TAXATION: by John BallantyneNews Weekly
Government's dilemma - "future fund" or tax cuts?
, February 4, 2006
Should the Howard Government hang onto its huge budget surplus or give it back to taxpayers?, asks John Ballantyne.The Commonwealth Government's finances have never been better. Thanks to years of economic growth and the proceeds of bracket creep and petrol excise, the Government continues to enjoy bumper tax windfalls. Its budget surplus, for this 2005-06 financial year, is predicted to swell to $11.5 billion.
So where does the Howard Government go from here? Should it pay back some of this money to voters in the form of tax cuts? Or should it continue to hoard it until just before the next election and use it to fund its pre-election promises, as it has done on previous occasions?
There is no end of people offering advice on what to do with the budget surplus.
Business and industry groups have predictably called for cuts in personal income tax. The country, they say, can well afford it, and the current top marginal rate of income tax, at 47 per cent, is far too high.
Access Economics director Chris Richardson, however, has warned that running down the budget surplus to finance income tax cuts will only stimulate higher consumption spending, thereby over-heating the economy and prompting the Reserve Bank to raise interest rates.
The apparent alternative is that the Federal Government should hang onto the budget surplus and invest it in its proposed Future Fund.
However, former secretary to the Treasury, John Stone, has ridiculed this idea, saying that the Government "should stop talking nonsense about hoarding those surpluses for the benefit of some future generation much richer than us". (The Australian
, May 2, 2005).Tax relief for savings
Finance Minister Senator Nick Minchin has recently floated the idea of offering especially-targetted tax relief that, instead of stimulating consumption, would encourage people to save more for their retirement. This could be achieved, he argues, by scrapping the 15 per cent tax on superannuation contributions.
This would add an extra $610 each year to the average wage-earner's superannuation account and, according to the Association of Superannuation Funds of Australia, could increase a future retiree's income by $30 a week.
Senator Minchin has criticised the current tax treatment of superannuation, saying: "It is a great bone of contention in the Australian system that we do tax super three times - going in, and while it's there and when it comes out." (Australian Financial Review
, January 23, 2006).
Scrapping the superannuation contribution tax would cost the Government $3.3 a year in lost revenue and reduce its budget surplus; but it would neither reduce savings nor stimulate spending on consumption.
All it would do would move a proportion of the nation's savings (in the form of the Government's budget surplus) from public into private hands.
A more ambitious savings scheme has been canvassed by Peter Saunders of the Centre for Independent Studies (CIS). He asks: Why should politicians control a single Future Fund? Why not instead have "20 million future funds" - one for each Australian?
Saunders writes: "The Future Fund is expected to exceed $60 billion by mid-2007. An equal share-out among all permanent residents in Australia (children as well as adults) could at that time provide everyone with their own personal 'future fund' (PFF) worth around $3,000.
"Further dividends from the Government as it disposes of surpluses in the future, together with contributions from individuals themselves, could swiftly raise this to around $5,000 per person." (Peter Saunders, "Twenty Million Future Funds", CIS's Issue Analysis
, No. 66, December 21, 2005).
He argues that this would help reduce people's reliance on government welfare and enable them to provide for themselves.