Both sides of politics falter in fairness test

18 Feb 2015

This article was written by Paul Kelly Editor-at-Large and published in the Australian Newspaper February 18, 2015

FAIRNESS as a political idea relating to moral obligations by government has been integral to the near destruction of the Abbott government — yet Australia’s so-called fairness debate has been weak, populist and deceptive.

Neither side of politics satisfactorily meets the fairness test. The Abbott government last year misjudged fairness as a public issue and brought down a budget far too unfair in its redistributive impact.

At the same time the Shorten opposition turned fairness into a populist drumbeat, attacking many budget measures and arguing the budget was unfair because of the hurt it imposed — on pensioners, patients, motorists and students.

The start point is the recognition that Australia has one of the most progressive or fairest tax-transfer systems among OECD nations. This was highlighted this week by the parliamentary secretary to the Treasurer, Kelly O’Dwyer, who provided statistics on personal income tax.

Nearly 50 per cent of people filing a tax return pay less than 4 per cent of income tax. The top one-sixth pay two-thirds of all income tax. The trend at the top is pronounced — just 2 per cent of taxpayers pay 26 per cent of all income tax. It is how a progressive tax system works. And Australia’s top marginal rate at 49 per cent is high, hardly constituting an incentive for anything but income tax avoidance. This reminds us of Joe Hockey’s mantra: there are no free services because somebody pays, even in a system where free services are often assumed to be a civilised right.

In her speech to the Centre for Independent Studies, O’Dwyer referred to OECD statistics showing that wages represent only 17 per cent of incomes for the poorest one-fifth of society. “This is the lowest of any OECD nation,” she said.

Is this good or bad? It is bad to the extent that more people at the bottom should be in jobs. But it is good to the extent that our social security system is targeting welfare benefits to the most needy, an Australian policy value.

The point is that Australia has close to the most progressive redistribution system among developed nations. For many years we have directed the highest share of social security to the poor and the lowest share to the rich.

O’Dwyer said the top quintile got less than 1 per cent of its income from government. (The OECD average is 10 per cent and in that socialist nirvana France the figure is closer to 30 per cent.) Our system of targeted welfare is largely doing what it is supposed to do.

Labor almost never mentions these figures because it locates the fairness debate in a completely different context. But if Labor wants to impose a fairness test on every individual measure — the test it applies to the budget — that means more onus on a redistribution system too narrowly based on income tax at the higher end.

Labor’s ideological opposition to any change in the GST must be seen in this context. A frozen GST means even more revenue dependence on income tax and more pressure on the top 15 per cent of taxpayers to feed the spending demands of the community. How fair is this? It depends on your perspective.

Such a progressive tax-transfer system has another consequence: if government decides to curb spending across the board this will increase inequity. That arises because the spending status quo is so heavily geared to redistribution.

In the 2014 budget, however, the Abbott government did something else — it targeted the less well off for savings. Labor was perfectly correct to argue the budget was unfair. This was based on fewer savings in absolute terms being extracted from the better-off, thereby making the proportionate extent of unfairness even greater.

Labor’s rhetoric, however, reveals it also opposes the budget simply for making people worse off. But how is it unfair to index the petrol excise maintaining the tax on drivers in real terms rather than seeing the tax diminish? Labor has no credible answer.

Labor says fairness means Medicare must remain universal but, given inevitable pressures on the health budget, isn’t it fairer to think of means-testing Medicare? Why is it unfair to ask middle-class university students to meet 50 per cent rather than 40 per cent of their costs and ask the general taxpayer (not attending univer­sity) to subsidise them to a lesser proportion?

O’Dywer recruited generational equity to her cause. She said using this test the six Rudd-Gillard budgets were the “most unfair budgets in Australia’s history”. This is because, starting from a net cash surplus of $44.8 billion, Labor delivered $240bn in total deficits. This is a debt against the future. These budgets constitute a choice to partly finance current generation living standards, health, education and welfare off borrowings the next generation must repay. How fair is that?

Labor defends its record and herein is the problem. Labor will not concede the full extent of the fiscal dilemma because that means accepting a high degree of culpability. The politics of subsiding living standards off borrowings is neat — the young and the unborn don’t vote. If you want a profound moral problem around fairness, this is it.

While the friendly Keynesians say “history shows this is no problem”, the Treasury says our sub-trend growth means it is indeed a real problem because economic growth alone cannot repair our budget deficit based on a structural imbalance between spending and revenue. A further fairness fracture is the current structure of spending. As the Grattan Institute recently argued in its paper The Wealth of Generations, much of the big increases in spending — health and the age pension — go to the older generation. Public policy now promotes the idea that the next generation will be worse off than its parents by the spending choices governments are making. How fair is that?

This week both sides of politics have rejected any effort to include the family home in the pension assets test, thereby validating people who are asset rich retaining a pension entitlement. Fairness? Please. The next time politicians bang on about fairness they should be subjected to a scrutiny that ends the rhetorical scam.

Meanwhile the politics of fairness will shift to tax breaks, notably on superannuation. This option cannot be ignored for much longer and Labor will be tempted to seize this idea. If the Abbott government was smart and fair it would get in first and address super tax breaks.