This Budget is forged in the fire of the most challenging global economic conditions since the Great Depression.  ….it is a nation building budget. ….this is not an easy budget for easy times.  So said the Treasurer Wayne Swan MP when introducing the second Labor budget of the Rudd Government.

What a load of codswallop!  After all the tough talk, it was somewhat of a wimpy budget. Why wasn’t it as harsh as had been predicted?  There was a perfect opportunity for the government to hit the hip pocket without being hurt too much by the electorate.  After all, it has been talking up how bad things are for sometime (some would say that things are not as bad as what we have been told) so surely the electorate would be forgiving in these circumstances.

Could it be this is part of a plan for an early election? Is it possible the government wants us to think that they can pull us out of this recession with little taxpayer pain only to stick the boot in after they have been re-elected?  Who knows, only time will tell.

One thing is for sure.  Debt such as the government is racking up now cannot be repaid without there being pain to taxpayers.  Taxes, direct and indirect will have to rise and middle class welfare will have to be pared back as growth in the economy alone will not do it. Somewhere along the line, we will have to pay.

But what about the budget itself?  As always, there was some good and some bad.

Superannuation

Many are rejoicing the fact that there was little tinkering with the superannuation system.  However, there are a number of inquiries going on in the superannuation system at the moment.  The amount of money in superannuation (which is concessionally taxed) is too large for a cash strapped government to ignore. Not only cynics would be forgiven for thinking that any changes would be best made in a second term when the blame can be shifted to the inquiry outcomes.

Budgets are framed by bureaucrats and politicians who live in a sheltered and pampered world in terms of their retirement benefits. Politicians have generous benefits paid to them, particularly when considering the period served. The bureaucrats are generally lifetime public servants who have accrued superannuation during 40 years of service.  Neither group has any concept of the small business person who struggles to build a business, ploughing all his/her money back into the business for years trying to build a sustainable business for the future whilst employing people and paying a range of taxes. These people don’t have anyone making superannuation contributions for them.

It is not until they reach the end of their working lives that people like the self employed and small business owners can devote money toward their retirement. This is when the government classifies them as wealthy high income earners and targets them for additional tax.

The government’s decision to have the maximum superannuation contribution amounts is one of the bad decisions. It will harm the ability of small business people to save for a comfortable retirement. They will just not have the time to accumulate enough for retirement and as a result will not enjoy the same tax concessions that those who make the laws.

Taxation

The government delivered on the promised tax cuts, a legacy of the Howard government. These are minor and mostly favour the high income earner. A strange outcome when you consider the range of other measures attacking high income earners.

The Medicare threshold, in other words the amount of income you can earn before you start paying the levy, has been increased, and that is a good thing.  It will be backdated to 1^st July 2008 and will benefit pensioners who were not paying tax but who were liable for the Medicare levy.

The introduction of means testing of the Private Health Insurance Rebate is a triumph of ideology over common sense. With our public hospitals under pressure (some would say, in crisis) you would think that any measure that would help take the pressure off would be welcome.  As this mostly affects incomes over $75,000 per annum, perhaps the government felt the tax saved would not come at a cost of a reduced private insurance coverage. On that basis, the increase in the Medicare Levy for high income earners smacks mostly of a need to be seen to be taxing the rich rather than any practical revenue raising measure.

Social Security

The increase in age pension payments was welcome particularly for single pensioners who are the most financially disadvantaged group in Australia.  They have all the expenses of a couple but only one income to pay them. Let’s hope this is just a first step in addressing the inequality in this group’s financial position. Single pensioners pick up an extra $32.49 per week while couples share an extra $10.14 weekly.

The closing of the Pension Bonus scheme is good news as it didn’t work very well. Its replacement with a Work Bonus which exempts 50% of the first $500 per fortnight in employment earnings from the pension income test, promises to deliver better benefits to those of age pension age who continue to work.

The government has previously announced that gross tax free lump sums and pension payments were to form part of the income test for the Seniors Health Care Card. Sensibly they backed away from this in the budget and left the rules unchanged.

It was a bolt out of the blue when the increase in the qualifying age for the age pension was increased to age 67. This was one thing that had not been leaked. Whilst increasing pension ages has been talked about for years, no government before now has been courageous enough to act.  Mind you, it is a bit of a claytons announcement when you consider that it doesn’t take full effect until 2023!  It is also interesting to note that the qualifying age for veterans remains unchanged at 60 years.

When the age pension was introduced in 1909, not many lived long enough to cause a big impact on the nation’s expenditure. Its aim is to alleviate poverty by providing an adequate safety net payment to older people unable to support themselves financially in their retirement. With the average life expectancy now around 80 years and pensions consuming ever increasing portions of the budget, it is increasingly difficult for the pension to be maintained at a high enough amount to achieve its stated aims. Perhaps it is time to increase the eligibility age.

Those affected are under age 55 now and have at least another ten years of work. As the compulsory superannuation system has been going for about 15 years already, it most cases it will mean that those currently at the top end of the affected age spectrum, will have at least 25 years of superannuation savings to rely on.  Whilst a 9% employer contribution (it hasn’t always been that much) won’t be enough to live the high life, it will at least enable some to retire earlier and survive until the age pension kicks in. 

In time however a higher retirement age will become the accepted norm.