Fiscal mess calls for extreme grandfathering

The Australian

3 February 2017

Adam Creighton

Extreme grandfathering: it doesn’t quite exude the drama of “extreme vetting”, Donald Trump’s phrase of choice to describe the US’s tough new immigration policy. But it’s an idea whose time has come if the government is to have a realistic hope of arresting Australia’s deteriorating fiscal position.

It’s that time of the year when the government should be thinking of bold ways to save significant licks of money. A few months out from the May budget, we might have expected the Malcolm Turnbull to have dropped some hints in his Press Club speech in Canberra this week. But there was little talk of significant savings.

The Prime Minister briefly mentioned the meagre $21 billion in savings, over four years, achieved since the election, which is barely a rounding error when expenditures amounts to $450bn every year. A further $13bn savings planned are unlikely to meet the same fate as the controversial savings in the Abbott government’s fateful first budget.

The Coalition needs to make savings at least three times as large to prevent a likely ratings downgrade this year.

But so many Australians are now receiving some form of government payment or tax lurk, it has become politically impossible — absent some traumatic, Greece- style crisis — for any government to make the sort of drastic fiscal reforms needed if it wants have a chance of winning re-election. The fact that barely more than half of households are net taxpayers, for instance, means offering tax cuts to make welfare cuts palatable isn’t electorally appealing. And even if a government did propose to, a populist Senate is unlikely to support them.

The government could instead adopt extreme grandfathering. Anyone currently receiving particular welfare payments would have the right to it for the rest of their lives, but others would not. Family tax benefit B, which is costly and unnecessary, could be abolished prospectively. And because children become adults quickly, it wouldn’t be too many years until no-one was eligible at all.

The thresholds for Family Tax Benefit A, meanwhile, could be cut and the payments trimmed. The number of children eligible for a payment per family could be limited to, say, two or three, which would blunt the incentive to have children to boost income. There are economies of scale in raising children.

Any government attempting to foist such changes on current recipients would be annihilated.

At the other end of the spectrum, the age pension, the single largest expense of the government, could be drastically reformed for people currently aged under, say, 50. The entire value of the so-called family home could be put entirely into the assets test — no more shifting assets around to get taxpayers to subsidise inheritances.

Similarly, the ludicrous Seniors and Pensioners Tax offset, which provides over 60s too well-off to even wangle the age pension a much higher tax-free threshold, could be done away with.

Reining in explosive health spending would stand a greater chance if particularly politically powerful voting blocks were effectively bought off through grand- fathering. Coalition and Labor proposals over the years to introduce modest co- payments for highly subsidised medical services has faced massive resistance, largely from pensioners. The current system could be grandfathered for people already of pension age, for instance.

Extreme grandfathering would take advantage of human nature: people become attached to things once they have them. They care far less about the prospect of having things. The government has traditionally grandfathered certain tax changes, such as those applying to superannuation lump sums from 1983. Labor’s policy to reduce the capital gain tax discount included grandfathering existing assets.

But the principle could have much wider application.

Extreme grandfathering is far from ideal: the arbitrary selection of a cut-off date is unfair to people who just miss out. But this problem could be ameliorated. Those inevitably younger voters who miss out on certain payments might be subject to a new, more efficient income tax system with lower marginal rates. Some would bemoan the temporary creation a two-tier citizenry, but perhaps that’s better than being collectively broke.

From the Rudd government’s Henry tax review in 2010 to the Abbott government’s Commission of Audit in 2013, countless reviews and studies have recommended major changes to fiscal policy. Our leaders know what has to be done but can’t. But neither Coalition nor Labor government has been able to achieve much. The Abbott government’s McClure review of social security is gathering dust. This calls for a new approach.

Extreme grandfathering would see a far simpler, cheaper social security system emerge over time, alongside a more efficient taxation system, ultimately making for a more prosperous country.

The sorts of savings possible could be very large, but wouldn’t show up in the four- year budget forecast period. They would nevertheless reassure ratings agencies and instil confidence in public finances, bolster prospects for economic growth.

The Prime Minister staked his claim to leadership on better economic policy, but little has emerged that’s different from previous governments, let alone the savings required to salvage the AAA credit rating.

Cutting company tax by tiny amount over a 10-year period is laughable, especially given the new US government is planning to more than halve their equivalent rate to 15 per cent. The government should take advantage of a political climate that appears to favour “extreme” solutions.