Comments on a tough Federal Budget

The recent Federal Budget has caused quite a stir amongst the Australian people.  Treasurer, Joe Hockey has labelled it not as “the age of austerity” but “the age of opportunity!” in a budget full of cuts to welfare and public spending.  Recent reports suggest it has hurt consumer confidence.

It was always going to be a case of tough love if the government is serious about one day achieving a surplus again.  For some this is a hard pill to swallow, particularly when we look around us.  The sun is still shining, people are still working… everything appears to be good on the surface.  So why are we being told that things are bad?  The first thing we need to recognise that it may not always appear this good if we continue to head down the same path we are on.  Think of a person with a credit card stretched to its limit.  The problem isn’t reaching the credit limit per se; it was the over-spending that occurred along the way.

It’s popular for the Liberals to blame Labor for the debt but the Howard government had their role to play in this also.  Federal Budgets used to be like Christmas eve.  We’d all wait to see what Santa was going to give us in the way of tax cuts, concessions and middle class welfare.  Only now has this become an issue.

The more contentious parts of the budget perhaps, are where the cuts are coming from.  It can be argued that the young and the poor have been hit the hardest.  Families will have their tax benefits permanently reduced whereas high income earners will have a temporary 2% levy applied to all income over $180,000.  In a budget where we have all been asked to chip in, it’s fair to say some are chipping in more than others.  The truth is, nobody likes to have something taken away from them.

A demographic headwind looms as the baby boomers begin to exit the workforce.  This poses a growing challenge to governments as to where they can find a secure source of taxation revenue.  It should not be ignored and rather seen as an opportunity to reform our painfully inefficient tax system.

One common suggestion has been to broaden the GST to include fresh food, education and some utilities.  While this would also hit poorer members of society, a portion of the additional revenue raised could be used to provide aid to those in need directly.

The Henry Tax Review made a raft of recommendations to the government in 2008 but sadly these continue to get ignored in the political spin cycle.  In short, it suggested transitioning away from inefficient taxes, such as personal income, company and payroll tax to rely more on a broader and more stable base made up of GST and land tax.  There is much academic research to support such reform.

Thankfully we still live in a lucky country.

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