Sunday, March 7, 2010

To increase infrastructure spending reform welfare spending

Infrastructure and its requirement for capital seems to be on everyone's mind at the moment. . Most recently the Sydney Morning Herald reported a Price-Waterhouse study which claims we can not meet expected infrastructure demands due to a lack of capital. It demands we give up our cars, live in smaller homes and generally change our life styles. Drastic measures indeed but what about other options? 

Well, a better option may be to increase our savings so we can have more capital. Now having a government that collects in taxes about 30% of our GDP limits what we can save. Especially since so much of of that tax is used to fund a social welfare system that discourages saving. Our welfare system is mostly income redistribution (the exception being the Superannuation Guarantee) it takes money from ordinary working mugs and gives it to people who aren't working or who the government thinks don't earn enough. A lot of this is just income churning, over your life time you get about the same amount back as taken it. The main beneficiaries are the public servants who administer the schemes and the politicians who promote them. The last budget allocated $110,884 million for social security and welfare so if a reasonable percentage of that could be converted to savings there would be no lack of capital for infrastructure.

So how can we do this? How can we convert our welfare system to a “wealthfare” system, one based on savings and investment?

We could expand the Superannuation Guarantee into an Australian version of Singapore's Central Provident Fund. That depends on compulsory savings to provide Singaporeans with welfare benefits and capital for national development. However the compulsory saving rate is up to 34.5% (ouch) and I don't like compulsory anything nor do I trust government officials with my money. We need more liberal alternatives. 

Back in the good old days of John Howard and budget surpluses Peter Saunders from the CIS proposed Personal Future Funds. All Australians would have such funds funded by the budget surpluses. Eventually the personal savings would replace unemployment benefits and allow voluntary medicare opt-outs. The days of budget surpluses are now over but perhaps there is still room in the budget to introduce such a scheme which could be expanded once the budget is back in the black.

Another option is to replace Income Tax with an Expenditure Tax. There are only two things people can do with their money, spend it or save it. An Expenditure Tax would allow the deduction all savings from income and whats left over, expenditure would be taxed, preferably at a single rate. Combine the Expenditure Tax with welfare reforms that encouraged the replacement of state benefits with the extra personal saving and investments and we can start hacking into that $100 billion welfare bill. 

I'm sure there are other alternatives but surely cutting taxes, reducing welfare expenditure, increasing savings and investment makes more sense then living in smaller houses and giving up our cars.

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