Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 610

Labor should focus on cutting Government spending

Writing recently in the Australian Financial Review, Associate Professor Steven Hamilton argued that, “There is one clear solution that public finance experts agree on, and that is the ‘dual income tax’ as implemented in the Nordic countries, which taxes all investment income and expenses (including trusts) independently of earned income at a flat rate and without a tax-free threshold.”

Achieving policy consensus among public finance experts, economists by another name, is no small feat. After all, if you ask three economists for their views, you’ll likely receive five different opinions. Nonetheless, after decades of studying, practicing, and observing public finance, this is the first time we have encountered such a claim of consensus.

It is true that investment income and capital gains are generally taxed at flat rates in Nordic countries: 30% in Sweden, 35% in Norway, and 42% in Denmark. However, it’s important to note that personal income taxes in these countries are so high and broad-based that there is little effective progressivity.

For example, in Denmark, the top marginal tax rate is 55.9%, and it applies to all individuals earning just slightly above the average income. In an Australian context, this would be akin to the top marginal tax rate of 47% kicking in at an annual income level of $100,000, rather than the current $190,000 threshold. In Sweden, all taxpayers pay a municipal income tax of 32% with no tax-free threshold, and a further national tax of 20% applies to incomes over SEK625,000 (approximately $100,000).

Hamilton is correct that Nordic countries tax trust income at a flat rate, but this is because trusts, as they are known in common law jurisdictions like Australia, do not exist in Nordic legal systems.

Most economists would accept that investment income should be taxed in proportion to the consumption it funds. Since income comprises savings as well as consumption, the tax on investment income either needs to be lower than that on labour income to more approximate consumption, or the tax shifted to cashflow (that is, consumption itself).

The appropriate lesson to be drawn from the experience of the tax regimes in Nordic countries, Australia, and the USA, is that to provide an adequate level of investment, the tax rate on investment income needs to discounted relative to labour income. One would hope that this is the duality that Hamilton had in mind.

Seemingly missed however is that Australia already has a dual income tax within the superannuation system, with most income taxed at 15% and capital gains on assets held over a year at 10%. By inference then, Hamilton’s dual tax proposal would need to extend beyond the superannuation system. This would likely impact dividend imputation, negative gearing, and accounting for inflation in capital gains (the so called ‘discount’).

Unclear is how a dual income system sits alongside the government's proposed 30% tax on higher super balances, including on unrealised capital gains. Particularly given the risk that once established, this model could leech beyond superannuation and become a broad-based wealth tax, including on the primary home. Such a ‘wealth’ tax would compromise the simplicity and efficiency of the current superannuation tax regime and significantly weaken Australia’s capital and investment markets.

These issues reflect the complexity of reforming Australia’s tax system. Thus, in contrast, we believe the Government's top reform priority should instead be tackling Australia’s persistently weak productivity growth.

Australia’s high tax rates and complex tax system undoubtedly contribute to its productivity challenges. However, an even greater barrier is the size, scope, and overactivity of the country’s bureaucratic and regulatory apparatus. This vast system, greatly expanded over the past 25 years, offers substantial opportunities for reform.

Scaling back Government would not only ease the fiscal burden but also create the political space needed to advance meaningful tax reform. Fundamentally, reversing the rapid growth in Government spending must be a top priority.

Major reformers of the past understood this sequence well. Hawke, Keating, and Walsh addressed Government spending before turning to tax reform, just as Howard, Costello, and Fahey did in their time.

Based on the 2025 budget and before election commitments are accounted for, approximately $300 billion or 40% of Commonwealth government spending will be on welfare and housing. The NDIS will cost 50% more than Medicare. Interest payments, which were essentially nil some 18 years ago, will be $30 billion. And by the end of the forward estimates, interest payments will be the Commonwealth’s 5th largest spending program; more than that budgeted for Medicare, defence, or aged care.

Real economic reform starts not with improving the efficiency of revenue raising, but rather with restoring discipline in how revenue is spent. Until the government reins in its own appetite, any attempt at tax reform, is simply rearranging deck chairs on the Titanic.

 

Peter Swan AO is emeritus professor of finance at the UNSW Sydney Business School. Dimitri Burshtein is a principal at Eminence Advisory.

 

15 Comments
Nick
May 09, 2025

NDIS is the spending program most in need of pruning. Costing 50% more than Medicare (which supports all Australians) makes no sense. If this represents the actual cost of providing support to the disabled then our definition of disability is wrong.

Russell Wadey
May 09, 2025

'discipline'.
Finally used in the second last sentence: the philosophy at the heart of every piece of conservative economic policy prognosticating I've ever heard. The justification for everything from the current US trade-war to not increasing the dole to something above the poverty line.
And behind all the teeth-gnashing over the amount spent on the NDIS and debt-service is the neoclassical economic assumption that taxation pays for federal government spending.
It does not (here's how it works in the UK: Berkely et al, 2024, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683).
We've got this all backwards.
Can we PLEASE start tax reform discussion with what our societal policy aims are (I'll start: 1. actually dealing with climate change and 2. way less inequality), then work out a level of fiscal spending consistent with full employment (with a job guarantee) and low inflation. This is MUCH HIGHER than what is commonly believed to be the case now (especially with nominal G > i).
And it will need to be to start properly addressing objective 1.
All the rest is tinkering around the edges, equivalent to fiddling while Rome burns.
Of course I'm not holding my breath while the pollies and current batch of "economists" like Hamilton & Fraser are in charge of what passes for policy discussion.
Leadership on climate change? Anyone?

Dudley
May 09, 2025

"here's how it works in the UK":

Need to incorporate this:

'Revenue collection, including taxation, involves the reverse process, crediting the Consolidated Fund’s account at the Bank, thereby offsetting past injections.'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683

James
May 09, 2025

"Can we PLEASE start tax reform discussion with what our societal policy aims are (I'll start: 1. actually dealing with climate change....."

How do you suggest we do that when Australia produces a very small proportion of world carbon emissions, has no sway over the world's biggest emitters and over enthusiastic, ideology driven climate action in Australia is only going to further hurt our economy, drive industry offshore and push up electricity prices!

OldbutSane
May 08, 2025

This doesn't really suggest any meaningful solutions.

The Government should start by realigning means tests for all government benefits. If family income is more than the median (or maybe no more than the top 40%), then there is no good reason why those need any Government support (given the median is well above the average). So, the $530k and $350k limits for childcare and parenting payments could be reduced. Likewise the CHCC limit if over $150k for couples should be reduced. In addition NDIS should be means tested, so that those who fur exemanple get large insurance payouts for disability (the amount usually includes ongoing care costs) can't double dip and get NDIS free as well

In addition the family home should be included in the pension assets test with a payback system for those who choose to receive the pension (ie thosedon't want to down size, but are income poor) similar to HECS, so that it is paid back on death or sale of the house.

Michael
May 08, 2025

According to ATO figures the median taxable income far lower then the average wage.
Median taxable income approx $65k.
AWE approx $87k.

Dudley
May 09, 2025

"family home should be included in the pension assets test":

That changes the scheme from:
. all assets but Full Age Pension threshold in home
to:
. no more assets than Full Age Pension threshold.

Then apply for Rent Assistance.

Franco
May 09, 2025

Agree with NDIS being means tested, I have known some wealthy individuals receiving NDIS (one who was self funded and left an estate of over 8 million--- including millions to a Sydney private boys school)

Peter Care
May 08, 2025

“Labor should focus on cutting Goverment spending.”. Great in theory, but the electorate and demographics won’t allow it.
Today is not the 1980’s which were the perfect time to reduce taxes and Government spending. Australia’s demographics are very different today and will dictate that Government spending will naturally increase.

One of the biggest increases in government spending is welfare spending and that is not because of unemployment benefits. It is the ever increasing age pension bill that is putting pressure on the budget. As we baby boomers retire we are eating more of the budget in age pension payments. As the largest demographic in our history, more of us are reaching age pension age and we are living longer. In other words you need to pay the full or part age pension to many more people than in the 1980’s, and because we are living a decade longer, you need to pay it for longer than in the 1980’s.
As well as ever increasing demands on our welfare budget (yes the age pension is a welfare payment), the ageing baby boomers also demand ever increasing spending on the health care budget. Superannuation helps a little but because more than 70% the aged receive some level of age pension the ever increasing welfare budget issue remains.
So two big budget items health and welfare must have significantly increasing spending.
Defence (another large budget item) will also have increasing spending as China flexes its muscles and the USA has an increasing isolationist policy.

So if Health, Welfare and Defence spending must increase how is Government spending going to decrease. We might have to slash or eliminate federal government grants to private schools but that won’t be nearly enough. (It is the states that mainly pay for government schools). You could also cut infrastructure spending but that would be bad for productivity.
Easy to say cut Government spending; much harder to do with our ageing population.

We are not in the 1980’s.

Dudley
May 08, 2025

"more than 70% the aged receive some level of age pension the ever increasing welfare budget issue remains.":

All well reasoned but I have never seen a plausible model of what might happen if the Age Pension Means Tests were abolished.

There are many interdependencies in the economy to consider.

Would Abolition result:
. in people working or running businesses or employing longer and paying tax longer?
. downsizing homes sooner; reducing the cost of 'family' homes; increasing worker productivity?
. ...?

Cam
May 09, 2025

Not sure there was much savings in the 80's. When Howard won in 1996 he had $96m of debt, the equivalent of around $500m in today's dollars.
Means testing Government handouts would be great. Families earning over $500k getting part childcare subsidies, retirees living in a $3m home with $1m in investments getting part age pension. The list goes on.

Dudley
May 09, 2025

"Families earning over $500k getting part childcare subsidies": Families should instead earn $250k and pay half tax?

Disgruntled
May 09, 2025

Howard and Costello wasted the revenue from the resource boom on middle class welfare to keep themselves elected.

Dudley
May 08, 2025

"Labor should focus on cutting Government spending": They should; mostly not liked by effected voters but keeping debt small is more universally appreciated.

Increased productivity requires more financial capital per worker and / or invested more profitably.

Middle age workers, human capital, are the source of many considered business ideas, some potentially highly profitable.
Financial capital is usually required to realise the profit potential.

Tax policies which MAKE SAVING GREAT AGAIN, and result in middle age workers having accumulated unencumbered financial capital (SAVINGS outside Super) increase productivity.

Rent and mort-gage are the largest financial drag for most young workers and not sufficiently productive use of capital.

Tax policies which do not discourage the "Bunk of Dad&Mum" or empoyer provided accomodation would give younger workers a means of buying their homes "Cash on the Knocker" in under 4 years; or starting a business with more financial capital.

JohnS
May 08, 2025

Flatter income tax scales (less progressive) is code for the lower paid people paying proportionally more tax, and the higher income earners paying proportionally less

Bad move, no thanks

 

Leave a Comment:

RELATED ARTICLES

Taxation reform: is Canberra serious?

Tomorrow's taxpayers pay for today's policy mistakes

The mixed fortunes of tax reform in Australia, part 2

banner

Most viewed in recent weeks

Pros and cons of Labor's home batteries scheme

Labor has announced a $2.3 billion Cheaper Home Batteries Program, aimed at slashing the cost of home batteries. The goal is to turbocharge battery uptake, though practical difficulties may prevent that happening.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

Welcome to Firstlinks Edition 606 with weekend update

The boss of Australia’s fourth largest super fund by assets, UniSuper’s John Pearce, says Trump has declared an economic war and he’ll be reducing his US stock exposure over time. Should you follow suit?

  • 10 April 2025

Latest Updates

Economics

Does Buffett’s farewell represent peak America?

Buffett's surprise decision to step down as Berkshire Hathaway's CEO sparked reflection on his legendary legacy and concern for America’s future, as he warned of unsustainable deficits and possible cracks in U.S. exceptionalism.

Taxation

Labor should focus on cutting Government spending

Reining in the Government's appetite for spending wouldn't just ease the country's fiscal burden. It would also clear the way for the meaningful tax reforms that are needed to boost Australia's ailing productivity.

Economy

The Liberals need to return to Menzies’ values

The former Liberal Minister and Chief of Staff to John Howard gives a blunt assessment of the election defeat and how the party needs to get back to its roots and merge its values with the needs of the community.

Gold

Gold $5,000?

Following the gold price's recent surge, headlines have popped up with increasingly bold predictions - US$5,000, even US$20,000 an ounce? This looks at the fundamentals and the credibility of these bullish predictions.

Economy

Are pension rules impacting fertility?

Australia’s push to delay retirement has boosted workforce participation - but at a cost. New research shows the measures have unintentionally impacted fertility rates, and the trend will be hard to reverse.

Investment strategies

Profiting from panic: inside the mind of a contrarian investor

Recent years have been challenging for contrarian investors, though 2025 has brought wild market swings, and with it, more opportunity. MFS' Zahid Kassam discusses contrarianism and his favourite global stocks.

Economics

America's green transition is taking a beating

The green transition in the US has made great progress in recent years, but the wheels are falling off. This is largely due to economic pressures, lack of financing, and the new tariffs instituted by Trump.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.