Crisis looming for tax system

Ken Henry, the man who lead the 2010 review into Australia’s tax and payment systems, has declared that now is the time for action on our complex and unsustainable tax system.

Dr Henry’s review made a number of recommendations aimed at simplifying our complex taxation system and streamlining welfare payments to help cope with a burgeoning ageing population. The extensive review was carried out under instruction from the then Labor Government and, while some recommendations were taken forward, many were not, being deemed at the time not to be critical.

Speaking yesterday at the Australian National University, Dr Henry expressed his disappointment that more had not been taken and implemented from the review. “The tax review that I was associated with – that I had the pleasure of leading – it identified a number of medium-term challenges confronting the Australian economy and it identified pathways for future tax reform,” he said. While he stated at the time of the review that there was no urgent need to move at that time, he said we were now approaching crisis time for the tax and transfer system, “We’re getting much closer to that point at which we should acknowledge that … there is an imminent crisis ahead for the tax and transfer system and therefore there is a strong case for developing a comprehensive tax and transfer reform package.”

The Coalition Government has promised another review of the tax system, which will include GST, although the Prime Minister has promised no changes in the Government’s first term. Dr Henry urged Tony Abbott to revisit his ‘comprehensive’ 2010 review. “It covers all elements of the tax system, obviously not the GST, and it covers the entire transfer payments system as well, there’s a lot in that document I think,” he said. He added that reviewing and changing GST was inescapable but that the Government would need to get the public onside before any major changes were made. “I think it’s very important that a government does have a mandate if it is going to effect large-scale reform,” he said.

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Opinion: Too many plans…

It seems everyone has a plan on how to restructure the country’s tax and welfare system, but how do we know which is the right one?

Dr Ken Henry is urging the Abbott Government to revisit his 2010 review of the tax and transfer system. It was only four short years ago, however, that many of the recommendations were deemed not to be urgent enough to require action. The Government-implemented Productivity Commission has delivered its report on the state of the country’s finances. And, while we’re not privy to what’s been suggested, ‘leaks’ suggest that means testing of superannuation and a review of Age Pension eligibility age are hot topics. Finally, forecasters at Deloitte Access Economics have also had a go at balancing the books, but have opted to target the indexation of Disability Support Pensions (DSP). Suggesting that the DSP should be indexed to inflation, as with the Newstart Allowance, rather than wages growth, would save the country $2.4 billion over the next four years. 

Australia’s welfare system is in for a major overhaul, of that there is no doubt, but how does a government tackle such a sensitive, ticking time-bomb and come out unscathed? For sure there will be no glory in getting the country’s balance sheet back in the black if those on fixed incomes and heavily reliant on government support fall deeper into the red. And while most of us are accepting of working to 67 years of age before we can even consider retirement, how many will be putting their hands up to work to 70 or beyond?

The Labor Government addressed the issue with Ken Henry’s extensive review in 2010, but failed to act, albeit because many of the items were not yet on the critical path. Yet we’re now being told action is needed quickly. Surely four years can’t make that much difference in the long-term planning of a country’s finances? And now the Abbott Government is faced with the same dilemma; act on the recommendation of the Productivity Commission and make changes to enable Australia to have more sustainable tax and welfare system, but risk being an unpopular, one-term government.

As the Government prepares to deliver its first budget under Treasurer Joe Hockey’s watch, let’s hope all reviews have been carefully considered and action is forthcoming, because sometimes it’s the not knowing exactly what lies ahead which is most difficult to live with.

Do you support the need for change in the welfare system, even if it means working longer, or reduced social security payments? Is it time to stop having reviews and start acting, or can we simply never have too much information when making such difficult decisions?

Written by Debbie McTaggart