The way ahead means tax and welfare reform

The media has been quick to characterise the current debate about tax and welfare reform as criticisms of the Government, even criticisms of its record. As practical people we should judge our leaders, in whatever field, on output, not rhetoric: on substance not process. The truth is the reason we have today such an exciting public debate about the possibilities for policy reform is because over the last nine years we have seen a Government which is prepared to undertake serious and controversial economic reform. We have also seen the real economic dividends that reform has produced.

It is the Government’s record of reform in the past that gives all of us the confidence to discuss and promote reform in the future.

The single biggest change to our society, and to the world, is demographic. Because of a decline in fertility and an increase in longevity the percentage of our population which is “aged” is going to dramatically increase. Those over 65 today are 12 per cent of the population. In fewer than 40 years they will number a quarter of the population. More significantly perhaps, those over 85 who today represent 1.4 per cent of the population (about 300,000 in number) will increase to nearly 6 per cent of the population (or nearly 1.6 million). Between now and 2045 about 2.3 million will be added to the working age population (defined as 15-64) but there will be 4.3 million added to the 65s and over - of whom more than half a million will be over 90.

Instead of there being more than 5 people of working age for every person over 65, by mid-century there were will be only 2. This demographic change will add considerably to expenditure on health (especially the PBS), aged care and age pensions. After taking into account some modest savings on education (fewer children), there will be by mid century additional fiscal pressure of 6.5 per cent of GDP, amounting over 40 years to $4.2 trillion. If this were to be met by increased taxation, far from reducing tax we would need to increase it by 21 per cent.

A consequence of ageing which we can at best ameliorate but not avoid, is that the legitimate claims on Government for health care, pharmaceutical benefits, aged care and pensions and the like will increase and will do so significantly. By mid century, we could be looking at a Federal Budget deficit equal to 5 per cent of GDP.

These momentous changes are upon us. They cannot be averted in the medium term. They make further substantial economic reform a vital necessity.

Without diminishing the scale of the challenges ahead of us, we must note that Australia is better positioned than any other developed country to deal with the consequences of ageing: we have little or no government debt; our retirement income system includes a growing element of personal savings and superannuation; and our birth rate while below replacement level is much higher than that in most other developed countries.

Our prosperity, our “national income”, is a function of three factors: population, participation and productivity.

It is clear we cannot, between now and mid century, do a lot about population. Vital though a strong skills based immigration program is, there is no practicable level of immigration which can materially offset the ageing phenomenon. I emphasise here that promoting a higher birth rate should be a national priority. Fertility is a critical element in our forward planning. For that and other reasons we should promote marriage and discourage divorce. But the results of those pro-natalist, pro-marriage policies will be seen many decades in the future.

The only factors we can work on in a shorter timeframe are participation and productivity.

Our national goals, our compass markings as we chart our national journey through this century must include greater levels of participation in the workforce and higher levels of productivity.

Every aspect of Government policy, be it tax, welfare, corporate regulation or workplace relations, should be tested at least by these questions: