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Thank You China - for Now

Summing the federal budget up this week, a well travelled economist did it in three words - 'Thank you China'. The 10%pa growth of the Chinese economy has seen metal commodity prices increase by 21%pa and consequent revenue flowing into the income tax coffers of Australia from expanded exports and resource company profits. The stock market is up 32% in the year to end of April and 20%pa over the last 3 years. These trends are unsustainable in the long term.

In this environment it is easy to make tax policy changes which promise an open candy shop to the baby boomers but don't cost much in current year revenue ($0.5 billion compared to income 'tax cuts' at $35 billion). The key item here is telling the baby boomers they will be able to draw down all of their super after age 60 any time they like without paying any tax. Current end-benefit tax arrangements encourage taking super as income. In 10 years time most of the baby boomers will have clocked off. They will then want top quality free health care and the government will be looking for revenue to help their Gen X children struggling with escalated mortgage rates, divorce and higher unemployment. It is in 10 years time that this "tax-free" super change will cost most in lost revenue. Super assets for people who will turn 60 over the next 10 years are currently estimated at $270 billion.

We have an 'almost great' retirement incomes system - compulsory 9% contributions, locked up until age 60 - but now with optional spending after 60 rather than incentive to draw it down carefully as income, it becomes very imperfect. The wise option would have been to take off the up front 15% taxes on contributions and investment income and toughen up lump sum taxes which would see more income and tax emerging in the future tough times when it is needed.

Posted Friday, 12 May 2006

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