Reform spending not taxes

The public policy debate surrounding tax and government spending has travelled a long way since the Abbott government came to office committed to ending the “age of entitlement” – but in a direction that will sooner or later be proven unsustainable.

A small step away from the entitlement mentality was the now scrapped Medicare co-payment. This proposal would have required those who could afford it to make a small contribution to the cost of their own healthcare out of their own pockets.

Opponents of the co-payment successfully argued that applying the principle of user-pays to health was unfair. Yet many of the same critics would now support tax increases to fund health services, or rather to fund a financial bailout of state health systems. Those who said no to a GP Tax six months ago, say yes to a Public Hospital Tax today and one considerably higher than a $7 per GP visit part-payment.

NSW Premier Mike Baird’s call for the GST rate to be increased from 10 per cent to 15 per cent has created the false impression everyone is being asked to dip into their pockets to pay for the ever-increasing cost of ‘free’ public hospital care. But the GST hike came with a crucial caveat. Households earning up to $100,000 a year would receive full ‘compensation’.

If implemented, this policy would represent the age of entitlement redux. The cost of health services used by all would be paid for only by the rich.

It would also be a stop-gap measure and merely kick the problem of rising health costs down the road. As the NSW Auditor-General has famously found, if the cost of health continues to increase at current rates, health spending in NSW will consume the entire state budget in 20 years’ time. This is the definition of unsustainable.

Tony Blair has argued that as technology improves and populations rapidly age, the healthcare systems of countries such as Australia cannot remain affordable “without putting individual responsibility and public health policy at the centre of the debate.” The only solution is to shift health costs off government budgets and require individuals to fund more of the cost of the health services they consume.

But exposing the fiction that is free and universal healthcare would require political leadership willing to tackle the sacred cow of Medicare. Instead we are trapped in the politics of the entitlement mentality, which maintains that governments will always be able to take from the few to give the many the things they aren’t prepared to pay for themselves.

 

BIGGEST SINGLE PEACETIME TAX INCREASE

Increasing the GST by 50 per cent would represent the biggest single peacetime tax increase in Australian history. Rather than address the root problem of government health spending, it would worsen the political problem that prevents genuine reform.

Protecting households up to $100,000 (a majority) from the change and loading of all the burden onto a minority represents an extension of the established tax-transfer system. This is the system that results in a majority of households being net recipients from government when all taxes paid are compared with benefits received, including social transfers in kind such as health benefits.

In short-sighted terms, the interests of this majority are best served by voting for more of the same, which is what Baird’s plan would deliver. He knows the 15 per cent GST would never see the light of day if a majority of households perceived it would make them worse off.

On a longer term view, this more-of-the-same formula is unsustainable. Not only will the growth of social transfers impose an intolerable squeeze on other legitimate functions of government, but the tax load on the minority will become so damaging to the wealth-creation process that the fruits of economic growth won’t be there to be distributed – something that has already happened in the more advanced welfare states.

It seems tax reform has morphed quite quickly into a hunt for more revenue, but simply increasing taxes doesn’t reform anything. Rather, it is a recipe for putting off reform of spending. We need genuine tax reform – of the lower, simpler, fairer kind – but we also need expenditure reform at least as much.

Ring-fencing health from reform to justify higher tax and spend policies does not meet Blair’s test of the kind of debate about health care affordability we need to have.