Smarter budget cuts? Government to target the usual suspects

With the federal budget in the next week, there is the usual jockeying for headlines by various groups. The interest groups include those who want more for their constituency and those who are scared they may lose some benefits or privileges. It seems that the more powerful the groups are, the less likely they are to have their government support cut. The cabinet has not reported focus on our many programs of welfare for the rich, such as superannuation concessions, but is making lots of noise on the need to persecute poor beneficiaries.

We need to question whether the balance is right. Why spend a large amount of public funds on executives car subsidies, rich retirement subsidies, privileged healthcare subsidies and other such tax expenditures? They are politically easier to hide as it’s usually money that is not collected rather than money that is spent.

However, the net result is the same, general revenue is equally reduced by the concessions and expenditures. The Henry Review was in favour of rationalising and making these types of payments more equitable but this is part of his report that neither side has adopted or even considered.

It is interesting to look at the relative costs of some such programs. According to the Australian Tax Office tax expenditure statement 2010/11, the estimated tax concessions on superannuation contributions will cost us more than  $30 billion next year. This is not much less than the $34 billion we will spend on the age pension. However, they serve different purposes: one funds those older people without enough income, (but could be trimmed at its upper levels); the other primarily supports higher income earners by diminishing their tax liabilities by $20 billion tax, (30c plus) in 2011/12.

This includes the 35% estimate of the concession that goes to the highest income earners who are unlikely to ever claim the age pension.

This expenditure is the difference between individuals being taxed on their super contributions and earnings at their marginal tax rate and the 15% concessional tax in super. This “spending” is due to rise by $7 billion in two years presumably in part because of raising the contribution rate towards 12%.

Reducing this by two thirds would allow some concession to people up to median earnings and add the bulk of $20 billion extra to spend on the equity programs rather than supporting the relatively well off. This sum would cover current spending on the disability support pension at $13.4 billion and job seeker income support at $7.2 billion and would allow the latter to be raised to take recipients out of dire poverty.

The policy choice is to use public money to mitigate the difficulties of surviving on low payments or forgoing tax to ensure a more comfortable tax payer supported retirement for the better off. Note that ACOSS points out that Australia is mean in its income support, as we spend 3.2% of GDP on payments versus 6.5% on average in the OECD.

Many other public “payments” benefit the better off and could be cut without seriously affecting their financial viability. These include the following tax expenditures and payments.

Dependent spouse offset $485 million
Heath ins rebate $3500 million
Tax shelter for trust etc $1400 million
Termination payments $500 million
Tax baby bonus ( mat leave is taxed!) $110 million
Mature Age Worker Tax Offset $445 million
Concessional tax non-superannuation termination benefits $1300 million
Application of statutory formula value car benefits FBT $1220 million
Capital gains tax discount for individuals and trusts (50%) $6700 million
Total $15,160 million

Cutting these back would provide maybe another $15 billion-plus that could be saved or even substantially shaved without leaving anyone in dire distress or even significant financial stress.

There are also other areas of spending, such as defence and immigration, that could have major cuts and make Australia fairer. I could suggest “wild” ideas such as abolishing mandatory detention and closing Christmas Island, and other expensive, either unjust or ineffective, programs. Money could be saved by not extending income management as it costs about $80 per week per person for administration. This would allow more money to go to expanding Aboriginal-controlled services than work.  But all these are not even up for discussion as they are seen as no-go areas by both sides of politics.

Instead, the indications are the government will go for more targeting of the usual populist scapegoats: those of working age not going to a job each day. This seems to be the new mantra of our future, get up early and take the kids to school then go to your workplace … This leaves out those who for a range of reasons, cannot be part of this and assumes this is their choice and not the result of social exclusions. There is no understanding of prejudice and discrimination by employers , for instance.

There are rumours of tightening of various rules for the formally unemployed and persecution for those presumed to be wrongly receiving disability payments. The welfare sector is alarmed and had a meeting of most major welfare agencies on Thursday, in Canberra. They were modestly asking for positive support rather than scapegoating but were substantially undermined by Mission Australia’s latest pitch for government approval.

They complain of non-compliance that suggests they are promoting  their failures to make their services relevant to their many “clients”, despite being handsomely paid for finding jobs for nearly 60,000 unemployed clients.

This example is further evidence of the problems of outsourcing government services to the not-for-profit sector, which is now too closely tied to government approval for its funding. Mission Australia has a long record of being overly supportive towards government policies and practices, particularly under Howard. It collects $235 million of its $295 million income from government grants so has difficulty representing the needs of its welfare clients rather than its funder. Major contractors for government services can be seen to lose their legitimacy as independent advocates.

So come budget time there are relatively muted voices defending those targets that offer the most media friendly scapegoat cuts. This rhetoric survives despite the lack of jobs for Newstart recipients. My earlier calculations showed one possible vacancy for six possible job seekers!