Greg Smith, a member of the Henry Tax Review, said on the second day of the Federal Government’s tax forum that the welfare payments system would become unsustainable.
I’m sorry to inject a sad note into the discussion, but my prediction for the next 10-15 years is that the issue will not be stop the taxes or stop the boats, it will be stop the welfare system.
Mr Smith said government spending and transfer payments would rise from 35 per cent of the nation’s annual gross domestic product (GDP) to 45 per cent over the next few decades. This could result in the average marginal tax rate rising from a current 45-50 per cent to 55-60 per cent, to fund government spending.
The marginal tax rate is the highest rate of income tax that a person pays on their income. Government spending had to be more efficient so the strains on the welfare transfer system did not place significant pressures on the budget, Mr Smith said.
It is a crisis . . . Australia has to basically become much, much smarter with the way we do government spending and the way we do the transfer system if we are going to make this a sustainable policy.
Treasurer Wayne Swan said Australia had always done well in putting in place a “judicious” mix of taxation.
We have got to make sure on the one hand we can fund first-class services in our economy, a first-class social safety net, whilst we compete in a region where many of those services are not provided. There is not some magic pudding out there that means we can fund every enhancement to our social security system and our social safety net.
Bingo, Mr Swan.
I have argued for some years now of this impending crisis. Over the next 10 years the last of the baby boomers are set to retire, and such is the vastness of their current numbers in the workforce, there are not enough Gen X or Gen Y members to replace them.
Most of these baby boomers have not had the luxury of a life-long superannuation plan or access to compulsory super programs. We could argue that they have not had the foresight to prepare for their retirement financially, nonetheless, their retirement years will be funded by the Age Pension and their welfare through other government support programs. This will place an enormous strain on the budgets of future governments for the next 30 or 40 years, that is, until the baby boomers have passed on and replaced by the growing generation of people who have the nouse and access to support programs to fund their own retirement.
In the meantime and the immediate future we face a dilemma, as warned at the Tax Forum.
The growing burden of financing the retirement years of the Baby Boomers can only be met through an increase in the number of tax payers in the workforce. But with a decrease in the size of the workforce predicted, we’re facing a real budget, spending, and welfare crisis.
The alternatives are to cut spending, raise taxes, or develop initiatives to increase the workforce (eg lifting the retirement age or increasing the number of skilled immigrants), and subsequently the number of desperately needed tax payers.
I look forward to your suggestions.