1. INTRODUCTION
This chapter differs from the others in that it contains no specific policy recommendations. Instead, it discusses the problems the Government will face in gaining political support for its policies and in actually implementing them.
2. CABINET AND PARTY ROOM
Much of the debate that the formal shape of the institutions suggests should take place in Parliament actually occurs in Cabinet and the Government Party Room or Caucus. The doctrine of collective responsibility locks Ministers into public support of government decisions, but in the secrecy of Cabinet the solidarity is absent and Ministers tend to fight for the interests of their electoral and departmental constituencies. Backbenchers who will loyally support a measure in Parliament may fight it tooth and nail in private. Any Prime Minister can be certain of having Ministers and backbenchers too overworked, disorganised or idle to master the issues, and too shortsighted to set the national interest above the immediate effects on themselves, their party organisation, the more vocal of their constituents, or the last lobbyist to buy them lunch. All recent Commonwealth governments share the pattern: a handful of far-sighted Ministers, a scattering of far-sighted backbenchers, outnumbered by the near-sighted, the numbers men, the single-issue specialists, and those whose genuine compassion for the disadvantaged prevents them distinguishing cause from effect. Political power depends on numbers.
Nothing can be done about this in the short term and little in the long term -- although the nation might benefit from minor changes in the way political parties select their candidates and thus in the kinds of person chosen. It is democracy in action. It is something that reformers have to live with. But it means that a reforming core of Ministers and backbenchers wishing to implement the policies presented in this volume have to start by enlisting their colleagues. The author has done his best to facilitate this in the development and exposition of the policies. Reformers in parliament must win the arguments in party room or caucus by presenting them in ways which will win the hearts and minds of the various groups of MPs.
One advantage reformers have only recently gained is the growing appreciation by the public of the seriousness of Australia's economic problems. Australians have never before in peacetime been as ready to accept tough or radical but necessary policies.
The largest group in any party is always the SOS (Save Our Seats). These will support change if persuaded that it will pay off with votes come election day, either if reform will win votes or if inaction will lose them. Many of the policies presented in this volume should be easily sold to SOS because they will obviously pay off within three years. Policies that take longer to implement or are slower to pay off nowadays have their political consequences brought forward by the media attention paid to the reactions of local and international financial markets and of institutions such as OECD, IMF, Moody's and Standard and Poor; this will make it easier to persuade the SOS of their benefits.
With a little courage, the Government or even individual senior Ministers can help lock policies in place by stating them in ways that make retreat very embarrassing. When announcing one policy, Ministers can take the opportunity to spell out implications for other policies. An instance of this was the way that the Liberal Party's freer labour market policies entailed freer markets for products, or the implications of the Hawke Government's rural policies for industry protection policy.
Backbenchers have more freedom than Ministers to deviate from or embroider the Government line; as individuals or groups they can argue for reform in Parliament, with interest groups, or in the media. With good timing and gentle use of sarcasm, individual backbenchers can do much to keep Ministers up to the marks the Government has set itself and to enforce generally accepted principles of good management.
Government MPs assembled in party room or caucus should be encouraged to agree to general propositions that are in themselves popular. These should then be set in concrete by talking about them until the media take them up. This done, the less popular steps needed to implement the general undertaking must follow to avoid loss of face and votes. The Hawke "trilogy" of 1984 was an example of this tactic.
Policies must be presented in terms which are relevant to voters. For example, protection reduction should not be discussed in terms of economic efficiency, vital though that is, but in terms of the cost of cars and shoes and nappies. Equity is important to most Australians, and especially to the significant number of MPs who entered Parliament with the hope of helping the under-dog (however perceived): show them that tariffs are the most regressive of all taxes, and that the cost to low-income families far outweighs the benefits to workers in protected industries. This makes more sense to most voters and MPs than figures on trade flows.
The Government can also gain and maintain a moral superiority by continually and publicly setting the interest of ordinary Australians, above that of any sectional interest. Ministers should say in as many words that they will not govern for the ACTU, big business, the textile industry, car makers, marginal electorates, the gnomes of Zurich -- but for taxpayers and consumers.
All parliamentary parties have a significant proportion of members who are genuine idealists but not always clear thinkers. These people are potential supporters of the policies proposed in this volume because on the whole they share the same goals. Reformers should only have to convince most idealists that the policies will tend to achieve the goals. This is true even of much of the Labor Left: although many of the policies recommended here are anathema to traditional Labor thinking, they are the best hope in the long run for the poor and the underprivileged and it should be possible to persuade many left-wing politicians of this.
Reformers must seek the support of lobbies that favour the broad thrust of the policies and have influence with a faction that might block reform. An obvious example is the National Farmers Federation which has influence in the National Party. Another example should be the many unions representing users of transport who will benefit from deregulation of the transport industries. The tail must not wag the dog: what is needed is lobby group support for the reform programme, not capitulation to lobby group demands. Nevertheless, successful reformers keep their eye on the main chance. Minor matters or unwinnable issues should be dropped or deferred to gain support for those which are vital to the programme.
3. PARLIAMENT
As discussed in the Government and Administration chapter, almost no real debate takes place in the House of Representatives. Party discipline is strong, and any Government measure that gets through caucus or party room is almost certain to succeed in the House.
The Senate is a different matter. In recent years the balance of power has been held by independents and Australian Democrats. Party discipline is not quite as strong as in the House, and past Coalition governments have needed effective advocates in the Senate Party Room; the ALP seems to have less trouble.
The Australian Democrats are a fact of life of Australian politics. Their presence in the Senate has had a beneficial effect by denying governments automatic majorities and reminding the Senate of its independence and function as a house of review. All Democrat Senators face the voters at the 1987 or 1988 election and it is possible that the parliamentary party will be wiped out if it is a half-Senate election. If Democrats and independents continue to hold the balance of power, then the Government will have to persuade them as far as possible of the merits of its policies. This should mostly not be too difficult, because the principles of freedom, ending of privilege, openness and equity embodied in the policies are shared by most Australian Democrats. Where persuasion fails, log-rolling will be necessary to get legislation through the Senate: the Government will have to compromise on minor points of policy, or in other areas, to gain Democrat or opposition support for the major reforms. The nature of the party means that Democrat Senators and their staff tend to lack the political and economic expertise that the larger parties can command; it would be in the public interest as well as the Democrats' if the Government provided them with the services of a suitably experienced officer of the Treasury. Balance would require another to be assigned to the Opposition; the cost in the context of government spending would be negligible and the benefits in terms of better-informed Senators could be large.
4. GOVERNMENT AND THE BUREAUCRACY
4.1 MINISTERS' ENVIRONMENT
A new Minister is faced with a new and unusual environment. This section examines its principal features: bureaucratic power, the politics/administration dichotomy, and the "real world" of policy-making and implementation. The television programme Yes, Minister provides a useful reference point, and readers are reminded of the story of a Prime Minister and a Treasury Secretary watching it together and both laughing loud and often but not at the same things.
Few real Ministers are as craven as Jim Hacker; conviction, determination and intelligence are shields against bureaucratic blandishments. There are other significant differences between real Canberra and fictional Westminster. In Australia's favour, Ministers here have larger and usually more effective personal staffs than Hacker had, selected by the Minister and not all seconded from the public service. They spend much more time away from their departments, either in Parliament House offices with their personal staff or in State capital cities or in their electorates. In Westminster's favour, large departments are divided among a number of junior Ministers with a Cabinet Minister at the top; such an arrangement seems precluded by the Australian Constitution.
4.2 BUREAUCRATIC POWER
In democracies where government regularly changes hands, the bureaucracy has considerable advantages over Ministers.
- Permanence: Sir Humphreys outlast many Jim Hackers. Permanent public servants generally have much more experience than Ministers of the business of administration and the minutiæ of departmental activities.
- Numbers: For the largest departments there may be a Minister, a Minister with a minor portfolio as "Minister assisting", and a handful of politically-appointed staff in the Minister's private office. Few if any of these will have had extensive experience of the department.
- Information control: Senior public servants are in a position extensively to control the information about the department received by the Minister and his personal staff. The public service possesses unique, detailed knowledge about public policies and issues; this knowledge enables it to influence the outlook and decision-making of the Minister, and to conceal much from the Minister.
- Control of policy implementation: no matter what the Government wants to do, by the time a reform reaches the man in the street it has been passed through several or many layers of bureaucracy, and the details have been worked out with very little political control. Implementation can be delayed or the Government's intentions can be perverted: something of the latter appears to have happened to the Fringe Benefits Tax.
Moreover, the bureaucracy delivers services to particular client groups. It forms alliances with client groups and can mobilise them to oppose changes that threaten to disrupt the symbiotic relationship. Such alliances may take the form of relationships between public-service unions and other organisations. Many bureaucrats are also strongly committed to existing, established programmes, and resist changes that might interfere with these.
All this is a far cry from the traditional view of the separation of politics and administration, which argues that politics and administration are separate fields and should not interfere with each other. Politics is supposed to determine the "ends" of government and once determined, administration is supposed to apply the most efficient technical and professional "means" to implement the "ends". The Minister is not supposed to tell the career staff how to implement a policy and the career staff does not, in any way, influence the policy-making process; finally any bureaucratic discretion in the system is used to determine "means" not "ends".
This "classical" theory coincided with the growth of government in western countries in the late nineteenth and early twentieth centuries, and was, indeed, necessary to the creation of the large bureaucratic states which now exist. It was a highly useful doctrine when public bureaucracy was an infant industry that needed a protective ideology behind which it could develop. Its survival, however, draws attention from the bureaucracy's ability to influence policy: and when this influence occurs, it distorts the democratic process because public servants do not have the political legitimacy to make policy in a democratic system.
4.3 THE REAL WORLD: MINISTERS AND BUREAUCRATS
The concept of the separation of politics and administration, although discredited, still formally dominates the working world of the Minister. In reality the Minister finds his relations with his bureaucratic "subordinates" differ greatly from the "classical" world of policy-makers and neutral administrators.
The most important point is the imbalance between the short-term Minister and his or her politically-appointed staff on the one hand and the long-term departmental staff on the other. It is simply impossible for the Minister and his staff to be aware of all the activities of a large department. If public servants were indeed neutral administrators this would hardly matter: all the actions of the department would conform to the policies laid down by the Minister. But public servants have opinions of their own, and seem to feel less and less obliged to abnegate these during working hours.
The imbalance is lessened to some extent if the department maintains good (and proper) relationships with the relevant Opposition spokesman: one day, the Opposition will be the government, and it is to everyone's advantage if the new Ministers do not start entirely from scratch. Scrupulous neutrality is necessary in dealings between bureaucracy and opposition.
A reforming Minister needs all the help he can get from his department. In practice it is, and should be, difficult to sack public servants; but senior officers have been known to take advantage of this to obstruct changes of which they disapprove. If necessary, the Government should put such people out to grass on full pay. The cost is tiny compared with the damage that an unscrupulous senior officer can do to a policy he opposes. Ministers must be very careful they do not confuse tough advice with obstructionism, and must not act capriciously, but if senior officers do not wholeheartedly assume the role of neutral advisors and administrators they must be moved out of the way.
4.4 THE MINISTER
The Minister needs:
- Clarity of view;
- Will-power;
- Stamina;
- Managerial talent.
Very few people have all these. Party selection processes and election campaigns are excellent tests of stamina and will-power, but pay little attention to managerial talent and probably discriminate against clear thinkers in favour of those who tell people what they want to hear. The result is that any Prime Minister will be forced to put up with many Ministers who do not think clearly about difficult problems and are barely competent managers, and a couple who would be stretching to organise a two man queue.
4.5 THE MINISTER'S STAFF
Ideally, a Minister's personal staff should include:
- An absolutely first-class personal secretary;
- A superb office manager to enable him and his other advisers to concentrate on policy and politics;
- At least one person intimate with the affairs of the department but loyal to the Minister;
- A policy adviser trained in economics or other relevant disciplines and distinguished by clarity of thought; and
- A "wordsmith" who understands the broad thrust of the desired reforms, the detail of the associated arguments, and the art of rhetoric.
This may be a tall order for a junior Minister in a minor department, but it is almost essential for success with a major portfolio. The Minister must be ready to sack people who do not perform, usually on the advice of the office manager. Jobs on Ministers' staffs are not well paid for the quality of people needed, and the hours and conditions are appalling, but there is compensation in the opportunity to build a reputation where it matters and in the special excitement of being close to power.
Most Ministers do not pay nearly enough attention to the quality of their staff. A good Minister with a good team is formidable in Parliament, in Cabinet and in his department. Much of the strength of the Hawke Government has been due to the absence of party hacks in key staff positions.
4.6 MANAGING THE WORKLOAD
It is not the Minister's job to attend to detail. The oldest trick in Sir Humphrey's book is to snow him with it; if the Minister and his team are good they will recognise a snow job when they see one and refuse to accept it.
Nor is it a Minister's job to wet-nurse his colleagues' constituents. MPs butter up their constituents and avoid the odium of saying No by passing all sorts of requests from constituents to the relevant Minister. These representations are passed from the Minister's office to the department which prepares a reply. The process takes weeks or months and is usually a great waste of time. Most representations could be sorted out with a telephone call from the MP's staff to the local office of the department or agency concerned. One reason the Fraser Government set up the Immigration Review Panel was to reduce the Minister's load of representations. Constituents' right to ask their MPs to intervene in bureaucratic decisions should not be limited, but it is sensible policy to provide extra-departmental review bodies (like the IRP) for departments whose decisions produce large numbers of dissatisfied people. All departments should have effective, senior Parliamentary Liaison Officers and MPs should be encouraged to deal with them rather than with the Minister. The Minister's staff should pass all representations to the Parliamentary Liaison Officer for attention except for ones that involve matters of principle or high politics. These alone should have a claim on the Minister's time.
Representations from the influential and the wealthy are the bane of democratic government. Chief executives of big companies, lobbyists and senior union officials have come to expect ready and private access to Ministers. Their influence has diverted governments' attention from the national interest towards that of various sectional interests. It has been instrumental in gaining privileges for sectional interests -- particular interest groups, firms or industries, the union movement or members of particular unions, etc. -- at the expense of the community. Public choice economists show how the cycle of influence and privilege can account for much of the economic difficulty Australia is now in. (1)
There is no easy solution to this problem. In any political system, there will be influential people whom the government must treat carefully. In democracies they inevitably include people who can exert some control over the lives of significant numbers of voters -- large employers, some union leaders etc. In other polities, they include generals, admirals and secret police chiefs. The democratic system seems preferable.
Nevertheless, the whole point of democracy is to minimise the political power and privilege that accompany wealth and "influence". Ministers can make a start by explaining carefully and often and in public that government should not be carried out by arrangements between powerful individuals behind closed doors, and that no favours will be granted that way. They will not be believed at first, but if they can hold out for a while the torrent of self-interested representations will decline to a trickle. Each time they say No they make the next time easier. They should in public and in private make a point of setting the national interest ahead of any sectional interest.
4.7 MINISTERIAL RESPONSIBILITY
No Prime Minister has a large enough pool of Ministerial talent, and it is a waste to have a competent person stuck on the back bench for a departmental error or a minor personal error. The old convention of strict, personal responsibility for every action of the Minister's department is impractical, given the size and complexity of government now. At the beginning of his term the incoming Prime Minister should make it clear that Ministers will have to answer only for their own competence and integrity; if the occasion arises he should ensure that they do so.
In the long term, let us hope that one day government will again be small enough to make the strict Westminster tradition practical.
ENDNOTES
1. For example, M. Olson, The Rise and Decline of Nations, New Haven, Yale University Press, 1982.
APPENDIX A: THE LABOUR MARKET
The Conciliation and Arbitration (Freedom of Association) Amendment Bill.
The Bill was drafted in 1985 by Parliamentary Counsel at the request of Mr A.C. Rocher, MHR. The long title is "An Act to amend the Conciliation and Arbitration Act 1904 so as to implement the principles of freedom of association, and for related purposes". What follows is a brief description. Clauses not mentioned mostly make minor changes necessitated by, the major provisions. "Organisation" means a registered trade union or employer association.
Clause 2 provides eight weeks between the royal assent and commencement of operation, to allow time for affected parties to arrange their affairs.
Clause 3 amends the Arbitration Act's section 2 ("The chief objects of this Act are ..."). It changes the emphasis from "encouraging" to "facilitating" unions and employer bodies, and adds "to maintain the freedom of persons to choose whether or not to be members of" unions or employer bodies.
Clauses 4 and 5 take demarcation disputes out of the Commission's jurisdiction.
Clauses 4 and 7 remove the Commission's "power to grant preference to members of an organisation" -- in other words to disadvantage non-members.
Clauses 8 and 11 provide for regulations to cover situations where an employee is eligible to be a member of one or more unions, and in consequence might come under more than one award. Mr Rocher envisages that employees in such circumstances would have one month in which to opt for one or other award, failing which the decision would be made for them by the Industrial Registrar.
Clause 15 removes the Registrar's power to refuse to register an organisation "if an organisation, to which the members ... might conveniently belong, has already been registered". It also removes the Commission's power to grant one union the 'right to represent ... a class or group of employees ... to the exclusion of" other unions. Correspondingly, clause 16 restores to unions the right to decide whom to admit to membership.
Clause 18 inserts a new Part XA into the Act, entitled "Prohibition of Acts of Discrimination &C., in relation to Membership or Non-Membership of an Organisation and Other Matters". This spells out and provides a mechanism for enforcing (in the Federal Court) the freedom of association implied in earlier clauses. It replaces the existing provisions protecting unionists and union activity, but does not weaken them except in so far as it extends protection to non-unionists and members of other unions. The objective is to reduce the monopoly power of trade unions and employer organisations, and especially to end the use of the coercive power of the state to support it. The provisions cover situations in which an employer is coerced by members of one union to act against a non-unionist or a member of another union, and bind the Commonwealth as an employer.
Other clauses make technical amendments.
As it stands, the Bill does not bind the States or extend to State jurisdictions. If the Government wishes to achieve this, it is probably best done by a separate Bill explicitly to introduce the freedom of association provisions of the ILO Convention on Freedom of Association and Protection of the Right to Organise and the International Covenant on Civil and Political Rights, which are very similar, into domestic law. Australia is a party to both, and it is almost certain that such a law would be upheld by the High Court as a valid exercise of the external affairs power. The effect of such legislation would be to invalidate Commonwealth and State laws that were inconsistent with it. The present Bill would make Commonwealth industrial law conform to the international human rights documents; the States would probably amend their laws accordingly.
APPENDIX B: WELFARE
Simplification of Social Security and Tax
1. INTRODUCTION
This scheme was first proposed by D. Dixon and C. Foster, An Alternative Path to Integration of Social Security and Income Tax Arrangements, Canberra, AGPS, 1983. It appears in more developed form in D. Dixon and C. Foster, "Simplification of Social Security and Tax", (paper presented at 14th Conference of Economists, Sydney, 13-17 May 1985), on which this appendix relies. Although passages in inverted commas are quotations from this paper, the discussion below differs from it in many matters of detail and readers should not assume that it necessarily represents the views of Dixon and Foster.
Dixon and Foster point out that one of the major disadvantages of proposals to integrate tax and social security systems is that they depend on "quite radical changes to the tax system. The changes required of the social security system by contrast are more manageable. Essentially the question has to be asked as to whether improvements to the social security system should wait for the overhaul of the tax system."
Since a similar distribution of incomes can be achieved by a variety of tax and social security approaches, there is in principle no reason why the social security system cannot be "fully responsible for providing income support to individuals with adjustments to those payments to take into account horizontal and vertical equity considerations. This does not mean that equity considerations should be disregarded in tax design. In setting rates of pension and benefit it would still be necessary to take account of horizontal equity issues particularly between beneficiaries and low income persons in the workforce."
Under the proposal "the private income of pensioners is not assessed by the tax system, it is dealt with by the social security system." This simplifies the system for administration and pensioner alike. The administration gains because the number of taxpayers is substantially reduced (and most of these are people with small incomes, but a much higher proportion of interest, dividend and other non-PAYE-deducted income than average: they pay little tax but it is complicated to assess). Pensioners gain because they no longer have to supply information on income and earnings in different forms at different times to two government authorities (and for an elderly widow faced for the first time in her life with paying provisional tax this is a substantial gain).
2. OUTLINE OF THE PROPOSAL
The main features would be:
- Exemption for pensioners from paying tax;
- Abolition of the pension income test free area;
- A compensatory increase in the basic rate of pension; and
- A progressive income test.
Abolition of the income test free area and a compensatory increase in the basic pension rate "would overcome the problem the free area shares with the tax threshold of providing little or no benefit to those with little or no income". Dixon and Foster also point out that an increase sufficient to provide full compensation for the loss of the free area would also increase the basic rate of pension to the Hawke Government's target of 25% of average weekly earnings at much lower cost than increasing the pension and retaining the free area. The question of compensation is discussed further below.
The basic withdrawal rate of the income test must substitute for the present 50% rate plus a 25% or 30% tax rate. Revenue considerations prompt a high rate; incentive considerations prompt a low one. Dixon and Foster propose 60%. So as not to apply this rate to modest private incomes, a lower withdrawal rate would apply for income between nil and a threshold corresponding to the current free limit. Dixon and Foster suggest 25%. The threshold need not be the same as the current free limit, and should be adjusted in line with a suitable index to prevent its value being eroded by inflation.
Pensioners with private incomes will lose from the abolition of the free area. The loss to someone with an income on or over the free limit will be the amount withdrawn by the new scheme on income up to the old limit. With a 25% clawback and threshold at the free limit of $40 ($60 married), the loss would be $10 ($15). Increasing the basic rate of pension by these amounts would compensate all those with private incomes over the threshold and over-compensate those with less.
This would involve increased net expenditure, but the least well-off would benefit most. Less than full compensation would still overcompensate those with small private incomes but would start to under-compensate people with private incomes somewhat below the present free limit.
The variables (compensatory increase, two clawback rates and the threshold between them) can be adjusted to produce the desired effects on income distribution among pensioners and on total expenditure. Dixon and Foster estimated that their proposal (full compensation, rates of 25% and 60%, and the threshold between them at the old free limit) would have increased expenditure by about $1 billion in 1984-85, say $1.4 billion in 1987-88. The budgetary constraints are tighter now than they were in 1985, and the government is unlikely to have room for substantial extra spending (especially if it also accepts our recommendation to eliminate the Pensioner Health Benefit card poverty trap). We expect that somewhat higher clawback rates (perhaps 28% and 65%) would be chosen, together with slightly less than full compensation for the abolition of the free area. Even a clawback of 65% is substantially less than the current, combined tax and income test marginal rate, and less than full compensation still leaves the poorest pensioners substantially better off.
A higher initial clawback rate will be required if our preferred PHB card proposal is accepted. (See Section 6.4 of the Welfare chapter.)
2.1 Unemployment Benefit
It is important for there to be differences in the financial positions of pensioners and unemployment beneficiaries. The pension is intended to provide a modest but tolerable standard of living for an indefinite period; in principle unemployment benefit should provide an intolerably low standard of living in order to maintain the incentive to seek work.
In present labour market conditions this principle should not be too strongly applied: where minimum wage laws, award conditions, and restrictive practices (mostly imposed or endorsed by government) effectively keep many people out of work, it is unjust to use a very low unemployment benefit in an attempt to force them to seek employment.
At present, unemployment benefit rates are slightly lower than pension rates (much lower for juveniles), the income test free area is smaller, and there is a 100% clawback rate for private income over $70 per week. Unemployment beneficiaries are also denied rent assistance and certain fringe benefits.
Corresponding arrangements can be incorporated in the new scheme. Because of the small free area, a full compensatory increase in the basic benefit will slightly increase the differential between pension and benefit for the poorest. For simplicity, the benefit income test should probably use the same clawback rates and thresholds as that for pensions, up to the point where the 100% clawback rate sets a ceiling on beneficiaries' total income, but this is not essential and may be overridden by fiscal or work incentive considerations.
2.2 The Assets Test
The assets test can if necessary remain almost unchanged for the introduction of the new scheme, with which it would interact no more than it does with the present income test. It might be desirable to adjust the assets test thresholds downwards slightly to counter the expenditure increase that would otherwise be caused by the increase in the basic rate of pension.
The proposed changes to the assets test to increase equity between those who do and do not own their own homes, described in section 6.3 of the Welfare chapter, are compatible with the simplification scheme.
Consideration should however be given to altering the basis of the assets test at the same time as introducing the scheme. We suggest that the assets test in its present form be replaced with a system of imputing income to the pensioner or beneficiary in proportion to the value of the assets, and incorporating this notional income into total income for means test purposes. As at present, there could be a threshold to exempt a certain value of assets, and income could if politically necessary be imputed to various classes of assets at different rates (for instance homes at 5% and other assets at 10%).
If this were done, administration would be simplified as pensions and benefits could be paid on the same basis to home-owners and to tenants, with or without assets, and rent assistance as such would not be needed. It would also bring the concept of imputed income into public view in a context other than tax reform. This could help gain public acceptance of subsequent income tax reforms that would reduce the present inequity in treatment of owners and tenants.
2.3 Pensioners aged 70 and Over
At present a special income test applies to pensioners aged 70 and over. This is an undesirable complication which exists for historical reasons and assists only a small proportion of pensioners (many of those who formerly benefited from it now have their pensions limited by the assets test, which has no special age provisions). Those it does benefit are far from being the poorest.
When the new scheme is introduced, pensioners over 70 should be subject to the same income test as others. (If this is felt to be politically unacceptable, a "grandfather clause" should be used to protect pensioners who have passed their 70th birthday at the time of implementation.)
2.4 Rent Assistance
Rent assistance is available to the poorest pensioners paying more than $10 per week rent, and is an important exception to the social security system's usual unfair treatment of poor renters. At present the amount provided depends on the amount of rent paid and an income test with no free area. The rent assistance income test needs to be modified when the new scheme is introduced to avoid adding its present 50% clawback rate to the 25% or 30% of the new scheme, thus imposing the system's highest marginal "tax" rates on its poorest beneficiaries. The rent assistance clawback should preferably be set at the difference between the two rates of the pension income test proper, but this would involve some increase in expenditure and a higher rate might have to be used.
When the proposal in the Housing chapter to end Commonwealth support for State government housing programmes is implemented, some of the saving should be directed to increasing rent assistance (if it still exists: see next paragraph).
If the present assets test is replaced by a test of actual and imputed income, as suggested above, the pension and benefit rates and income test clawbacks and imputation rules can be arranged to achieve equity between home-owners and tenants, and rent assistance will be unnecessary.
3. SPECIAL TAX SCHEDULES
If the variables of the new scheme are set to produce financial outcomes generally similar to the present ones, the private income at which pensions cut out and pensioners return to the tax system will be well above the threshold for paying tax. This would cause a poverty trap at which a dollar extra private income would both cause withdrawal of the last few cents pension and incur a tax liability of hundreds of dollars. It is therefore necessary to provide a special income tax arrangement for persons otherwise eligible for a pension whose private income exceeds the relevant pension cutout point.
This is simply achieved by taxing such people either on the standard schedule or at the top pension clawback rate (probably 60%-65%) on income over the pension cutout point, whichever involves less liability. This produces a smooth transition from pension via special schedule to standard schedule except for a drop in marginal rate to 30% or 46% at the point of transition to the standard schedule.
Dixon and Foster also point to the need for a special tax schedule to facilitate transition from the tax to the social security system or vice versa. It "would be the normal tax schedule but scaled down in proportion to the part of the year for which the person is in the tax system.
"The case for this arises from the argument that persons who are not liable to taxation for part of the year should not be eligible for taxation concessions which cover the whole year ... Under the special tax schedule persons who retire or become unemployed would not have to wait until the end of the financial year to acquit any outstanding liabilities or receive any tax refunds.
"The special tax schedules will increase the tax liability of those who have relatively high incomes for one part of the year if they choose to apply for a pension of benefit." This helps achieve equity between high and low income retirees and between people with stable and with fluctuating incomes. It increases tax liability on incomes which are received during only part of the year, but also provides higher payments to those most in need of income. It would also make it less advantageous for people whose incomes stem from very highly paid very seasonal jobs to claim unemployment benefit during their off season.
4. COVERAGE
The new scheme should ultimately cover all pensioners and beneficiaries. The administrative task of transferring all pensioners and beneficiaries to the scheme in a single year would be quite large, and the Government might prefer to introduce the scheme in stages. The first category to be included should be age pensioners, who (a) gain most from the simplification and (b) offer a simpler administrative task because very few people once retired move back into the full-time workforce and thus shift from "pensioner" to "taxpayer" under the new scheme. Phased introduction might also make it possible to get the scheme into operation a year earlier than if all pensioners and beneficiaries were to be included from the start.
A major administrative burden of introducing the scheme comes with unemployment and sickness beneficiaries, many of whom have alternating spells of employment and unemployment during the year. Ideally people would acquit their tax liabilities at the time of signing up for benefit, using the tax schedule appropriate to the fraction of the financial year that has elapsed or the length of employment, as appropriate. This is fine if a refund is due but may cause problems with a debit assessment. Dixon and Foster propose allowing optional end-of-year tax reconciliation, in which the tax schedule would be that appropriate to the proportion of the whole financial year during which benefit was not received. This would protect everyone except those who received a debit assessment for the whole year and were unemployed at the end of the financial year. Since PAYE deductions are made on the basis of weekly income, they would cover the tax liability of most people in short-term employment. A withholding tax would further reduce the prevalence of debit assessments.
It should be remembered that introduction of this scheme does not affect the case for simplification of the income tax system proper.
5. ADMINISTRATION
"Full year pensioners would provide two sets of data each year to the Department of Social Security (or some other organisation). The two sets of data would be provided at the same time:
- The first would be essentially the same as is currently provided in respect of the pension income test, namely expected annual income for the coming year; and
- The second would basically replace the existing tax return.
"This approach would enable much improved reconciliation of pension payments. Pension entitlement would continue to be determined on the basis of the prospective statements of income but would be automatically revised for future periods on the basis of the annual ex-post returns of income." Pensioners with unpredictable private incomes would probably find it wise to make more frequent declarations of income and have pension payments adjusted accordingly, both to achieve a steadier income flow and to avoid the possibility of overpayment of pension and the inconvenience or hardship of repaying it.
"The special tax schedule is designed to cope with part year pensioners and beneficiaries and it would be possible for the Department of Social Security, acting as an agent for the Tax Office, to acquit a person's tax affairs for the period up to when he or she becomes a pensioner."
6. GAINERS AND LOSERS
In the short term, changes in the social security system tend to be a zero-sum game in which, throughout the community, the winners' gains and the losers' losses balance. In the longer term, net effects appear as beneficiaries and taxpayers respond to the changed incentive structure, and government (and taxpayers) cope with the administrative and financial changes. The present scheme will be no exception.
We must also distinguish between changes in total transfers from the "taxpaying sector" to the "beneficiary sector" on the one hand, and relative changes in the financial position of various groups of pensioners on the other.
6.1 Short-Term Changes
For any given level of expenditure, the scheme outlined above would tend to benefit the poorest pensioners and beneficiaries at the expense of those with substantial private incomes. Many married couples would benefit because the new scheme would effectively allow "income splitting" (the present system is inequitable in treating couples with the same gross private income differently depending on whether the tax rules allow the income to be effectively split or not). Pensioners with large private incomes will benefit from the lower effective "tax" rate. The amount depends on the clawback rate chosen.
The people who would lose the most are those over-70-year-olds who now benefit most from the special income test (unless of course there were a special exemption for them).
Increases in expenditure on social security of course tend to benefit all pensioners at the expense of all taxpayers.
Implementation of the scheme as proposed by Dixon and Foster would lead to substantial gains for all the poorest pensioners and most others, at a cost of about $1 billion extra annual expenditure for all pensioners and beneficiaries or $500 million for age pensioners only (say $1.3 billion and $650 million in 1987-88).
Given the budgetary constraints, however, we expect that the Government will have to adjust the rates and thresholds to introduce the scheme with little or no net increase in expenditure.
6.2 Longer-Term Changes
In the long term the scheme offers worthwhile administrative economies by substantially reducing the number of taxpayers. This will enable Tax Office resources first to be directed at fewer targets and then (over many years, as the tax system is simplified) to be reduced.
"Second-round" or "social" gains include increased equity, both vertical, as a greater proportion of expenditure goes to the poorest, and horizontal, as people with similar gross private incomes receive similar treatment. A simpler system can make detection of cheating simpler and will certainly reduce the extent of inadvertent "cheating". The lower effective "tax" rates will increase the incentive for part-time employment and reduce the incentive to cheat by not declaring it.
APPENDIX C: THE ENVIRONMENT
A National Conservation Strategy for Australia
For background, see the 1982-83 Annual Report of the Department of Home Affairs and Environment. The document "A National Conservation Strategy for Australia Proposed by a Conference held in Canberra in June 1983" (NCSA) was sent by the Prime Minister to State Premiers and the NT Chief Minister, and was tabled in Federal Parliament in December 1983. What follows is an extract from the NCSA.
OBJECTIVES
- The three main objectives of living resources conservation identified in the World Conservation strategy have been adopted for the NCSA. They are:
- "to maintain essential ecological processes and life-support systems (such as soil regeneration and protection, the recycling of nutrients, and the cleansing of waters), on which human survival and development depend;
- "to preserve genetic diversity (the range of genetic material found in the world's organisms), on which depend [sic] the breeding programmes necessary for the protection and improvement of cultivated plants and domesticated animals, as well as much scientific advance, technical innovation, and the security of the many industries that use living resources;
- "to ensure the sustainable utilisation of species and ecosystems (notably fish and other wildlife, forests and grazing land), which support millions of rural communities as well as major industries."
- An additional and no less important objective for Australia is to maintain and enhance environmental qualities which make the earth a pleasant place to live in and which meet aesthetic and recreational needs.
- In the context of these objectives, the role of development is to use resources to:
- provide for the essential needs of individuals and society;
- generate economic wealth which enables the community to enhance its standard of living and to pursue educational, cultural and recreational interests including preserving its heritage; and
- provide economic capacity which helps society to practise resource conservation which in turn enables sustainable development.
- It follows that implementation of the Strategy must have regard for the general economic climate, which has an important bearing on the speed with which the Strategy can be implemented, and for the inability of Australia to isolate itself from the world economic system. It also requires a proper accounting of the costs and benefits to society.
- Australia's important role as a reliable supplier of food and resources is also relevant. Consistent with other objectives this can afford opportunities to minimise the extent of environmental degradation around the world. Trade also provides for the distribution of other economic benefits which themselves can facilitate global strategies for sustainable development.
[Words in italics were emphasised in original; underlining is added emphasis.]
Mining and Export of Uranium
The arguments in favour of the mining and export of uranium are straightforward, which is why most scientists do not oppose it. Most of the opposition stems from ignorance, fear and misinformation: what Senator Gareth Evans has called the "Kryptonite mentality".
COAL VERSUS NUCLEAR
Coal mining, the only alternative long-term source of large-scale power supply currently available, is, by comparison with nuclear power, an exceedingly dangerous industry. Thousands die every year in mining and from mining-related, mainly bronchial, illnesses. Far more insidious and far more dangerous however, are the downstream health effects.
The US Department of Health has estimated that more than 50,000 people die each year from diseases caused or exacerbated by fossil-fuel-induced pollution effects (mainly from coal-fired power stations) in the northern hemisphere alone. In addition, to the extent that exploitation of nuclear power can provide cheaper and more reliable domestic heating, the winter death rate among the old and the poor in northern countries is reduced.
Another effect related to the cost of available heating is more ironic, more subtle and probably equally massive in effect. After smoking, one of the most important causes of lung cancer is exposure to the gas radon. Radon, which occurs at very low concentrations throughout the atmosphere, is released by the natural radioactive decay of underground uranium (small amounts of uranium are common in rock). Significant exposure of ordinary people to radon only occurs in not-very-well-ventilated buildings: effective ventilation removes the radon seeping from underground or released by the minerals in the fabric of the building. When people insulate and draftproof buildings to conserve fuel they reduce ventilation. For example, Sweden has halved its household ventilation rates in recent decades, and tripled average radon concentrations. The increased death rates associated with this effect cannot yet be accurately determined.
In comparison, until recently the nuclear power industry was without a single known death. Chernobyl, considered to be the worst possible accident type, in an unprotected (by western standards) reactor, located near major population centres, will result in at most a few thousand deaths in the long term. (In the light of reports on how the Chernobyl reactor was being run, "accident" seems the wrong word for that disaster, but equivalent accidents in properly-run reactors are not inconceivable.) When contrasted with the annual death rate resulting from the use of coal-fired power instead of nuclear, amounting to almost certainly 100,000 and probably many more, the picture becomes starkly clear.
Other relevant considerations include destruction of forests and crops by acid rain, destruction of historic buildings from similar causes, and the possibility of disastrous results from the "greenhouse effect".
NUCLEAR WASTE
Here too the situation is clear. Low-level radioactive waste when dumped becomes literally a drop in the ocean of sea water's natural radioactivity. The small quantities of high-level waste elements can be securely "imprisoned" in synthetic, naturally occurring, crystal lattices where they are known to have remained immobile for billions of years. These small packages of stable material can then be sealed thousands of metres below the surface, in geological environments also known to have been undisturbed for extremely long periods.
