16 February 2015

'Looking to the future: fairness, families and free enterprise' - Address at the Centre for Independent Studies leadership lunch, Sydney



Introductory remarks

Thank you for this opportunity to speak to you today. It is a great honour.

The Centre for Independent Studies (CIS) has been at the forefront of thought leadership for more than 38 years. Its influence on Australian political and economic debate has, and continues to be, significant - not only in providing forums for people to speak on policy and other issues of public importance – but also because the CIS has an important voice of its own in the public sphere, prosecuting fact based arguments for a free and open society.

My connection with the CIS began almost 20 years ago when I participated in the Liberty and Society series as a student, and has continued more recently as a Member of Parliament through forums such as Consilium.

Greg and Jenny – you took a great idea, backed it with private funding and built it into a critical national institution – I, for one, am grateful for your foresight and vision.

When I thought about what I wanted to talk about today, three central themes came immediately to mind. Fairness, families and free enterprise. The right policy approach to each will be central to our future prosperity.

That said, I quickly realised that 20 to 30 minutes would be barely time to do justice to the first of these themes – fairness; what it really means, and how we ensure that public policy takes account of its many dimensions.

As such, I want to concentrate on fairness today. I will return to the themes of families and free enterprise in separate speeches in the time ahead.


Much of the public conversation since the 2014 budget has been about fairness.

In itself, this is not a problem and not particularly surprising. After all, Australians are a fair-minded people. Public policy should be fair.

However, I have a very deep concern that fairness is being hijacked as a one-word slogan by Labor and the Greens to encapsulate a very narrow concept. Their aim is to set a Boolean test - whether a budget measure takes more from those with higher incomes than they enjoyed prior to the budget and/or gives more to those with lower incomes than they enjoyed prior to the budget.

The truth is that fairness is a much more sophisticated concept than Labor and the Greens' rhetoric suggests. We need to engage the Australian public in a conversation about the many other dimensions to fairness than the redistributive dimension. That will be critical to prosecuting economic and social policy reform successfully.

Before I come to a discussion on some of the many dimensions to fairness which are being ignored, I first want to put the status quo in perspective, at least in the context of our tax and transfers system which has been the epicentre of the budgetary debate.

Australia has a very progressive income tax and transfer system.

For instance, ABS data shows that households in the lowest income quintile rely on the government for around 55 per cent of their income. Conversely, households in the highest income quintile receive less than 1 per cent of their income from government.1 Many of course would argue this is still too high.

Households in the top quintile receive only 2 cents in government support payments for every $1 of income and consumption taxes paid.2 Those in the bottom quintile receive $2.50 for every $1 in income and consumption taxes paid.

Looking at the income tax system alone, for 2011-12, a sixth of all individuals filing income tax returns paid nearly two-thirds of all income tax. Significantly, the taxable income threshold to fall within that two-thirds was $80,000. Around two per cent of individuals paid about 26 per cent of all income tax. At the other end of the spectrum, 45 per cent of those filing a tax return paid less than 4 per cent of all income tax.3

Recently the Organisation for Economic Co-operation and Development (OECD) found that wages represent only 16.6 per cent of incomes for the poorest fifth of the population in Australia. This is the lowest of any OECD nation.4

Indeed, many look at how steeply progressive the tax and transfers system is, and ask themselves whether it is necessarily a fair starting point in that it places too much burden on too few – especially after taking into account the sacrifices that many people make to be in a position to earn a higher income, the risks they take to do that and the fact that whether someone is in a particular income tax bracket may vary from year to year.

Indeed, these elements are just some of the dimensions of fairness that I want to explore today.

Simple as a slogan, fairness is multidimensional and complex in practice.

To illustrate the complexity of fairness, let's consider a hypothetical example of David, who finds himself fighting for his life in the face of a cancer diagnosis. The all-in treatment cost is likely to be very substantial, potentially running into tens of thousands of dollars over time.

Ask yourself, do you think it's fair that he has to bear these costs? Or do you think, it's only fair for the Australian taxpayer to bear them?

Does your attitude change if you learn that David has been paying tax and the Medicare Levy at the top marginal tax rate as a PAYE taxpayer for 20 years and never once turned to the public healthcare system?

What about if you learn that he inherited a $5 million estate last year?

Does it change if you learn that David was a middle-income earner who chose not to take out private health insurance because there wasn't enough room in the family budget? What if that's because he was squirrelling savings away for this first home or paying for his children's education at an independent school? What if it's because he habitually travels first class overseas to stay in a five-star resort on his annual holiday?

Does your attitude change if you learn that David didn't take out private health insurance specifically because he knew that he would be covered by the public purse?

How do you feel if you learn that it's a rare cancer that appears to stem from genetic factors rather than behaviourial factors? What about if you learn that it's a skin cancer and that David refused to wear sunscreen? Or lung cancer and David smoked two packs a day?

Does your view change if you learn that David had been to the doctor on several occasions and, each time, refused to act on advice to have the skin cancer removed before it spread? What about if he had been to the doctor and the doctor has been negligent in not identifying the symptoms?

Does it change if you learn that David is a five year old child?

My guess is that at various times during the past few minutes you changed your mind on the question of whether it was fair for David to turn to the taxpayer. That, frankly, is not surprising – precisely because fairness is a complex question.

My point is that fairness is not only complex at a micro level; it is also complex at the macro level as well. There is absolutely no question that fairness involves assisting the truly disadvantaged and marginalised. But it also involves questions of intergenerational fairness. Amongst other things, it also involves looking at the hidden winners and losers, questions of personal responsibility and reward for effort, and complex transitional questions.

There are other dimensions too, but these are the ones I want to call out today.

Intergenerational fairness

Labor is fond of describing the 2014 Budget as "unfair". But consider the six budgets delivered by Labor over the period from 2008-09 to 2013-2014. From an intergenerational perspective, they were clearly the six most unfair budgets in Australia's history. During that period, Australia's net debt position rose from negative $44.8 billion – that is, net cash of $44.8 billion – to net debt of $202.5 billion in 2013-14. During that period, Labor delivered $240 billion in aggregate in deficits, despite inheriting a budget in surplus.5 Worse, they put in place a wide range of growth expenditure initiatives that were either unfunded or not fully funded beyond the forward estimates, setting Australia on course for further deficits beyond their time in office. Yes, they faced the global financial crisis in 2008. But they also had the biggest terms of trade tailwind in the nation's history, benefiting from an enormous commodity boom that was never going to endure.6

Those budgets and the trajectory they established for future years were, quite simply, an enormous exercise in intergenerational wealth transfer from our children and grandchildren to us. As economic historian Niall Ferguson has stated:

"The heart of the matter is the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn."7

At the family level, most parents look to build some wealth to leave to their children and grandchildren so that they have an easier start in life. At the government level, Labor took the opposite approach.

The Coalition has taken some steps towards turning the ship around, although we are the first to admit we have a long way to go. For instance, real spending over the life of the previous government grew at around 3.5 per cent per year.8 Worse, the 2013-14 MYEFO released shortly after this Government came to office, showed that the growth in spending would have increased to an average of 3.7 per cent beyond the forward estimates.9 As we detailed with the release of the Mid-Year Economic and Fiscal Outlook in December, the Government has pulled back average real spending growth over the current forward estimates period to 1 per cent per year.10

Notwithstanding this, we can reasonably expect the next intergenerational report to highlight that demographic changes will see very substantial increases in spending on healthcare, aged care and the aged pension over the longer term. We can also expect that it will show a smaller ratio of "working age" Australians as the revenue base to fund that growing expenditure. Quite apart from handicapping the next generation of Australians with unacceptable public debt at the outset of their lives, we will also be expecting them to fund a higher standard of living for us than they can ever reasonably expect to achieve. Is that fair?

Hidden winners and losers

One of the great challenges to good policy making is that fairness is too often judged with reference to the very visible winner, rather than the hidden losers. That's one of the problems with intergenerational fairness. Too often, we see today's Australians, but forget about tomorrow's. But it's also a problem in other areas as well.

For instance, the higher education debate has focused on those students who are fortunate enough to attend university and who are being asked to pay a little more. But what about the Australians who have not been fortunate enough to attend university who will earn less on average who collectively will be asked to pay a little less? They are the hidden losers under the status quo, and the hidden winners of changing the contribution mix.

The same phenomenon appears in debates on welfare, where the focus is on the visible "winner" who receives welfare, rather than on the hidden loser who funds that welfare – the ordinary taxpayer whose income is appropriated by the state to fund it. Similarly, on industrial relations, where the focus is all too often on the visible workers in employment without sufficient consideration of whether the policy is fair to the small business owner or the unemployed, or indeed the consumer.

Personal responsibility and reward for effort

Reflect on the thought experiment we went through earlier about David. How did your mind change when you learned that he contributed to his plight, whether by smoking or by failing to heed his doctor's repeated warnings to go in for earlier treatment?

I suspect that on the sliding scale of fairness these aspects pushed you further to the "fairer to require a private contribution" side.

Conversely, when David was a minor who clearly could not have made informed decisions, I suspect you were pushed in the other direction.

This reflects another fundamental aspect of fairness which takes into account an element of personal responsibility.

Hence, there is limited community angst about individuals with debilitating injuries who have made every effort to find meaningful employment receiving income assistance, yet far more concern about people in areas of high unemployment refusing to move or take on jobs which are "beneath them".

The flipside of the above is recognition of reward for effort, including a recognition of the many sacrifices and risks that Australians and Australian businesses take to drive themselves and our country forward. Those who work harder and longer should be rewarded. Those who put capital on the line to invest in new enterprises should have the opportunity to earn outsized returns – after all, many who risk capital end up losing that capital altogether. Yes, the whole community benefits because these entrepreneurs and workhorses drive the country forward, but far beyond that utilitarian argument for free enterprise policy settings, ensuring government policy rewards effort and risk-taking is a basic matter of fairness.

Transitional fairness

I'd like to finish by addressing what I think is one of the most complex areas of the fairness debate – namely transitional fairness. All governments need to recognise that people make life decisions, and businesses invest, on the basis of government policy settings. In many ways, no matter how unfair and unreasonable the government policy, people should have some reasonable expectation that the settings will not simply change overnight and that when they do change there will be some form of transitional arrangements in place.11

That's why when both Labor and Liberal governments have proposed increases to the eligibility age of the aged pension, government has flagged the change well in advance of the change taking effect with long-dated transition arrangements.

The intergenerational report will no doubt highlight the need to look very carefully at a range of growth areas of government expenditure – including tax expenditures. The debate will almost certainly move to very long-dated policy areas like the aged pension and superannuation. I don't want to pre-empt where that conversation ends up, but I would say that one of the most important areas for participants to address will be how to manage transition arrangements.

For instance, there has already been some public discussion about the assets test for the pension and specifically whether the family home should be excluded. Leaving aside for the moment whether it's the right thing to change that assets test, one of the key questions that advocates of change will need to address is how to be fair to those who decided to overcapitalise in their house over a number of years, possibly decades, precisely because of that exemption for the family home.

Herein lies one of the central challenges in the fairness debate. The millennial generation might consider it fair to remove this exemption immediately rather than over time. From their perspective, that would minimize the intergenerational wealth transfer, so why delay? But a middle aged family or pensioner might consider that completely unfair because they made a range of choices based on that exemption continuing. At the end of the day, perhaps, beauty is in the eye of the beholder, but fairness is a matter of perspective.

The challenge for government is that it needs to take into account all of these different perspectives, and will necessarily need to make compromises between them.

Concluding remarks

The traditional Australian society of decades past has changed. Our workforce and economy have changed. And our population is in the midst of momentous change.

We need to set Australia up for the future. Prosperity is not predestined – the decisions we make today will shape our future.

Reform is essential. But now, more than ever, it is clear that we will only achieve reform if we convince the Australian population that the reform is fair.

Not fair in a simple redistributive sense, but fair having regard to principles like intergenerational equity, reward for effort, personal responsibility and policy certainty, as well as a moral responsibility to have a social safety net for those who are truly vulnerable in our society.

All of us who are interested in good public policy need to reclaim the fairness agenda and highlight fairness' many dimensions. We need a more sophisticated and nuanced fairness debate. Unless and until we achieve that, we risk compromising our future.

Thank you.

1 ABS 6523.0 Household Income and Income Distribution Australia 2011-12 and 6537.0 - Government Benefits, Taxes and Household Income, Australia, 2009-10.

2 Calculated off Ibid.

3 ATO 2011-12 (Latest available) Taxation Statistics.

4 OECD Household Income Survey 2014.

5 2014-15 MYEFO Table D1 p 266-267.

6 ABS 5206.0 Australian National Accounts, National Income, Expenditure and Product, September 2014.

7 Niall Ferguson "The Great Degeneration How Institutions Decay and Economies Die" (Penguin, 2013), p 41.

8 2013-14 MYEFO p 3.

9 2013-14 MYEFO p 3.

10 2014-15 MYEFO Table D1 p 267.

11 The increase in the Age Pension eligibility age to 70 years by 2035 is an example of a transitional policy. The long lead in time is in recognition of the fact that people need time and policy certainty from the Government in order to plan their financial affairs ahead of their retirement.