Hello, my name is David Linke and I’m the head of Corporate Tax for KPMG Australia. On May 13, the Federal Treasurer, Joe Hockey, will present his first Federal Budget to the Parliament since the election of the Liberal/National parties. And it really is an opportunity to commence the repair of the Federal Budget and start to place the country on a sustainable footing. Questions about what services does the public require, and how we’re going to fund those services are critical in this first budget since this government came to power.
And we’ve had recently the Commission of Audit, released by Mr Tony Sheppard and his commissioners recently, and that contains 86 recommendations principally focused on the expenditure side of the budget and really aiming to ensure that the expenditure side of the delivery of government services is on a sustainable footing. So it really will be this Federal Budget, a question of balancing some of those recommendations from the Commission of Audit and also looking at the tax reform side of the equation.
Now the tax reform side is still the missing piece of the puzzle, because the Commission of Audit did not look at that. Admittedly that is part of a separate government white paper for later on this year, but continually through the Commission of Audit report, they noted that the revenue side of the budget does need to be addressed.
So what do we expect in this Budget? I think we expect to see some changes to the aged pension. It was a clear focus of the Commission of Audit’s report, and they made some recommendations on eligibility in terms of age and also indexation. And I think if you look at the cost of the aged pension, it really is a clear focus for our policy thinkers in the country. The aged pension currently costs the Federal Government about $39 billion a year, and it goes to approximately 2.4 million people. And in terms of the Commission of Audit’s numbers it’s growing at 7 percent per annum. So it really is a significant cost to the expenditure side of the Federal Government.
And if think about the ramifications of that particular issue, it really folds neatly into the tax reform issue. Some recent analysis from Bernard Salt shows the demographic bubble issue that Australia has relied on for so long and the issue it now faces in terms of its budgetary position.
For the last 40 or 50 years, each year approximately 20,000 people roll into the 70 or above age bracket, and therefore leave the workforce – they may have left earlier – but leave the workforce and start to draw down on the healthcare system and the pension system. In 2014, that figure is 60,000 people will hit 70 or above.
And Bernard Salt’s estimates are that by 2017, it will be approximately 80,000 people per annum. So you can that the demographic bubble that’s really supported our system of federal taxation and expenditure for the last many decades is coming under serious stress. So I think aged pension will be a key issue.
For healthcare there is already been some indications that a co-payment system will be looked at, and some changes to the Medicare system. So you can expect to see some announcements to this regards as well.
The other matter that is being floated by the government recently is a debt levy, so a temporary surcharge on high income earners. And the real underlying policy rationale behind this seems to be that a levy is an appropriate mechanism to repair the Federal Budget, repay some of the Federal Government debt, and ensure that high income earners pay their fair share of that burden. The concern with that debt levy is that it will push even higher our marginal tax rates. With a debt levy of 1.5-2 percent, marginal tax rates in this country will be at 49 percent, and therefore significantly in excess of some of our comparative trading partners. There is a question whether we will be internationally more non-competitive.
So it will be an interesting Budget. I think tax reform is still to come in terms of later on the year with the government’s white paper. We do expect to see some tax changes on Budget night, but our sense is and my view is that more focus on the expenditure side come May 13.