The Australian
July 23 2016
Judith Sloan Contributing Economics Editor Melbourne
Here’s what’s going to happen with superannuation. The narrowly re-elected Prime Minister, Malcolm Turnbull, has assured his detractors within his party that “it will get fixed”. The quid pro quo for this assurance is that the detractors will go quietly, at least for the time being.
After all, there is many a slip between the cup and the lip before the radical and hastily assembled package of superannuation changes announced in the budget is legislated.
All Coalition parliamentarians with any hope of promotion — indeed, retention of their present position — will have the good (read: self-interested) sense to stay mum at this stage, irrespective of their private views of the superannuation changes.
We shouldn’t expect Labor to make life easy for the government; criticisms will be raised and amendments will be required.
At the end of the day, Labor will allow the (amended) changes to pass the Senate, leaving Turnbull to deal with any residual resentment on the part of his own parliamentary colleagues and party members.
All that bluster from Turnbull during the campaign that the superannuation changes were “completely iron-clad” was basically for show.
Walking quickly away from any of the key changes at that stage would have been a clear sign of weakness and indecision.
Of course, Turnbull deliberately failed to mention the fact Scott Morrison had already been forced to back down in relation to one matter: grandfathering the access to non-concessional contributions under the old rules to pay off non-recourse loans. So much for “completely iron-clad”.
And now there is talk of other exemptions. If uncle Bob leaves you some money, that won’t be counted in the lifetime non-concessional contributions cap. But if you save up post-tax earnings and want to make a substantial contribution to your fund, you will be limited to $500,000 backdated to July 1, 2007.
All I can say is this sort of stuff is a hard sell. And, by the way, divorce was always a major complicating factor that the budget super changes ignored.
The Prime Minister rightly says superannuation is a complex area. Indeed, it is so complex that I would be surprised if he were across the details.
But the key question is this: what did the Prime Minister and the Treasurer think they were doing?
- It can’t really have been about budget repair; under $3 billion across four years is chicken feed.
- It can’t have been about improving the super system in terms of encouraging more people to self-provide during their retirement. After all, the changes will make it more difficult for people to accumulate sufficient funds to make it on their own.
- It can’t have been about making the system simpler; the complexity of the arrangements will increase by several notches and the transition costs will be vast.
The only groups that are happy are financial planners, accountants and lawyers, who will be raking it in advising their clients on the new arrangements and restructuring their clients’ financial affairs.
And the union-controlled industry super funds are pleased at the prospect of billions of dollars, in total, of taxpayer money being added to the accounts of low-income members, to be then gobbled up in extra fees and charges.
The answer to the question about the government’s superannuation brain snap is twofold.
Turnbull and Morrison were spooked by the accusation they had achieved nothing in terms of tax reform. One moment everything was on the table; the next nothing was.
The GST option had come to nothing. Similarly, the suggestion that the states levy their own income tax had come to nothing. By introducing the raft of radical superannuation changes in the budget, these two men thought they would show their sceptical supporters, particularly in the press, that they could do reform.
Then there was the underlying misinformation in the Treasury’s estimates of the costs of the concessional taxation of superannuation, which a sensible Treasurer (with the help of his advisers) should have insisted be corrected. Only in this way could the Treasurer deny the false proposition peddled by ill-informed commentators that super tax concessions cost as much as the age pension.
In fact, the solution was relatively simple. Treasury just needed to present the cost of the superannuation tax concessions using the GST as the benchmark tax rather than income tax.
After all, superannuation is about saving and a consumption tax, such as the GST, promotes saving. It is therefore the appropriate tax benchmark. At a minimum, the figures for both benchmarks should have been presented.
This was done in the Treasury’s 2014 tax expenditure statement, although the estimates using the GST benchmark were relegated to an appendix with the adjective “experimental” added to the title.
Note that the estimated cost of the superannuation tax concessions using the GST as the benchmark was negative. But for some strange reason the practice was discontinued last year.
Morrison then missed a key opportunity to highlight the substantial downward revision in the cost of the superannuation tax concessions that was outlined in the 2015 tax expenditure statement released by Treasury.
The cumulative cost of the concessional taxation of superannuation had fallen by more than 22 per cent for the three matched years, 2015-16 to 2017-18. Indeed, for one component — the concessional taxation of superannuation entity earnings — there was a fall of $11.45bn, or 40 per cent, for one year alone, 2017-18.
These sorts of wild fluctuations really gave the game away. How could $11.45bn just go missing in one year without the validity of the entire exercise undertaken by Treasury being called into question? But the real problem was that few people — including, it would seem, the Treasurer — picked this up. The basis on which the government devised its radical superannuation changes was a fraud or the dramatic writedown in the cost of the superannuation tax concessions undercut any need for major changes.
Now this may all seem rather technical, but let us not forget the role of the backroom boffins in Treasury (and in the Department of the Prime Minister and Cabinet) helping to devise the changes to superannuation and attach mythical cost savings/additional revenue to each one of them.
Let us also not forget the warning given by Treasury itself that “the effect of superannuation is to reduce outlays on the age pension. Some commentary argues that these expenditure savings should be recognised in the estimates of superannuation tax expenditures. (But) tax expenditures are a more limited construct than a budget costing and, by their nature, do not seek to measure the full budgetary impact on related current or future government expenditure.”
This is the key: the Treasury’s extremely unreliable estimates of the cost of superannuation tax concessions are not reflective of the true cost to the budget, which must include the (cash) cost of the age pension.
Undercut the incentives for people to save via superannuation and the cost of the age pension goes up — something this government has studiously ignored. The second part of the answer as to why Turnbull and Morrison opted for the radical super changes is along the same lines that explain why Joe Hockey decided to impose the temporary budget repair levy in the 2014 budget.
This latter decision also has significantly annoyed the Liberal Party’s base.
Hockey (and presumably Tony Abbott) thought that this measure would convince the critics that the government cared about fairness; after all, they were prepared to increase the top marginal income tax rate by two percentage points for four years.
Of course, few opinion leaders gave the government any credit for introducing the levy on the grounds of fairness. Labor, however, was more than happy to wave it through the Senate while blocking almost every other (cost-saving) budget measure. It is now Labor policy to keep the levy as a permanent feature of the income tax scales.
Having learned nothing, the next dynamic duo, Turnbull and Morrison, thought they would have another crack at irritating the Liberal Party’s base of supporters while seeking the approval of the progressive press for the “fairness” of the superannuation changes.
After all, it is proposed that nearly $3bn of the gross increase in revenue across four years will be redirected to top-up the superannuation accounts of low-income workers, mirroring Labor’s policy.
A large proportion of these low-income workers will end up on the full age pension and adding a few hundred dollars of precious taxpayer money to their superannuation accounts is expensive and extremely bad public policy.
So what are the lessons for the government of the past nine or so months? Don’t ever put everything on the table. It is poor policy and potentially suicidal politics.
Let’s face it, tax reform was Hockey’s vanity project — all treasurers like to claim the title of reformer — but Turnbull would have been wise to drop it and make the case for much more limited change, such as reducing the rate of company tax. As it turned out, he did a lousy job at explaining even this proposal.
Also forget the call for us to feel excited. Toddlers drinking red lemonade are excited. Optimistic could work, even aspirational — but not excited.
Optimism can be tied into people being motivated to get ahead, to provide for their families and be independent of government handouts. Fairness can then be framed in this context, rather than the narrow focus of win-lose redistribution, which is the Labor way. And don’t forget to mention the lack of fairness of building up government debt to be paid for by future generations.
At this stage, there is no reason to believe Turnbull or Morrison have any particular skills in quality economic management. The challenge is in front of them; they have got off to a very bad start.
Tuesday, July 4, 2017
