Eight senior Australian economists have written to Prime Minister Rudd suggesting, among other things, an immediate reduction of the compulsory contribution rate from 9% to 6% followed by a gradual doubling to 12% in the years between 1 July 2010 and 1 July 2015.
An increase to 12% (or even 15%) is a worthy idea and one that the Rudd Government has consigned to the Ken Henry tax review.
Basically, I think we shouldn’t stuff around with superannuation. It certainly shouldn’t be used as a fiscal lever. What we need in the superannuation system is stability and certainty. Given the declining fund returns recently, and in the immediate future at least, many Australians will already be having doubts. It would be tragic to increase those doubts by saying that we can windback our commitments to super for a few years.
Every government over the past few years has stuffed around with superannuation and there is no doubt that the system can be improved (e.g. to improve fairness in tax treatment and access to government benefits) but government must also be careful to make the least number of changes possible and to avoid giving a signal that its commitment to superannuation has been diminished by the current downturn.
The economists say the increase to 12% should be written into law but so what. We all know that L-A-W law tax changes can be abandoned if it becomes expedient to do so. That won’t convince anyone. And what happens when it comes time to reduce incomes by 1% a year for 6 years, it is easy to see a government putting that off ‘under the current circumstances’.
In the meantime, the stimulatory impact would be reduced because much of the reduction would end up in government coffers through income tax and GST. It is hard to see that the ’stimulus’ would be worth the potential long-term damage to the superannuation system overall.
What’s more, I think the economists have missed the point that consumers are basically on strike because they have lost confidence and that confidence won’t be restored by panicky measures like reducing the superannuation rate.
With Australia still struggling with huge foreign debt, a proposal to reduce national savings, even for a few years, seems a little odd. The economists weasel around this one by referring to that whimsical notion ‘the longer term’.
The letter over all is strangely unimaginative if not a little reckless as well. Apart from raiding national savings, in the form of superannuation, to stimulate consumer demand, it also proposes government borrowings to fund infrastructure (hardly the first to suggest this) and some mickey mouse stuff on adjusting to climate change.
The infrastructure idea is obvious and long overdue as the economists say it represents “a welcome return to the basic economics of government investment”. Both sides of politics having been running down investment in public infrastructure for a few decades now, all in the name of ‘economic rationalism’, ‘economic responsibility’ and ‘economic conservatism’.
The big problem with infrastructure now is the NSW Government, and the economists tacitly acknowledge this with talk of safeguards etc. The Carr-Iemma-Rees Government has been an economic disaster and it’s getting worse.
Roozendaal’s recent proposal for an infrastructure bank was truly scary but the bigger problem is that there is no sense of planning and therefore no sense of a meaningful criteria by which these ‘infrastructure projects’ can be judged. The NSW Government has repeatedly, and without the slightest shame, proven itself unable and unwilling to act in the broader interests of the state, let alone the nation. NSW ALP admits no other consideration than short-term political gain.
The Prime Minister needs to ensure that he is not sucked into the NSW vortex of political expediency. There is already a sense of the Global Financial Crisis being used to prop up the state governments, throw money around and abandon all discipline.
Economic stimulus is important but let’s not destroy all semblance of fiscal discipline and undermine one of the ALP’s greatest achievements in compulsory superannuation to do it.
