The Liberal Disconnect

This is the second in three related posts about the major political parties in Australia. This post deals with the Liberal Party. Across the world those on the left side of politics are often referred to as liberals whilst those from the right are often called conservatives.

As the conservative party in Australian politics is the Liberal Party (LP) it must be quite confusing for people not from Australia who are trying to wrap their head around Australian politics. None the less that’s the situation here down under. Despite a few shocks from minor parties over the years it’s a situation which doesn’t seem likely to change in the immediate future.

Over the past twenty years it has probably been more stable, in terms of its overall message and certainly more stable in terms of its leadership, than the Labor Party. For this reason the Liberals have been in government for the majority of the previous twenty years. Despite this it would be an enormous mistake to suggest that the Liberal Party has governed well during all of its time in government or that the Liberal Party does not face significant challenges of a similar nature to those facing the Labor Party.  

Perhaps the most obvious of these challenges revolves around what has historically been one of the great strengths of the LP and of other conservative political parties around the world. Their much vaunted reputation as economic managers.

There are many challenges facing the world’s economies most of whom are struggling through a difficult period after the GFC and the ‘great recession’ which followed it. Compounding these issues for Australia is the evolving demographic of our population and the resulting changes to our tax base and the cost of government services that result from these changes.

With regards to income tax Australia uses a progressive taxation system in which higher earners are taxed at a higher rate than low income earners. There are arguments for and against this system but I think on balance the majority of Australians are content with the current system. The problem for the government is that the Australian population is aging and over time this may reduce the amount of income the government will receive from income tax.

Compounding this problem is what happens after retirement. Australian citizens who retire either access the pension, their accumulated superannuation or a combination of both to pay their bills. Obviously the pension is paid by the government and is a direct cost for the government so superannuation is the preferred option from the government’s perspective. For this reason there are generous tax concessions around numerous aspects of the superannuation scheme.

In terms of contributions to super these are taxed at a flat rate of 15% up to $300,000 and those earning less than $37,000 actually have that ‘tax’ credited back to their account. If people make additional contributions to superannuation it is not taxed at all up to an amount of $195,000 a year. All this is very sensible in my view as it encourages people to fund their own retirement which should theoretically reduce the overall cost of the pension for government.

In terms of income earned from superannuation it is not taxed at all for people aged over sixty. A fifty year old person earning over $180,000 is taxed at $54,547 plus 45% of every dollar earned over $180,000 per annum. A sixty year old person who has retired and is earning $180,000 per annum from their super fund is not taxed at all.

I’m not sure how you can conceivably justify taxing income progressively for everyone except those who have retired. This is not to say that those who have retired should not be taxed differently, but to not tax them at all? It’s an inconsistency which is difficult to qualify.

If Australia was to tax those retirees who are earning very high incomes from their superannuation it would certainly increase the tax base which in turn would assist the government to meet future increases in expenses. Surely the LP, the party with the reputation as responsible economic managers, would consider changes to taxation of retirement income. Yet they are not and are unlikely to. Why?

Consider the demographics of the LP voter base. This base has a higher proportion of the elderly, and in particular the wealthy, self-funded elderly. Would those people vote for a party who amended the taxation system in a way which clearly disadvantaged them? That seems unlikely.  

What I find particularly fascinating about this situation is some of the rhetoric espoused by the LP since winning government. Often the ‘message’ has talked about ending the age of entitlement and the need to make hard decisions which are unpopular but which are none the less necessary.

It’s a challenge to imagine making a choice more difficult than one which disadvantages the core of your party’s voting base but is none the less an obviously sensible economic decision. It’s less obvious if this a challenge which the LP can overcome?