Using the resources boom to fund the future

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These are extraordinary budgetary times. The revenue just keeps pouring in, continuously exceeding Treasury forecasts. The Government has made clear choices about what to do with this money, channelling very little into infrastructure, and considerable sums into tax cuts and benefits, including cuts to the top marginal tax rate, a benefit enjoyed by only 2% of tax payers.

Other than income tax cuts, the biggest news in the Budget was the ‘reform’ of superannuation. Australia is unusual in taxing super at three points — on contributions, on interest earned in the fund and on withdrawals. The super industry argued for a cut on the first stage, arguing that this would increase contributions and savings by giving younger workers a benefit now. But the Treasurer opted for the cheaper ($1.6 billion against $3.4 billion) option of cutting the tax on withdrawals.

The cut to the tax on super only applies to those over 60. Costello argues that this gives older workers an incentive to stay in the workforce longer in order to receive the tax cut. And provisions to allow people to keep contributing after they start drawing benefits, combined with the tax cut, will encourage more people to work even longer. This adds to previous changes which reduce income tax rates for self-funded retirees, meaning that older workers pay lower taxes than younger workers. The changes are justified as providing an incentive for people to fund their own retirement, easing the cost of an ageing population.

Thanks to Sean Leahy

The Government has taken a different approach to encouraging others to stay in the workforce. In last year’s Budget the Government introduced much more punitive rules to entice single parents and the disabled into paid work. Welfare to Work also comes into effect on July 1 this year. However, these changes actually reduce benefit levels for future disabled workers deemed able to work 15 hours a week and single parents whose youngest child is over 6. The changes also increase the rate at which these people lose their benefits as they earn income. Instead of granting benefits, these changes use a threat (taking people’s income away from them) to change people’s behaviour.

Economist John Kenneth Galbraith once observed that there is often a double standard in the way Governments use incentives to change our behaviour. Encouraging rich people involves giving them more. Encouraging poor people means giving them less.

The Government assumes that poor people want to ‘bludge’, so even small benefits may allow them to shirk their obligations. It assumes that the rich want to contribute, but that high taxes dissuade them. So not only do the rich get more, but their benefits are not really monitored or evaluated, while the poor are under constant scrutiny for every cent they receive.

This policy is not supported by evidence. For example, the existing job assistance scheme for those on disability support pension is capped. Disabled people volunteering to work have to wait up to two years to receive job search assistance. Most disabled people want to work, but fear losing benefits and suffering discrimination. While addressing some of these issues, the new policy actually makes others worse. Low income workers face much higher effective marginal tax rates (the total income lost in each extra dollar earned) because they lose benefits as they pay tax.

Yet the Budget did little to address these incentive problems. It raised the low income earner tax offset, a welcome relief. But this benefit is withdrawn as your income increases. So it merely defers, rather than solves, the problem of high effective marginal tax rates. Meanwhile cuts to the top marginal income and super tax rates have no cap, meaning the higher your income, the more you benefit. These simple tax cuts should not be dignified with the word ‘reform’. Costello justified the cuts by arguing that as high income earners pay more tax, they will naturally receive more from tax cuts.

What Costello does not say is that the windfall revenues funding these tax cuts have primarily come, not from high income earners, but from company profits, in particular from mining companies enjoying the resources boom. And these profits are not really the result of increased productivity, but simply of higher prices as the booms in China and India bid up commodity prices. In other words, the cash bonanza comes from selling non-renewable resources. This is a one-off opportunity.

We could look overseas for some direction about alternative ways to use this one-off funding to achieve real ‘reform’ and properly ‘future proof’ Australia.

In Alaska, politicians more visionary than our own set up the ‘Alaska Permanent Fund’ to manage state oil revenues. Alaska’s solution recognizes that all citizens — no matter what their income — have an equal claim to their environment and its natural resources. The proceeds from this fund are divided up equally between all Alaskans (regardless of how much income tax they pay), and returned via an annual Permanent Fund Dividend. Last year the dividend was US$846, and Alaskans have received nearly US$25,000 each since the fund’s inception in 1982. Because these payments are made equally to all they are progressive, increasing poor people’s income by a greater proportion than the incomes of the rich. Contrary to Costello’s claim, Alaska’s model demonstrates that tax cuts need not disproportionately benefit the rich.

Another option is the Norwegian State Petroleum Fund, which manages the revenues from Norway’s lucrative, though finite, North Sea oil reserves. This is a true ‘Future Fund’ (c.f. Costello’s pension plan). Norway recognises that oil revenues will not last for ever and that Norway has an obligation to future generations to use the proceeds wisely. In contrast, the current Australian approach will see future generations inheriting nothing, save for a house of over-inflated value and a credit card debt.

The Norwegian model also recognises inter-generational equity. The Petroleum fund was initially used to pay off Norway’s large debt, and then to invest in social services and infrastructure. While Australia has paid off its (public sector) debt, this has been achieved in part by under-investing in social infrastructure like health and education. This Budget delivered nothing to universities or schools, and very little for hospitals. Australia’s university system, in particular, is unsustainably dependent on foreign and full fee paying students.

Given the origins of this tax windfall, it might be particularly appropriate to finally deal with two of our most pressing national issues. The Australian Medical Association estimates it would cost only $400 million a year to address the appalling state of Indigenous health. This is less than 5% of the money spent on tax cuts and would recognise that Australia’s traditional owners deserve to see some of the benefits of resources extracted from their own land.

Or Australia could plan to achieve real, lasting economic reform by finally dealing with climate change. We could use the income from non-renewable resources to help our economy through the transition to renewable energy.

Instead, by spending the proceeds of a short-term windfall on tax cuts for the rich we are missing a once in a lifetime opportunity to repair and create a strong and vibrant society (and economy) for ourselves and for our children.

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