In pre-budget periods rumours abound. Often the most unpalatable ideas come from the government itself, so that on budget night people can breathe a sigh of relief that they did not materialise.
We can be reasonably sure, however, that this year the Commonwealth will try to inject a short-term stimulus to the economy, while capping long-term commitments. It will be generous with outlays with a limited time span, and tight on those outlays and tax deductions which extend into the future.
It will also try to restore the revenue base. The expected deficit arises not only from stimulatory outlays, but also from a sharp fall in taxation revenues. In recent years revenues were sustained by taxes on company profits, as if the commodity boom would never end. These revenues, instead of being invested in education, infrastructure and environmental repair, were spent on what has come to be known as ‘middle class welfare’ — a misleading term, for some of the greatest benefits have gone to the very well off.
One such benefit has been the set of incentives for private health insurance. Most attention is centred on the 30 per cent rebate (extending to 40 per cent for older people). My estimate (based on AIHW projections of historical data) is that without any policy change the rebate will cost in excess of $5 billion in the coming year. (Because of ‘commercial sensitivities’ the budget papers do not show projections of these outlays.)
The 30 per cent rebate is only part of the benefit, however. A far greater monetary incentive is the 1 per cent tax rebate for higher income earners holding private insurance (called, misleadingly, the ‘Medicare levy surcharge’). The income threshold for this surcharge is $70 000 for singles and $140 000 for families.
Last year the Commonwealth tried to lift the threshold for the surcharge from $50 000 to $100 000; after a long battle in the Senate a compromise was set at $70 000.
The very cheapest hospital policies (with exclusions and co-contributions) cost around $1000 a year, or $700 after the 30 per cent subsidy. That means anyone with an income above $70 000 is actually fully subsidised for holding private insurance. Someone with an income of $200 000 is given a $2000 subsidy for holding private insurance, which is around the price of the most expensive cover on offer. Those with even higher incomes can get the most expensive insurance policies paid for and have money left over.
If the Commonwealth were guided by considerations of equity and economic efficiency, it would abolish all support for private health insurance. Private insurance does indeed take some demand off public hospitals, but it also draws resources out of public hospitals, which is why it has not eased waiting lists. It is administratively expensive and, as experience in other OECD countries shows, it is inflationary.
Above all, it is inequitable; essentially it is a subsidy for the better off to jump hospital queues. And for ancillary services such as dental care it penalises self-reliance, for those who pay for their own services do not enjoy the benefit of the 30 per cent subsidy.
Ian McAuley is a contributing author to CPD’s recent publication More Than Luck: Ideas Australia needs now. Ian’s chapter Living off our resources looks at how we use our resources in an era where environmental capital is fast-becoming our scarcest resource of all. Ian lectures in Public Sector Finance at the University of Canberra. His research interests are in public policy, with a specialisation in health policy. His academic qualifications are in engineering and business management from Adelaide University and in public administration from Harvard University. Besides his academic work, he has assisted consumer and welfare organizations in financial and economic policy matters. He has been a strong advocate for integration of the components of health care into a coherent consumer-focussed system. He has been a critic of successive governments’ piece-meal approaches to health policy, particularly the government’s subsidies for private health insurance because they bring neither the benefits of market competition nor the benefits of strong government control. Ian is co-author of a number of papers for the Centre for Policy Development, including ‘Reclaiming our Common Wealth: policies for a fair and sustainable future‘, ‘A Health Policy for Australia: reclaiming universal care‘ and ‘You Can See a Lot By Just Looking: Understanding human judgment in financial decision-making‘.