Debt and Superannuation

George Megalogenis in Future budgets offer super reasons for wholehearted tax reform looks at a couple of issues facing the economy - debt and superannuation. On lending he notes that, because of Australia's strong economy and good public finances, other countries want to lend us money. Unfortunately, it seems that the banks are less keen to lend to business. This is having a drag on the economy.

George also notes that the Government intends using some of the revenue from the Resource Rent Tax to help finance state infrastructure, something that might have a downside:

Wayne Swan, for instance, wants to use about one-fifth of the proceeds of the mining tax in the first three years to set up a fund to bankroll state infrastructure. Taking a little extra revenue from the resources boom to build a road, or a school or a hospital, may impress the focus groups. But it makes no fiscal sense for a government to buy with cash. In fact, dud investments are more likely if they are paid for directly out of the budget because politicians will err on the side of the cheap photo opportunity, not the big, bottleneck-clearing project.

The other reason to borrow for infrastructure is the cost to taxpayers can be spread from this generation to the next, across the life of the asset. It seems perverse, but the very fact of a loan focuses the public mind. If the benefit exceeds the interest bill, the project goes ahead. If not, no deal.

George also notes that the Government will receive less revenue as superannuation contributions are increased from 9% to 12% as these contributions are taxed at a much lower rate than income.

One other item in George's column:

The compulsory system turns 20 years old on July 1. In the first 14 years, it coincided with a fall in the household savings ratio (which measures the share of disposable income that is put aside in any form of savings, including voluntary contributions to super). In the 15th year, 2006-07, Peter Costello removed the tax on super payouts and encouraged higher-income earners to put an extra $1m of their own cash into super.

I actually think that removing the tax on super payouts was one of the worst decisions of the Howard Government. As the population ages the Government is going to be faced with declining revenue from income tax. I think a future government will at some stage need to re-instate the tax. That's going to be a very hard policy to sell politically.