Dear Prime Minister and Opposition Leader
This open letter is about one of the key issues in this election — how the next government will close the growing gap between the community's reasonable expectations of government and the revenue available. This problem will not be "solved" in a single Budget. Without structural reform of tax and expenditure, it will burden the next government for as long as it remains in office.
It will not be easy for the next government to restore the budget to surplus while making room for investment in the essential services and supports the community expects. You will hear many voices urging you to preserve or improve subsidies and tax breaks that benefit influential constituencies. It is our role to speak up for those whose voices are rarely heard.
We seek your assurance that, should you be elected, benefits and services for people at risk of poverty will not be reduced throughout the term of the next government. These include the level and indexation of income support payments for people on low incomes, avoidance of policies that transfer people (such as people with disabilities or sole parents) from higher to lower payments, no time limits on income support, funding for social housing, employment services for disadvantaged jobseekers, and dental health services for low income earners. People who are already struggling to house themselves, feed their families, or find a job should not be expected to carry extra burdens as a result of Budget decisions.
It is possible to restore the budget, improve the efficiency of both spending and taxes, and repair gaps in the social safety net such as disability services, adequate income support for unemployed people, schools funding, and affordable housing. We suggest that if you win government, you take three steps.
First, we suggest a commitment be made to restore the budget to surplus as economic conditions permit. Clear medium-term revenue and expenditure targets should be set, with the proviso that they should only apply when economic growth is restored to trend. Arbitrary time limits for the restoration of surplus are economically dangerous and should be avoided.
The next government should also avoid arbitrary limits on tax revenues. This is like fighting with one hand tied behind your back. The expenditure targets should allow for realistic indexation of funding for essential programs and avoid arbitrary rules that cramp the ability of governments to re-order priorities.
Second, we urge the next government to pursue structural reform of the tax system to restore public revenues as fairly and efficiently as possible. As the Treasury warns, federal tax revenue is in structural decline. This is largely due to decisions made as the mining boom gathered pace in the mid to late 2000s, including eight successive income tax cuts and tax breaks for retirees. Now the revenue tide is running out. Compared with its average level over the decade prior to the GFC, Federal government revenue has fallen by almost 3 per cent of GDP which is equivalent to $40 billion a year.
Federal and state governments cannot continue to meet the community's expectations for essential services with the third lowest public revenue levels in the OECD. Structural reform is needed — not just an increase of taxes off the existing narrow income tax base. As long as income from different sources is taxed inconsistently, the well-advised can avoid their obligations leaving the rest to pay more. Inconsistent tax treatment also distorts saving and investment decisions, for example over-investment in existing housing which is a major cause of our high housing costs. State taxes also need reform, to strengthen potentially sound tax bases such as Land and Payrolls and reduce reliance on inefficient Stamp Duties.
This week ACOSS released a set of principles for tax reform. We proposed that the next government announce its intention to undertake major reform of the tax system to improve its equity and efficiency, followed by a well-structured and transparent community consultation. We suggest that this start with a Green Paper early in the next term of Government, followed by a White Paper after extensive consultation. We are ready to play our part in this community dialogue on tax reform.
Our third suggestion is that the next government restructure its spending to remove wasteful and poorly targeted programs and make room for higher priorities including those mentioned above. This should start with a thorough public review of the goals, targeting and cost effectiveness of major expenditure programs, and emerging pressures on spending such as population ageing.
Governments need to start a conversation with the community about what can reasonably be expected from them, and who should receive which benefits and services. The past decade witnessed an accumulation of poorly targeted programs that lack a clear purpose such as the Baby Bonus and Schoolkids Bonus, and programs that promote inflation in the cost of essential services such as the Extended Medicare Safety Net. These could be replaced with better-designed schemes. Last week we released a report modelling the effects of replacing the Baby and Schoolkids Bonuses with an increase in Family Tax Benefits for low income families to reduce child poverty.
Tax expenditures that have similar effects to direct spending should be included in this review, and aligned with structural reform of the tax system. For example, many high income earners receive more throughout their lives in tax breaks for superannuation than if they were paid the full rate of age pension.
The next government can meet the community's reasonable expectations without leaving the Budget in the red, or the most vulnerable in the community to bear the cost. The key is inclusive policy development where all voices are heard and the hard issues are discussed.
Dr Cassandra Goldie
Chief Executive Officer, ACOSS
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