THE STATE OF THE NATION

In my last newsletter, I spoke of Australia’s growing debt and the effect it would have on future generations. This resulted in a lot of feedback, both positive and negative – I was even accused of being an LNP stooge, and not knowing anything about economics.

No, I’m not an economist even though I studied economics when I was completing my accountancy degree. However I don’t think you need to be an economist to know that no household or nation can continue to spend more than they earn. At some stage there must be a day of reckoning.

Leading economist Judith Sloane (The Australian, Tuesday July 29) said “Take it from me, every sensible economist believes that the Budget situation has to be repaired, starting now, and that government debt cannot be allowed to continue to accumulate as it has over the past six years”.

My close friend, economist Dr Don Stammer, tells me that the situation right now is not desperate – the main problem is what’s going to happen if tough measures are not taken to cut future expenditure.

The proposed changes to the age pension are a good example of the way relatively small changes now can help the country to make big savings in the future. Currently, pensions are indexed to average weekly earnings, which are around 4% per annum. The government is proposing they be increased in future at the rate of the Consumer Price Index, which should equal the cost of living. This is around 2.5%.

The pension for a homeowner couple now is $33,000 a year. At 4%, it would be $49,000 in ten years; at 2.5% $42,000. Now let’s go out 20 years and watch compounding start to come into play. If pensions continued to be increased at 4% per annum, they would be $73,000 a year in 20 years. At 2.5%, the maximum pension for a couple in 20 years would be $54,000 a year. There are massive savings to be made by acting sooner rather than later. It’s also a wake up call for a person who is 50 now. Your age pension is not going to be as much as you may have hoped.

Growing life expectancies are a tsunami which is coming slowly but surely. Unless strong action is taken we will suffer a shrinking tax base, which means future tax cuts will be unaffordable. This will put the employed in higher tax brackets because of bracket creep – it will also mean less welfare for our growing ageing population. This means longer hospital waits, and less money for essential services such as education and infrastructure.

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