Making plans for top-heavy future

Many Australians are now wondering about the outcome of the May federal budget proposals. Even with the repeal of the carbon tax achieved, it's unclear how many and which of the savings measures will be enacted in to legislation.

At the macro-economic level, this means the actual size of this year's federal deficit won't be known for quite some time even if the revenue estimates come in as targeted. The worst-case scenario for the government would be for revenues to fall short of estimates at the same time as planned savings are rejected by the Senate.

This wouldn't necessarily cause serious problems funding this year's deficit because our federal debt is relatively low by international standards. Even if Federal Parliament ends up being dysfunctional for an extended period, Australia is unlikely to lose its prime credit rating for several years yet. Any damage is therefore unlikely to be short term. A larger than planned budget deficit could even help underpin an economy that is still performing well. The medium and longer-term consequences of political stalemate are of far greater concern, primarily because of the delay in resolving our structural financial problems.

The longer the delay in making fundamental changes, the greater and more difficult the task future governments will face in balancing the books. A combination of factors needs to be dealt with as soon as possible.

A key concern is the steadily ageing population, with very rapid growth in the oldest age groups. The consequences for age pension, health, aged care and disability support outlays in future years are huge.

These funding problems have been increased by short-term decisions made in the 1970s and '80s not to fund national superannuation schemes as was done for the Canada Pension Plan. While assistance to private superannuation was beefed up in the '80s and '90s, it's now being cut back so much that many future retirees will have inadequate private funds to keep up their living standards.

The problems aren't solely on the expenditure side. Our federal revenue system is inadequate to meet the funding needs of an ageing population. With the revenues from the GST earmarked to fund state outlays, federal government collections rely far too heavily on income and excise taxes.

Raising personal income tax will mean higher burdens on a declining sector: the working-age population. Even if expenditure growth can be controlled, major taxation changes will also be needed to meet future funding needs.

We can only hope that we're not in for years of political gridlock that preclude essential fundamental changes.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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