Ideas@TheCentre

Avoiding the carbon tax compensation nightmare

One underreported outcome from Tony Abbott’s budget reply speech was the Coalition’s backflip on its promise to abolish the carbon tax compensation package.

Prior to the announcement, the Coalition’s policy had been to abolish the carbon tax and the compensation that came with it. After all, ‘once the carbon tax has gone, there’s no need for compensation’.

The compensation package has two major components: The first is an increase in the tax free threshold from $6,000 to $18,000, and the second is the introduction of the Clean Energy Supplement which provides a financial increase to pensioners of up to $336 per year.

Until the backflip, the Coalition was effectively going into an election campaign with a policy commitment to increase effective marginal tax rates on low income earners (by scrapping the income tax threshold increase) and making 3.5 million pensioners worse off (by scrapping the carbon tax compensation payments).

The Coalition – facing a carbon tax compensation nightmare – has now taken action to neutralise the issue by stating unequivocally that they will scrap the carbon tax but keep the compensation package.

This decision has both good and bad elements to it. Maintaining the higher tax free threshold is a good thing which will help reduce poverty and increase the financial returns for people on low incomes who work additional hours. However, compensating pensioners for something that will no longer exist is poor policy and a waste of taxpayer money.

It is worth keeping in mind that in addition to the carbon tax compensation, Australia’s pensioners received a $30 a week increase this year in the base rate of the pension, something the government called ‘the biggest increase to the pension in more than a century’.

With Australia’s ageing population and our unsustainable spending on the welfare state, future governments will need to reform our system of retirement savings to ensure that more people spend more of their own money on their retirement, rather than rely on the pension.

Andrew Baker is a Research Fellow at The Centre for Independent Studies.