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Intergenerational Report exposes Savings Problem

A prominent feature of the Federal Budget speech tonight is the Intergenerational Report 2002-03. The projections in this report show that the current generation of taxpayers is likely to impose a higher tax burden on the next generation. The required adjustment in taxes and spending to maintain current benefits is about 5.0 per cent of GDP by 2041-42, or $87 billion in today’s dollars. This exactly equals the income tax paid by individuals. No solution is offered by the government other than the implication of these fiqgures that taxes would need to double.

There are two choices to solve this imbalance:

1. Keep doing what we are doing now and face up to a much lower standard of living and debt like Argentina

2. Reduce current consumption, save excess income and draw on investments in future years to maintain a similar standard of living to now

Australia sits precariously between these two alternatives. Superannuation is accumulating at a modest rates of 7.65% (9% less 15% tax) and 6.3% (9% less surcharge rate 30% for employees on $85,242 or more). This compares to the 20% rate required to cover comfortable pensions for federal public servants. These general rates of 7.65% and 6.3% are not sufficient rate to be meaningful in plugging an $87 billion per annum gap and need to be increased to around 15% for currnet 20 year olds and need to provide catch up scope for 50 year olds who have had littel benefit to date from compulsory super. The government and opposition show no reconition of this need fro significant lifting of savings rates.

The problem becomes worse when other government policies are considered. Negative gearing has encouraged excessive household debt which banks are financing by mainly offshore borrowings. Taxes have been stolen from future generations by the Keating budget of 25 May 1988 and the introduction of 15% up-front super taxes and the Costello budget of 1996 which introduced the 30% surcharge. These taxes now bring forward revenue which belongs to future generations at the rate of $5 billion annually. This prominent intergenerational shift is not highlighted anywhere in the Intergenerational Report. You can read the intergenerational report in our Resources section of this site

Posted Tuesday, 14 May 2002

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