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Economy in deep waters

Herald Sun, April 4, 2014

The need to change the way people are taxed has been made starkly apparent as the Abbott Government prepares to bring down a budget expected to rely on deep spending cuts and slashing regulation to stop Australia drowning in debt brought on by Labor as it tried to buy votes to stay in power.

But it is not Treasurer Joe Hockey who has rung the alarm bells, it is head of treasury Martin Parkinson, who served previous Labor governments and now spells out what discredited Labor treasurer Wayne Swan refused to admit.

The nation is in dire straits and unless direct action is taken, even people's standard of living is likely to fall. The Abbott Government knew spending had to be cut back. Now Mr Parkinson, who has been asked to stay on by Mr Abbott, warns that budgets could stay in deficit for the next 10 years. He repeats the Government's concerns that plunging productivity, falling commodity prices and an ageing population. But how to do it? .

Mr Parkinson, who has had his term as treasury secretary extended by Mr Abbott for at least six months, ran his speech past Mr Hockey before he suggested that the GST might have to be raised as part of serious tax reform. This won't happen in this term of government and that was confirmed yesterday, but it's now out there for debate Labor won't wear it but spending cuts alone, which Labor regards with similar abhorrence, are not enough.

The challenge for the Abbott Government is how to cut income tax to encourage people to work longer and raise productivity. In his speech to the Sydney Institute, Mr Parkinson appeared to ridicule the suggestion by Labor treasury spokesman Chris Bowen saying the Budget could be returned to surplus in five years.

"Arithmetic," he said, "suggests the dice are loaded against us." Mr Parkinson appears to be in line with Mr Abbott's thinking, which may well be why the PM has asked him to stay on as treasury chief until at least until the G20 meeting in Brisbane in November. Who knows how long he might stay on?

Mr Parkinson forecast that without changing spending on health, pensions and personal disabilities would cost the Commonwealth $114 billion a year more in another decade than it does now. Australia has had 22 years of unbroken economic growth but if that were to last for another 10 years it would be "an extraordinary achievement."

Extraordinary aside, how long can taxpayers be expected to keep tearing out the lining of their pockets as they struggle to pay income tax likely to see the average full-time employee enter the second top tax bracket, paying 37c in every dollar earned over $80,000. Tax bracket creep alone won't pay our way as it destroys the incentive to work and to save.

Broadening the tax base by increasing the GST from its current 10 per cent and increasing its scope is one way, with a simultaneous reduction in income tax: less direct taxes and a rise in indirect taxes that allow discretionary spending.

The GST cake also needs to be more equitably cut with Victoria getting only about 80c in every dollar of what it raises. We deserve to have returned from the Commonwealth what we pay. It was introduced as a tax to benefit the states, but we are not getting our fair share.

Mr Parkinson's warnings mean we must think seriously about what needs to be done over years to come. It needs to start with the May Budget. It's not all about cuts. There has to be change as the China boom turns to potential bust.

There must be no further distractions. Australians voted to repeal the carbon and mining taxes and they voted for the Coalition to bring the nation back from the spendthrift years. Let it be so. The Senate must honour that mandate.

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