Thursday, May 02, 2013

Fear taxpayers to take up disability levy slack

Prime Minister Julia Gillard this week framed the fiscal scenario surrounding the Budget as one in which the growth in government revenue collections has fallen short of their previous expectations.

Stronger than expected reductions in the company and mining taxes, in particular, have meant that total Commonwealth general government revenue will increase 7 per cent this financial year, rather than the 11 per cent expected at the time of December's midyear economic and fiscal outlook statement.

With aggregate spending still at excessive levels, spilling over in the form of a persistent Budget deficit and burgeoning debts, Ms Gillard indicated that her Government needed ''to have every reasonable option on the table to meet the needs of the times, even options previously taken off the table''.

The Government wants a 0.5 per cent levy dedicated to funding the National Disability Insurance Scheme, incidentally a proposal that the Prime Minister ruled out six months ago.

Strictly dedicating a pool of funds towards specific purposes can help reveal the full costs of such initiatives to the taxpayer.

However, there are reasons for taxpayers to be concerned about the financial efficacy of an NDIS levy, if the experience of the longstanding Medicare levy is any guide.

The Medicare levy was introduced in 1984 at a rate of one per cent of personal taxable income and was described by the Labor government during the September 1983 Medicare parliamentary debates as a ''substantially self-funding'' arrangement for Medicare.

But subsequently, experience has shown that changes to the Medicare levy have acted in effect as generalised income tax increases befitting political needs to expand consolidated revenue.

In 1986 the Medicare levy was increased to 1.25 per cent and again to 1.5 per cent in 1995, with an additional Medicare levy surcharge of one per cent enacted by the Howard government to encourage higher income earners to take up private health insurance.

In addition to insufficient safeguards against levy increases, the Medicare levy has consistently been found to be seriously deficient in meeting its original ambition of financing most, or all, of the Medicare system.

According to the Australian Taxation Office, the Medicare levy raised $7.7 billion in revenue whilst the accompanying surcharge raised less than $200 million in 2009-10.

The amounts raised by the levy and the surcharge only cover about half of the estimated Medical Benefits Schedule spending during that year and would cover less than 30 per cent if Federal hospitals and Pharmaceutical Benefits Scheme expenditures were also included.

The effect of patients not fully facing the costs of their health care is that the remaining costs associated with Medicare are borne by general Commonwealth government taxpayers, which defeats the purpose of tax hypothecation for Medicare.

Some preliminary estimates suggest that the modest 0.5 per cent increase in the Medicare levy, rebadged as an NDIS levy, would raise a little over $3 billion a year.

However, the likely fiscal costs associated with the NDIS are forecast to be up to $22 billion in gross terms, or $8 billion in net terms, in its first year of operation alone.

At first glance, an NDIS levy would need to be set at a much higher rate to collect enough revenue to fully fund the disability support needed across the country, however, there is the pressing economic need to ensure that the levy does not unduly hamper economic activity through the disincentive effects of higher taxation.

Therefore, it is difficult to imagine how an NDIS levy would not replicate the largely unhappy experience of the Medicare levy, with entrenched higher tax rates unable to deliver sufficient funding for the intended purpose.

If both parties remain determined to implement the NDIS, a more effective approach would be to make sustained and permanent reductions in government expenditures elsewhere.

There are always opportunities for governments to divest themselves of responsibilities in activities which do not correspond with public goods, such as industry subsidies or arts and recreational spending.  There also seems to be a growing acceptance of the need to reduce middle-class welfare payments.

Both Labor and the coalition could also make a case for a generic reduction in funding right across the board, to fund an NDIS.

As risky as the NDIS is likely to be in terms of the effective containment of spending pressures in the longer term, funding it through spending cuts, as opposed to increasing taxes, should at least encourage politicians to become more discerning more often about their budgetary priorities.

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