AFR: Why Hockey's Budget Has Not Convinced the Voters

Published in the Australian Financial Review on July 3, 2014

After eight weeks the budget is still seen as the least fair in two decades. At the heart of the disagreement between the Coalition government and the Australian people about the budget’s fairness is a fundamental difference of opinion over what fairness actually means. Instead of branding anyone who criticises the budget as being guilty of class warfare, the government would gain greater support for tough fiscal measures if understood that the Australian people will never accept it is fair to hand out cash payments to middle and higher income earners while cutting benefits to the poor.

A budget could be fashioned to achieve greater savings than Treasurer Hockey's effort while passing the fairness test. But the government seems unwilling to consider going down this path for fear of upsetting beneficiaries of middle-class welfare.

This fairer, stricter budget would more rigorously means test the age pension, the seniors’ health card and family payments. This would allow the government to abandon its plans to lift the pension eligibility age to 70 years, together with its pernicious decision to deny all stay-at-home mothers family tax benefit part B when their youngest child turns six.

Stricter income testing would mean genuinely needy people would not be denied access to the pension or family payments while much greater structural savings would be achieved.

During his budget speech, Treasurer Hockey complained that a retired couple with a home and more than $1 million in assets qualifies for the age pension. Yet the budget does nothing about it. While it is understandable that the Treasurer might not want to include the family home in the pension means test, why not include more private income?

When the Keating government introduced compulsory superannuation, the aim was to provide income security in retirement while achieving structural budget savings by lessening dependence on the age pension. But by relaxing the pension means test and increasing the generosity of superannuation tax concessions for higher income earners, the Howard government punched a hole below the budget's waterline. That hole is getting bigger by the year and will sink the budget as population ageing gathers pace.

So Hockey is right to complain about 70 per cent of retirees receiving the age pension but wrong in failing to tighten means tests. Instead he is unsuccessfully trying to convince the Australian people that the country cannot afford to pay the pension to anyone under 70 years of age.

Health costs, too, will continue to escalate as the population ages. But again the government’s response is to hit everyone with a Medicare co-payment with the stated aim of deterring them from making too many visits to the doctor. None of the savings achieved would go to improving the budget bottom line. At best this is short sighted. No work has been done on the effect of reduced chances of early detection of diseases such as cancer, heart disease and diabetes on hospitalisation rates and ongoing health care for sufferers of these chronic ailments.

The previous Coalition government relaxed eligibility for the seniors health card. A retiree can earn up to $50,000 a year and receive unlimited superannuation income and still remain eligible for the health card. The government rejected the audit commission’s recommendation to include superannuation income in the means test and instead indexed the eligibility thresholds to maintain the scheme’s generosity.

Using the proceeds of the first mining boom, the previous Coalition government also relaxed means tests on family payments. Prime Minister Howard boasted in parliament that a family earning $54,000 per annum paid no tax. Of course it did. But in a money-go-round it received back from the government in fortnightly cash payments an amount exactly equal to income tax it paid.

The government's audit commission pointed out that a family earning up to $170,000 a year could receive family tax benefit part A. To his credit, Hockey froze the upper income eligibility thresholds for family payments and tightened the means test on family tax benefit part B. However, the $170,000 threshold for family tax benefit part A still applies.

The government’s reluctance to apply proper means tests appears to reflect a Coalition philosophy that government payments should be universal and not penalise the financially successful. As opposition leader last year, Tony Abbott told the National Press Club that when the Labor government said it was attacking middle-class welfare "it's just attacking the middle class - because the family tax benefit and the private health insurance rebate are tax justice for families, not handouts." These sentiments are reflected in Abbott's book, Battlelines, where he writes: "What's missing is a universal system of family assistance."

When the previous Labor government began means testing the Howard government’s universal baby bonus, Abbott condemned it. When the Labor government reduced the baby bonus for second and subsequent children, Hockey likened it to China's one child policy.

Universality of government payments is a fine notion in a world of no fiscal constraints. But Australians have a different notion of fairness - provide a social safety net for the poor and don't cut holes in it because you're too frightened to withdraw payments from middle-class constituencies who don't really need them.