Balancing budgets in difficult times. John Daley Urbis, Brisbane 4 February 2014

Transcription

1 Balancing budgets in difficult times John Daley Urbis, Brisbane 4 February 214

2 Overview Australian government budgets are in trouble The Commonwealth has had a structural deficit for over 7 years Spending rise was masked by minerals prices Health, Age Pensions and infrastructure grew faster than GDP These rises were driven by policy choices rather than population ageing On current settings, the problems will get worse in the next decade Balancing budgets will require some tough choices Queensland has started earlier than other governments Budgetary reform will require both tax increases and spending reductions Few budget reforms are both large enough to matter and socially acceptable Pension and superannuation ages need to rise Superannuation concessions for the old and rich should be wound back Age Pension eligibility should be better targeted These reforms would also reduce the risk of the next generation being worse off There are the first signs of a cohort less wealthy than its predecessor Younger cohorts are struggling to buy homes Governments spend much more on older households, and this bias is increasing 2

3 The Commonwealth s structural deficit for 7 years was masked by mining boom and GFC Commonwealth government budget balance Per cent of nominal GDP Cyclical Terms of trade Structural balance Underlying cash balance f Note: Cash balance is equal to receipts minus payments, minus Future Fund income, (under.25 per cent of GDP) Source: ABS Tables 1 and 4; ABS526. table 5; Budget 21-14, ATO database 22/-21/11; Budgeting in challenging times, M. Parkinson; Estimating the structural budget balance of the Australian Government: An update, N.Win et al.

4 Spending rise was masked by minerals prices Per cent of GDP: Structural receipts If minerals prices fall to long run average Structural payments w/ stimulus If minerals prices stay high 15 Source: f ABS 524. table 1; ABS 526. table 5; Budget 21-14, Treasury; ATO database 22/-21/11; Budgeting in challenging times, M. Parkinson; Estimating the structural budget balance of the Australian Government, T. McDonald et al.; Estimating the structural budget balance of the Australian Government: An update, N.Win et al.; Treasury briefing paper for the senate inquiry into the economic stimulus package 4

5 Health, Age Pensions and infrastructure grew faster than GDP Change in Australian governments expenditure 2-21 $ bn relative to CPI 45 4 Real growth Growth at GDP Ageing, comm & disability services Welfare Health Education Defence Infrastructure Government Other 5

6 Qld health and infrastructure spending grew much faster than GDP Change in Queensland government expenditure 2-21 $ bn relative to CPI Real growth Growth at GDP Education Infrastructure Gvt ops Industry Comm services Debt mgt Health Grattan Institute unpublished analysis Other Crim justice Eco & finance Disability services 6

7 Health and Age Pensions were driven by policy choices, not population ageing Real increase in expenditure 2-21 ($212 billion) Health Grattan Institute, Budget Pressures More, improved, and new services per person GDP growth Health inflation >CPI Population ageing Population growth Rate & eligibility change Indexation >CPI Population growth and ageing Age Pension

8 Australian governments face a decade of deficits on current trends Potential annual deficit of Australian governments budgets by 22 (Percent of GDP) %.% 1.% -2% -4% 1.5%.5% 1.% 4.% -6% -8% Forecast surplus Signature initiatives e.g. Schools, NDIS, Direct Action, PPL Health 2-21 trend Welfare response to inequality increase Terms of trade potential fall Deficit 22 on current trends Grattan Institute, Budget Pressures on Australian governments; subsequent Grattan Institute analysis 8

9 Queensland spends more on most categories than the two largest States Larger State government expenditure/resident $ per capita, , 8, 6, 4, 2, Infrastructure, transport & planning Other Industry Criminal justice Govt & economy Education Health Grattan Institute unpublished analysis Vic NSW Qld WA 9

10 Overview Australian government budgets are in trouble The Commonwealth has had a structural deficit for over 7 years Spending rise was masked by minerals prices Health, Age Pensions and infrastructure grew faster than GDP These rises were driven by policy choices rather than population ageing On current settings, the problems will get worse in the next decade Balancing budgets will require some tough choices Queensland has started earlier than other governments Budgetary reform will require both tax increases and spending reductions Few budget reforms are both large enough to matter and socially acceptable Pension and superannuation ages need to rise Superannuation concessions for the old and rich should be wound back Age Pension eligibility should be better targeted These reforms would also reduce the risk of the next generation being worse off There are the first signs of a cohort less wealthy than its predecessor Younger cohorts are struggling to buy homes Governments spend much more on older households, and this bias is increasing 1

11 After 8 years of rapid spending growth, the Queensland government cut spending hard Real expenditure growth by state government term, cumulative annual growth, % p.a C th Forward estimate Coalition Labor NSW WA Victoria Qld FE FE FE FE FE Source: Grattan analysis of Commonwealth and state budget papers. 11

12 All of the material budgetary choices require tough choices Budgetary impact of tough budget choices 21$b per year Collateral impact Age Pension assets test Negative gearing Pharmaceutical spend Pension and super access CGT discount Higher ed subsidies Defence spending Cost effective medicine Super contr concessions Super earn concessions Fuel tax indexation Transport infra costs Industry support School class sizes GST broaden Health rebate Mining royalty CGT owner occ Payroll threshold Fuel tax credit Bracket creep High risk in execution 16 Positive Neutral Mild negative Negative Very negative 12

13 Most of the more attractive reforms involve age pensions, super, and assets taxation Budgetary impact of tough budget choices 21$b per year Age Pension assets test Negative gearing Pharmaceutical spend Pension and super access CGT discount Higher ed subsidies Defence spending Cost effective medicine Super contr concessions Super earn concessions Fuel tax indexation Transport infra costs Industry support School class sizes GST broaden Health rebate Mining royalty CGT owner occ Payroll threshold Fuel tax credit Bracket creep High risk in execution 16 Pensions & super Assets taxation 1

14 Years of disability-free life have increased substantially Expected years of life for a 65-year-old by disability status Severe or profound core activity limitation Nonsevere disability 7 Free of disability 65 Males 1998 Males 29 Females 1998 Females 29 Source: AIHW (212) Table C2 14

15 Most older people choose to leave the workforce Per cent of people retired 1% 9% 8% 7% 6% 5% 4% % 2% 1% % < Retired when interviewed at this age Source: ABS (21) Cat 628 Table 6.1 Care for child or other Own sickness/disability Terminated/no work Temporary/seasonal job Left own business Holiday/leisure Coincide with partner s retirement Reached retirement age Other Issues finding work Discretionary exit 15

16 Lifting eligibility for Age Pension and taxfree super would increase retirement ages Cumulative per cent of male labour force retiring by age 1 8 Eligible for pension 6 4 Eligible for taxfree super 2 Public sector 54/ Age Source: Grattan analysis of ABS (211b) cat no

17 Super contributions tax concessions primarily benefit rich old people Superannuation concessions and government benefits per person per year Income decile within age group $ per person Under 5 5 to and over Additional super tax concessions at current thresholds Super tax concessions if capped at $1k Government benefits Note: assumes over 6s earning more than $6k/yr contribute to concessionary threshold. This is an individual-level analysis, and so does not pick up household-level income. Source: Grattan analysis of ATO (21i) 17

18 Tax free earnings on super for over 6s mostly benefits rich old people Income by source for those in their 6s, by income decile, $k yearly Other income Gross income decile Age Pension Super earnings tax concession Super income Note: Numbers presented are the income decile averages for each income category for those aged Source: Grattan analysis of ABS (211c) cat no

19 Age-based super rules result in different taxation of people with similar incomes Labour income, super earnings, and tax paid $k yearly 14 Super tax 12 Salary package: Both $1k Income tax 1 Super balance: Both $5k Super 8 contributions: Super earnings Yasmin, $8.5k 6 Olivia, $5k Interest/dividends 4 earned on super: Labour income Both $5k 2 59 year old Yasmin Note: Numbers based on 21 marginal tax rates, and earnings within the fund of 7 per cent. Source: Grattan analysis 6 year old Olivia 19

20 The Age Pension could be better targeted Household net wealth for matureaged households, $ million Proportion of mature-aged households receiving government benefits Benefits received by those receiving government benefits, $/wk % 75% 5% 25% % 4 2 Household wealth percentile Current asset test threshold Source: Balancing budgets. Note: mature-aged household is household where oldest occupant is over 65 $1m in wealth 2

21 Overview Australian government budgets are in trouble The Commonwealth has had a structural deficit for over 7 years Spending rise was masked by minerals prices Health, Age Pensions and infrastructure grew faster than GDP These rises were driven by policy choices rather than population ageing On current settings, the problems will get worse in the next decade Balancing budgets will require some tough choices Queensland has started earlier than other governments Budgetary reform will require both tax increases and spending reductions Few budget reforms are both large enough to matter and socially acceptable Pension and superannuation ages need to rise Superannuation concessions for the old and rich should be wound back Age Pension eligibility should be better targeted These reforms would also reduce the risk of the next generation being worse off There are the first signs of a cohort less wealthy than its predecessor Younger cohorts are struggling to buy homes Governments spend much more on older households, and this bias is increasing 21

22 Home ownership determines wealth, but younger cohorts are struggling to buy homes Composition of household wealth, 21 Home ownership rate, per cent 9 Other financial Busines Bank s deposit Shares Home Superannuation Other property Source: Hilda (21) Source: Yates (211) 22

23 Owning a second property is increasingly popular Taxpayers claiming rental losses (m) Financial year Source: Grattan analysis of ATO (21i) Individuals tax Table 1 2

24 Governments spend much more on older Australians Government benefits per household 29-1 $ per week Age of reference person in household Education Other in kind Health Cash Note: Other in kind includes child care assistance, other social security and welfare benefits, housing benefits and electricity concessions. 24

25 Those over 65 benefit more and more from government taxes and transfers Average net benefit by age of reference person 29-1 $ per week Note: 65+ bracket in 2-4 and 29-1 is a weighted average of and 75+ age brackets reported Source: ABS (various years) cat

26 There are the first signs of a cohort less wealthy than its predecessor Median wealth by age cohort, 21$ 9, 8, 7, 6, 5, 4,, 2, , - Source: HILDA (21) p. 75 <

27 Overview Australian government budgets are in trouble The Commonwealth has had a structural deficit for over 7 years Spending rise was masked by minerals prices Health, Age Pensions and infrastructure grew faster than GDP These rises were driven by policy choices rather than population ageing On current settings, the problems will get worse in the next decade Balancing budgets will require some tough choices Queensland has started earlier than other governments Budgetary reform will require both tax increases and spending reductions Few budget reforms are both large enough to matter and socially acceptable Pension and superannuation ages need to rise Superannuation concessions for the old and rich should be wound back Age Pension eligibility should be tightened These reforms would also reduce the risk of the next generation being worse off There are the first signs of a cohort less wealthy than its predecessor Younger cohorts are struggling to buy homes Governments spend much more on older households, and this bias is increasing 27

28 Backup Where do Australian governments spend their money? Infrastructure House price drivers 28

29 Welfare, health, education and infrastructure spending will be under pressure Combined government expenditure % = $5b Everything else 26% Ageing, community & disability 6% Infrastructure 7% Government operations Disability services Community services Ageing and aged care services Grattan Institute, Budget Pressures Criminal justice Foreign affairs Superannuation Debt management Economy and finance Industry Infrastructure transport & planning Defence - other Military operations Intelligence and national security Climate change and environment Military capability Other Skills Early childhood Research Seniors Schools Higher education Family support Workforce Hospitals Disability Health - other Pharmaceuticals Private health Health insurance - NFS Defence 6% Education 14% Welfare 22% Welfare - NFS Carers Welfare - other Primary care & medical services Health 19% 29

30 Almost 2/ of the Queensland budget is health, education and infrastructure Economy and finance Disability services Community Services Debt management Housing Legal Other Hospitals Health 2% Primary care and medical services Everything else 8% Industry Criminal justice Health - other Government operations Schools Education 17% Superannuation Infrastructure, transport & planning 2% Grattan Institute unpublished analysis Infrastructure, transport and planning Skills Early childhood Research

31 Public infrastructure spending is already near record levels Engineering construction work done for public sector % of GDP, calendar year 2.5% 2.% 1.5% Other Drains Water Electricity 1.% Railways.5%.% Source: ABS, Engineering Construction Activity, Australia Cat no 8762 Table 11. Excludes telecommunications which is insignificant after Telstra sale Roads, subdiv s, bridges 1

32 Queensland infrastructure spend has been very high, and is falling to normal levels Capital expenditure by government, by State 21$b Projections NSW 4 Vic Qld WA 2 SA 1 NT Tas ACT Financial year ended Note: Data to 212 is ABS gross fixed capital formation; data from is purchase of non-financial assets. Source: ABS Cat no 5512.; State and Territory budget papers

33 Traffic forecasts are not always adjusting to the new reality at least overseas Vehicle miles travelled in USA trillions per year Dept of Transport forecasts Actual State Smart Transportation Initiative

34 House price multiples rose as interest rates fell and they are unlikely to fall much further Interest rates and house price multiples Standard variable home loan rate Interest rate Ratio of mean dwelling price to GDP per capita House price multiple Source: RBA (21) Table F5, Stapledon (212) p. house price multiple is calculated as a ratio of the market value of all dwellings (Australia) to nominal GDP. 4