existing housing. The limitations of current housing policy are increasingly accepted across the economic community, but there are significant political obstacles to reform. The first-term Labor Government took some steps in the right direction.
Current government policy
A long-term lack of funding for social housing has meant increasing need to subsidise private renters. These subsidies now cost $2.6 billion per year14. There is no direct means test – renters who qualify for other government payments can also get rent allowance – but this means that some low-income earners fall through the cracks. The level of assistance also does not account for higher rents in cities like Sydney and Melbourne.
The stimulus package began to address this by investing $6.6 billion to building 20,000 new units of social and defence housing15. This is a significant commitment, but still only a small step towards reducing the 230,000 waiting list for public housing16. The National Rental Affordability Scheme also offers greater rental stock by encouraging institutional investors like super funds to build affordable housing.
Helping first home buyers
Both the past Coalition and the Rudd-Gillard Government introduced new schemes to support first home buyers. Initially these were poorly targeted, giving most assistance to the wealthiest. Labor has made some modest improvements. It amended its own First Home Savers Scheme, and the First Home Owners Grant, to better target these payments. Even so, these programs do relatively little to benefit low-income earners.
The extra support provided by the government to home buyers has been far from efficient. While incentives for new housing can stimulate building, the grant also goes to those buying existing housing, which tends to simply inflate prices. Indeed this appears to have been the intended effect of the stimulus measures, encouraging first home buyers into the market to stabilise falling house prices. However, it has left many with large mortgages as interest rates now increase, prices rise and investors return to crowd out new entrants.
Billions in tax concessions
The budget provides $40 billion a year to existing home owners in concessional tax treatment, primarily through the exemption on capital gains 17. This encourages home owners to spend more on renovation than they otherwise might and to retain larger houses than they need – pushing up house prices for everyone. The government then spends an additional $5 billion on negative gearing18, and billions more in the concessional treatment of capital gains (although this is not properly reported), for investors. Negative gearing has been shown to push up house prices for all19.
So the government is now backing every buyer at an auction, funnelling money to new home buyers, existing owner-occupiers and investors, spending tens of billions each year and yet the effect of all this is basically the opposite of the stated goal of improving housing affordability. All of these measures have a fatal weakness: they compete against other government schemes and give even more to the very buyers that new entrants are competing against.
There is increasing recognition that this situation is unsustainable. A 2004 Productivity Commission report identified the interaction of negative gearing and the capital gains tax concessions as potentially promoting a the boom-bust cycle in the property market20. A number of economists have identified the unsustainable nature of household debt, almost all of which is housing debt generated from rising property prices21. And the Henry Review recommended wide-ranging reforms to reduce the preferential treatment of housing in the tax system to allow investment to flow more evenly through the economy22.
Addressing housing affordability requires an increase in supply. A series of reports have shown that the most cost-effective way to do this is through direct government investment in social housing (see Industry Commission 1993). The stimulus has been a good first step, but more needs to be done. Likewise, any assistance given to owners or investors needs to be targeted to those building or buying new stock to reduce the inflationary effects of government assistance.
In the short term support for the private rental market must remain. But this assistance should be better targeted to those most in need. This requires changing the means test for rental assistance, and restricting tax concessions to landlords who provide affordable housing to low-income tenants.
From left field: So crazy it just might work
The Henry Review proposed a more radical idea, including the family home in the means test for the aged pension to reduce incentives to retain more expensive housing in older age 23. This proved politically unpalatable, but a similar objective can be achieved through more creative means. Abolishing the aged pension means test would also remove the bias. While this would be inequitable when taken by itself, it could be funded by removing tax concessions for high-income earners investing in superannuation. The net effect would be largely revenue neutral, have no negative effect on equity, provide greater accountability and would make housing more affordable.
The main challenge to childcare in Australia comes from individual public subsidies for the purchase of private services delivered by the for-profit and non-government sectors. In pitching its message at ‘working families’ during the 2007 federal election campaign, Labor identified unaffordable childcare as one of several pressures undermining family ‘work-life balance’ that the Howard government had failed to address and that it could handle better. So, have the government’s childcare policies improved affordability for working families?
Again, the answer is mixed. In contrast to its predecessor, the Labor government has promoted universal access to childcare and envisages it as part of a longer-term strategy that includes increasing labour force participation and productivity, social inclusion and the ‘education revolution’24. Whilst the government has taken steps in the right direction, other policy decisions have undermined both equity and efficiency.
Current government policy
Subsidising Child Care
The government supports private childcare services through two subsidies for consumers, which largely leaves them to co-ordinate activity themselves through market mechanisms in the private sector.
The Child Care Benefit (CCB) is a means tested cash benefit available to those who consume up to 50 hours of services from private providers; each week, it provides up to $30.10 for registered care or $180 for approved care per child. The Child Care Rebate (CCR) provides a 50 per cent flat rate rebate to consumers for their out-of-pocket expenses on approved childcare services up to $7,778 per child each year.
The CCB provides most assistance to those on lower incomes, whilst the CCR benefits almost all consumers of childcare, particularly higher income earners who have greater purchasing power and thus larger out-of-pocket expenses.
Building new centres
An immediate challenge for parents is a lack of quality, affordable childcare. The government has committed to building an additional 38 childcare centres but this is a far cry from the 260 it promised at the 2007 election25. When ABC Learning collapsed – the major private provider that accounted for 25 per cent of childcare places nationwide – the government injected $58 million to support the continuation of childcare services until all but 55 centres (of over 1,000) were transferred to new operators26. But despite the collapse of ABC Learning, the government has yet to impose accreditation or other regulatory controls on the sector27.
Problems with current policy
Failure to regulate
The collapse of ABC Learning has, as Cox28 notes, provided the government with an opening to review the whole system and impose further regulations on the childcare sector. The government has also ‘avoided at all costs’ an active involvement in childcare provision, which would have provided a direct means to increase competition in the sector and expand access.
Current policy gives parents more money to spend on childcare without sufficiently increasing the supply of childcare places. This tends to push up the price of childcare and reduce value for money.
By raising the CCR to 50 per cent (from 30 per cent) up to a ceiling of $15,000 in 2008, the government has further raised the purchasing power of childcare consumers without adequately addressing supply. Logically enough, this feeds the inflation in childcare fees that reduce the affordability of care29, although the impact may be unwound to some extent by the decision to wind back the ceiling of the CCR to $7 778 per child each year in this year’s Budget.
Moreover, by favouring the CCR over the CCB, the government has expanded the benefits received by higher income-earners at the expense of lower income-earners. In short, the Labor government’s policies have done little to alter the market environment of childcare or extend universal access.
Funding needs to be direct. If supply is the issue, than building centres and funding them is the solution; using mechanisms like rebates and subsidies is less direct and less efficient.
Regulation of the sector
Regulation which makes it easy for parents to choose quality care, rather than maximising inefficient and confusing choice in an artificial market.
Table 3. Redistributive Implications of CCB and CCR
|Family Adjusted Taxable Income ($)||CCB Received Per Week($)||Out of Pocket Amount ($)||CCR received per week ($)|
* Calculations assume one child in Long Day Care (50 hours) costing $200 per week. CCB rates as of 2005.30
An agenda for reform
There are a few simple principles that can help to make public spending more efficient and equitable. These principles underpin the reforms proposed in the three areas we have discussed, but also apply more broadly.
The first step to ensure that public programs are sustainable and offer value for money is to find out exactly what things cost. That might sound straightforward, but there are two accounting tricks that make it much more difficult. First, governments can reduce the cost to the Budget by restructuring a policy as a tax concession rather than a spending measure. The effect on the economy and the budget bottom line is the same, but it doesn’t show up on the official statistics. Second, governments can cut spending on services, passing increased costs on to individuals. Instead of paying through our taxes, we pay (often even more) in higher charges, but it looks like the government is being ‘responsible’.
Recognising the need for greater accountability, the Henry Tax Review31 proposed that the government release a ‘Tax and Transfer Analysis Statement’ each five years to report on the cost, efficiency and distributive effects of the tax and transfer system, including tax expenditures. This recommendation should be implemented. It would shine light on neglected public programs and hopefully inspire further research and public debate.
2. Make funding direct
The next step is for governments to more clearly match their funding models to what they actually want to achieve. Too often funding is designed to have the maximum short-term electoral effect, rather than the maximum effect on welfare and service provision. Research suggests that reducing the distance between the government as funder and the organisation delivering the service contains costs.
The most obvious example here is the private health insurance rebate. The policy aims to encourage people to use private hospitals. The goal is controversial, but even on its own terms the policy fails. Rather than funding private hospitals the government provides a subsidy to individuals, to purchase insurance, which then covers hospital stays. That is a complex and convoluted way to subsidise private hospitals, and the result is that only half of the money ever ends up supporting private hospital beds32. Indeed, if the government decided to simply provide a subsidy directly to the hospital for each service it delivered, the same effect could be achieved while saving more than $2 billion a year.
By funding insurance rather than hospitals the current scheme also subsidises gym memberships, dental work and administration costs that are not the main focus of the policy. By funding individuals, these subsidies tend to increase inflationary pressure and reduce the ability of governments to ensure good value for money. Often direct provision (as with public hospitals) is the most efficient alternative. But there are many ways of supporting greater choice while also reducing costs by funding services, not individuals.
3. Let people choose not to choose
People do not always want more choice. Recent developments in economics have shown that people’s ability and desire to choose is not infinite.33 Often having complex choices means that people simply fail to act, or make decisions they later regret. Competition and choice can be powerful forces to improve efficiency – but increased choice often just leads to confusion and to industries taking advantage of governments and consumers. The solution is to give people manageable choices, and to introduce public default options to allow people to opt-out.
Photo Credit: Alex E. Proimos, http://www.flickr.com/photos/proimos/4046053052/
- Australian Institute of Health and Welfare (2009) Australia’s Welfare, Canberra: Australian Government (accessed 22/05/2010) http://www.aihw.gov.au/publications/index.cfm/title/10872 :97 ↩
- Australian Government (2008) Budget Paper No.1. Canberra: Australian Government (accessed 22/05/2010) http://www.budget.gov.au/2009-10/content/bp1/html/index.htm :68 ↩
- AIHW, loc. cit ↩
- ibid ↩
- Australian Government (2009) Budget Paper No.1, Canberra: Australian Government (accessed 22/05/2010) http://www.budget.gov.au/2008-09/content/bp1/html/index.htm :23 ↩
- Nielson and Harris, “Chronology of Superannuation and Retirement Income in Australia”, (6 February 2008 updated 3 July 2008), Parliament of Australia, Parliamentary Library Background Note ↩
- Treasury (2010) Tax Expenditures Statement 2009, Canberra: Australian Government: 4 ↩
- Australian Government (2009) Budget Paper No.1, loc. cit. ↩
- Australian Government (2010) Stronger, Fairer, Simpler, Canberra: Australian Government (accessed 23/05/2010) http://www.futuretax.gov.au/pages/default.aspx ↩
- Newman, G. (2010) ‘New superannuation funds soften pain’ The Australian, May 3 (accessed 22/05/2010) http://www.theaustralian.com.au/business/new-funds-soften-pain/story-e6frg8zx-1225861307940 ↩
- Australian Government (2010), Stronger, Fairer, Simpler, loc.cit ↩
- Spies-Butcher, B. and A. Stebbing (2009) ‘Reforming Australia’s Hidden Welfare State: Tax Expenditures are Welfare for the Rich’, Occasional Paper No.8 Sydney: Centre for Policy Development. ↩
- Shelter NSW (2010), ‘Housing Australia Factsheet: A quick guide to housing facts and figures’, National Shelter, available at http://www.shelter.org.au/archive/fly-factsheet-australia.pdf ↩
- Steering Committee for the Review of Government Service Provision (2010), Report on Government Services 2010, Productivity Commission: Melbourne: 16.6 ↩
- Swan, W. & L. Tanner 2009, Updated Economic and Fiscal Outlook, February, Commonwealth of Australia: Canberra: 17 ↩
- Shelter NSW (2010), ‘Housing Australia Factsheet: A quick guide to housing facts and figures’, National Shelter, available at http://www.shelter.org.au/archive/fly-factsheet-australia.pdf ↩
- Senate Select Committee on Housing Affordability in Australia (2008), A Good House is Hard to Find: Housing affordability in Australia, Final Report, Canberra: Commonwealth of Australia: 40 ↩
- Colebatch, T. (2010), ‘Negative gearing top tax break’, The Age, March 27. ↩
- Hanegbi, R. (2002), ‘Negative Gearing: future directions’, Deakin Law Review, 7(2), 349-365. ↩
- Productivity Commission (2004) First Home Ownership, Report No.28, Melbourne: xxv ↩
- Keen, S. (2009), ‘Household debt: The final stage in an artificially extended Ponzi bubble’, Australian Economic Review, 42(3): 347-357. ↩
- Henry, K. (2010) Australia’s Future Tax System: Final Report, Canberra: Australian Government (accessed 22/5/2010) http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm ↩
- ibid. ↩
- Brennan, D. (2008) ‘Reassembling the child care business’ Inside Story, 19 November (accessed 23/05/2010) http://inside.org.au/reassembling-the-child-care-business/ ↩
- Tiffen, R. (2010) ‘Lost in the Spin Cycle’, Inside Story, http://inside.org.au/lost-in-the-spin-cycle/ ↩
- Ellis, K. (2009) ‘The Future of ABC Learning’ Ministerial Statement 15 September (accessed 23/05/2010) ↩
- Cox, E. (2008) ‘A Rather Too Conservative First Year’ InSight, 21 November (accessed 23/05/2010) http://cpd.org.au/2008/11/a-rather-too-conservative-first-year/ ↩
- ibid. ↩
- Cox, E. (2007) CPD Road Test: The child care rebate, Sydney: Centre for Policy Development, 22 November (accessed 23/05/2010) http://cpd.org.au/article/cpd-road-test-child-care-rebate ↩
- McIntosh, G. (2005), ‘The new child care tax rebate’, research note, no. 3, 2005-06, Parliament of Australia, Parliamentary Library, Canberra: 2 ↩
- Henry, K. (2010) Australia’s Future Tax System: Final Report: 722 ↩
- McAuley, I. (2005), ‘Private Health Insurance: still muddling through’, Agenda, 12(2), 159-178: 167. ↩
- see Fuller, J. 2009, ‘Making bad decisions’, Heads, You Die: Bad decisions, choice architecture, and how to mitigate predictable irrationality, Per Capita, available online at < http://www.percapita.org.au/01_cms/details.asp?ID=215 >. ↩