As widely expected, this year's budget was a non-event aimed at avoiding controversial changes in an election year. But for the reasons outlined below, major changes will be required to both our tax and expenditure arrangements even if the mining boom continues unabated.
The projected deficits of about $18 billion for this year and the next are not the problem. But if the federal government cannot generate a surplus when the economy has been growing at close to 3 per cent in real terms, real problems will arise because of the ageing of the population.
Further, if the end to the boom lowers the value of the dollar, this will increase inflationary problems and add to the costs caused by an ageing population and foreshadowed boost in education and disability outlays. The biggest challenge is that personal income tax now provides the bulk of federal government revenue.
Now with the population ageing rapidly, relying primarily on income tax collections is a high-risk strategy which will upset the working-age population. While Labor is highlighting the benefits of its increase in the tax-free area threefold to $18,200 annually, this has resulted in higher marginal tax rates on those working.
The tax-free area is even higher at $20,452 annually because of the low-income tax offset. This means a couple with income equally split do not pay tax until they earn $40,904. If their combined income is $74,000, tax is only $6785, or 9 per cent of family income.
Such high thresholds will force future governments to lift marginal tax rates to maintain revenue. This is what was done this year by not indexing the thresholds for inflation over the next two years and by a 0.5 per cent discretionary increase in the Medicare levy from July 1, 2014.
By reducing the assistance provided to superannuation savings and lifting the age pension, the government is encouraging retirees to access the pension in retirement. Just how large the increased demand will be depends very much upon future superannuation earnings rates.
If these are reduced by lower interest rates, this will encourage using up capital to increase age pension entitlements in retirement. While it might have appeared attractive at the time to earmark revenue from the GST to the states, this could prove to be a costly decision.
Funding an ageing population without access to the most important source of indirect tax revenue will cause headaches for all future governments. Hopefully the economy will continue to perform well to allow sufficient time to address these problems.