Relax.
According to Treasury over the next 40 years the average income of a full-time employee is going to surge from $89,000 today to $164,000 in 2060, life expectancy is tipped to rise, and the GDP of the Australian economy is tipped to more than double in size.
But despite all the good news heading our way the Treasurer wants you to be afraid. Very afraid.
The front page of The Australian moaned ‘Our bleak future: Births to fall, deficits to stay’.
The Australian Financial Review focused on ‘40 years of deficits’ but what neither paper reported – because the Treasurer Josh Frydenberg didn’t mention it – is that all of the Budget numbers in the so-called Intergenerational Report (IGR) are based on the assumption that Australia will cut the income tax rate every year for the next 40 years.
You would think that forecasting 40 years of income tax cuts would be a big, good news story for the Morrison government.
But again – the whole point of the Intergenerational Report is to scare Australians into believing that we need another big dose of ‘reform’ if we are to stop the economy going to hell in a handbasket.
If people thought that the economy and the budget were in good shape, they might start demanding simple things like more funding for health, education and protecting the environment.
And the last thing the Australian Treasurer wants is for the Australian economy to start looking more like the successful Nordic countries.
So how do you make 40 years of growth and prosperity seem like bad news?
Simple. Bury some dodgy assumptions deep in the economic modelling and hope no one asks any simple questions about them.
The main assumption that drives the ‘looming catastrophe’ story is that spending on health and education is expected to grow, but that revenue from our progressive income tax system is assumed to shrink.
Yep, you read that right. Even though the inflation-adjusted average income is expected to rise to $164,000 by 2060, the Intergenerational Report assumes that we won’t get any steady increase in income tax revenue because the government will be cutting income tax rates every year.
Think of it this way. Someone earning $200,000 a year today pays about $61,000 in tax, and by 2060, even after for controlling for inflation, there will be a lot more people earning $200,000 per year.
But according to Treasury, people earning $200,000 per year in 2060 should pay a lot less tax than someone earning that much today. And it’s those future tax cuts that ‘cause’ all the future deficits.
The economists at Treasury clearly have a very strong belief that high-income earners in the future should pay less tax than high-income earners do today and, of course, they are entitled to their personal preferences.
But despite the fact that Treasury has made this assumption in all five of its Intergenerational reports, it is important to highlight that there is nothing in economic theory – not a word – that suggests that it is ‘efficient’, ‘fair’ or in any way ‘necessary’ to ensure that tax collected from high-income earners doesn’t rise when the number of high-income earners rise.
To be clear, the Treasurer and others often talk about the unfairness of ‘bracket creep’, which occurs when inflation pushes people into higher tax brackets.
But all of the analysis done in the Intergenerational Report controls inflation.
As productivity growth pushes real wages higher and higher, the number of high-income earners obviously rises.
If the Intergenerational Report assumed that our tax brackets rose in line with inflation each year, the amounts of tax collected would still rise steadily out to 2060, which would of course destroy the scary story the report is designed to tell.
Australia is already one of the richest countries in the world and our Treasury expects our national income to more than double by 2060.
But rather than popping champagne corks, Treasury’s assumption that we need to cut income taxes every year means the public is told that we ‘can’t afford’ to provide high-quality health and education to all Australians. But of course, we can.
As new book The Nordic Edge: Policy Possibilities for Australia by Andrew Scott and Rod Campbell makes clear, if Australia based its policy making on the successful Nordic countries we could easily have much better health, education, welfare and, if we wanted one, a much smaller budget deficit.
The tax/GDP ratio in Sweden is 43.9 per cent and in Denmark it is 45.8 per cent, while in Australia it’s only 28.7 per cent.
The fact that they collect more tax than us hasn’t ruined their economies, but if Treasury assumed that tax revenues might grow with our incomes it sure would ruin their scare story.
Richard Denniss is chief economist at independent think tank, The Australia Institute @RDNS_TAI
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