Success? Christopher Pyne’s plan to allow universities to charge more for courses will work only if there is genuine competition, the OECD says. Photo: Alex EllinghausenThe Organisation for Economic Co-operation and Development has taken aim at a raft of Australian budget measures, describing one as potentially unsustainable and another as requiring close monitoring.
It has also urged Australia to shake up superannuation tax concessions and to lift sharply the goods and services tax to cut income tax.
The Paris-based organisation’s biennial review of Australia found the balance of risks facing the Australian economy contained more substantial downside than upside.
“External risks, chiefly from commodity markets, combined with speculative activity in the housing sector and uncertainties in the responsiveness of non-resource sectors, could conspire to generate a period of weak macroeconomic activity,” it said.
The Abbott government’s decision to restrict access to Newstart for young Australians might not work as intended, it said.
“The proposals will certainly motivate some to seek and take up work or go into further education. However, the precise impact of such reform is difficult to predict. Close monitoring, and adjustment as appropriate, is important.”
The report described Australia’s fixed-rate, means-tested Newstart benefit as “modest”. Two years ago it suggested it should be increased.
The report’s lead author, OECD economist Philip Hemmings, told Fairfax Media the Newstart change could have a significant impact on low-income households and had to be watched closely.
The government’s proposed cut to pension indexation was likely to be unsustainable over the long term, he said. Australia’s aged pension replaced only 60 per cent of half Australia’s average wage, which was low by OECD standards.
The government’s plan to remove the link between the age pension and wages would cause its value to drift down in relation to average incomes, Mr Hemmings said. At some point it could “cross socially acceptable limits of adequacy”.
Australia’s tax treatment of superannuation was unusual, the report said.
A Howard government decision to make most superannuation payouts tax free meant sizeable sums of public money were implicitly being spent in a way that largely benefited middle and upper income earners, it said.
The report said Australia’s superannuation tax concessions cost about $32 billion, which is about 2 per cent of GDP.
The government’s plan for fully paid parental leave is expensive and should face a “careful impact assessment” to check that it stacks up against alternative plans that would funnel more money toward child care.
The success of its government’s plan to cut university funding while allowing universities to increase their fees would depend on whether universities competed genuinely on fees. “Monitoring of the reforms will be important to ensure access to higher education is not compromised, particularly for students from disadvantaged backgrounds,” the report said.
Australia’s goods and services tax is low by international standards, raising only half as much of gross domestic product as the OECD average. As a result, Australia’s tax burden falls more on other taxes, including those on labour and business. The report said New Zealand and Israel were good models for Australia, with GST rates of 15 per cent and 18 per cent respectively. To the extent that a boosted GST disproportionately hurt low-income households, the impact could be softened by boosting benefits and carefully designing income tax cuts.
The report backed the Abbott government moves to give the states more control over their hospitals and schools and more direct access to tax. It was critical of Rudd government programs that tied grants to outcomes. Australia’s states had good room to lift their own taxes without help from the Commonwealth, it said.
Excessive exemptions meant only 5 per cent of Australian businesses were eligible for state payroll tax. Local government rates were an exceptionally efficient tax but were underused. Other states should emulate the Australian Capital Territory in boosting local government rates while they lowered stamp duties, the report said.
The decision to replace the carbon tax with direct action grants for businesses that cut emissions could work, having the same effects as a carbon tax at the margin, providing difficulties in establishing baseline emissions and checking the achievement of emissions reductions were overcome, it said.
The report suggested establishing a “secondary market” for direct action grants, which would allow the Abbott government to harness market forces in the same way as Labor’s emissions trading scheme was going to.
While supporting of the government’s plan to spend more on infrastructure, it said the projects approved must be backed with robust and transparent cost-benefit analysis, to ensure economic use of the existing stock and appropriate selection of new infrastructure projects.