102006121p4.indd

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Policy Brief

JULY 2006

This Policy Brief presents the assessment and recommendations of the 2006 OECD Economic
Survey of Australia. The Economic and Development Review Committee, which is made up of the
30 member countries and the European Commission, reviewed this Survey. The starting point for
the Survey is a draft prepared by the Economics Department which is then modified following the
Committee’s discussions, and issued under the responsibility of the Committee.

Economic Survey of Australia, 2006

policy respond to the

force participation be

Summary

Sometimes referred to as the “lucky” country, Australia has been riding the
global boom in commodities, benefiting increasingly from its proximity to
Asia. But Australia “has also made its own luck” through a series of structural
reforms and the introduction of a robust macroeconomic framework which
have bolstered resilience. This is illustrated by its macroeconomic stability in
the face of a string of recent shocks, in stark contrast to the macroeconomic
chaos which followed the commodities boom of the early 1970s. A further
test of this new resilience will occur at some point when the terms of trade
decline – this underlines the need to continue prudent macroeconomic
policies.

Reforms have also boosted productivity, with living standards steadily
catching up with the best performing countries since the early 1990s. The
long-term challenge is to sustain this performance, particularly in the face of
population ageing, which will require progress on a number of fronts:

•

Improving fiscal relations across levels of government

. Many public services are

funded jointly by the central government and the states. Clarifying roles
and responsibilities would raise public sector efficiency. Particularly in
the areas of hospital services and old-age care, fragmentation in decision
making leads to cost and blame-shifting. Addressing these problems has
been placed on the agenda.

•

Boosting productivity growth

. Following a surge in the second half of

the 1990s, productivity growth has reverted to its long-run average.
Infrastructure bottlenecks have held back export growth in some cases.
More importantly, there is still further business in the reform of network
industries and inefficient use of water remains a major concern. The
slow pace in overcoming market segmentation and instilling greater
competition in these sectors is partly due to the joint responsibilities of
the federal government and the states, although the Council of Australian
Governments has recently agreed to a National Reform Agenda that
aims to re-invigorate and broaden the reform process. In this context,
improving workforce skills will also be important.

■

Policy Brief

ECONOMIC SURVEY OF AUSTRALIA, 2006

Figure 1.
THE TERMS OF TRADE:
WHERE NEXT?

•

Raising labour market flexibility and supply

. The recent industrial relations

reform is a further move away from a system that had been highly
prescriptive. Room for further simplification remains, which would allow
greater scope for bargaining over workplace conditions. In addition,
labour supply can be raised further, particularly from lone parents,
second earners, disability beneficiaries and those aged over 55. The recent
tightening in eligibility requirements for welfare benefits goes in the right
direction, but should also be applied to the stock of all beneficiaries. A
priority for future tax cuts should be to reduce “low wage traps”.

Australia has a strong track-record in pushing ahead with sensible reforms.
Further reform is needed to underpin vigorous growth and sustainable
prosperity in the face of population ageing.

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ECONOMIC SURVEY OF AUSTRALIA, 2006

Policy Brief

How strong has

recent performance

been and what

challenges remain?

Figure 2.
GDP PER CAPITA

Recent macroeconomic performance continues to be impressive: gross
domestic product (GDP) growth since the turn of the millennium has
averaged above 3% per annum and, including the terms-of-trade gains,
growth in real gross domestic income has averaged over 4%, among the
handful of OECD countries achieving such rapid growth; the unemployment
rate has fallen to around 5%, its lowest level since the 1970s; inflation has
remained within the target range; and, following a long stretch of fiscal
surpluses, Australia is now one of the few OECD countries where general
government net debt has been eliminated. Living standards have steadily
improved since the beginning of the 1990s and now surpass all G7 countries
except the United States. Wide-ranging reforms, particularly to promote
competition, were instrumental in this respect. They promoted productivity
growth, most notably in the second half of the 1990s. The greater flexibility
engendered by these reforms, together with the introduction of robust
monetary and fiscal policy frameworks, has also bolstered the economy’s
resilience to a series of major shocks over the last decade: the Asian crisis in
the late 1990s, the global downturn at the turn of the millennium, followed
by a major drought, the ending of a house price boom and currently, the
commodity price boom.

The major short-term challenge is to manage the consequences of the
commodities price boom that has boosted the terms of trade by around
30% over the last three years, but is likely to decline at some point. The
buoyancy of tax revenues, which is significantly higher than can be explained
by the commodities boom alone, also raises a complex question as to how
ambitious short-term fiscal objectives should be. Over the longer term, the
key challenge is to sustain the growth in living standards, particularly in
the face of population ageing. In many areas this would be facilitated by,
or even requires, improvements in the operation of fiscal federalism. The
efficiency of government services can be raised by clarifying responsibilities
and improving co-operation in those areas, notably health, where the federal
government and the states both have responsibilities. Similarly, productivity
can be enhanced by further co-operation to reform infrastructure and
network industries as well as making more efficient use of the available water

■

Policy Brief

ECONOMIC SURVEY OF AUSTRALIA, 2006

supply. Productivity can also be boosted by up-skilling the workforce and
by taking advantage of the reformed framework for industrial relations to
promote necessary workplace re-organisation. Finally, to counter the adverse
effects of ageing on labour supply, consideration should be given to whether
further reform is required to lessen welfare dependency and promote the
labour force participation of particular groups – notably women, single
parents, the disabled and those aged over 55.

Currently, one of the main driving forces of economic activity is the global
boom in mining commodities in which Australia is a major exporter. The
terms of trade are currently around a 32-year high and business investment,
especially in mining and associated infrastructure, is growing at double digit
rates. The commodity price boom gained momentum just as consumers’
expenditure slowed following the cooling of the housing market at the end
of 2003. There are some regional divergences in activity depending on the
relative impact of these two shocks. The commodity-rich states of Western
Australia and Queensland are growing faster than others, especially New
South Wales, where house prices have been weakest. In aggregate, output
growth has been sustained at around 3%, although activity slowed during the
second half of 2005 largely due to a disappointing export performance and
weak housing investment. Headline consumer price inflation reached 3.0% in
the March quarter of 2006 compared with the medium-term target of 2 to 3%.
This partly reflects rising petrol prices. Consumer price inflation, excluding
energy and seasonal foods, did not increase and remained in the lower half
of the target range. Nevertheless, the Reserve Bank did raise the policy rate
to 5¾ per cent in May, the first move in 14 months, citing the strength of
the global economy and its likely impact on export earnings, as well as the
pick-up in household credit growth and an increase in other core (weighted
median) measures of inflation.

Output growth should pick up in 2006 and 2007, to 3 and 3½ per cent,
respectively. The interest rate rise should dampen the recent pick-up in
household credit and ensure that consumption growth remains consistent
with a gradual increase in the saving ratio. Business investment will be
underpinned by tight capacity in commodity sectors and strong profitability
more generally. The additional capacity should allow higher resource-based
exports so that if the terms of trade remain at recent levels the current
account deficit may fall to just over 5% of GDP next year, down from a record
high of 6¼ per cent of GDP in 2004. The major uncertainty for the outlook
concerns the timing and extent of the eventual downturn in commodity
prices. The continuing strength of China and its seemingly insatiable demand
for hard commodities may mean that the upswing is more prolonged and the
monetary authorities will need to remain vigilant to inflation risks.

Some sectors have been adversely affected by the commodities boom and
the associated increase in the exchange rate. It is important that any policy
response to consequential structural adjustment occurs with minimal
disruption rather than seeking to prevent adjustment.

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ECONOMIC SURVEY OF AUSTRALIA, 2006

Policy Brief

How should fiscal

policy respond to the

substantial terms

of trade gains?

What are the

priorities for

future tax cuts?

The authorities’ budget projection, which is similar to the OECD’s, predicts
a fall in the consolidated general government surplus from 1.3% of GDP in
2005/06 to 0.5% of GDP in 2006/07, with the federal tax cuts imparting some
fiscal stimulus. How large a surplus should be targeted depends partly on
how much of the recent surge in the terms of trade will be permanent.
If the terms of trade were to revert to their long-run average, an extreme
assumption in the short run, nominal GDP would decline significantly
and tax revenues could fall by around 1¾ per cent of GDP. The assumption
incorporated in recent budget projections of federal surpluses of about 1% of
GDP over the next 4 years is that about half of the improvement in the terms
of trade, relative to its long term average, will be reversed in the two years
following the budget year. Accordingly, the prospective federal surpluses are
consistent with the federal government’s objective of balancing the budget
in the medium term. The assumed decline in the terms of trade provides
for some “fiscal insurance” by slowing projected revenue growth and is a
prudent departure from the traditional methodology which implicitly would
have assumed an unchanged terms of trade. Given continuing momentum
in global growth, especially from China, the assumption that there may
be some long lasting improvement in the terms of trade is reasonable, but
there are obvious uncertainties as to the timing and extent of an eventual
decline.

In the event of a more pronounced fall in the terms of trade and a downturn

in the global economy, it will be important to allow the automatic stabilisers to work,
including, to allow at least temporarily modest fiscal deficits if that downturn were
severe

. Importantly, government sector net debt has recently been eliminated,

providing an extra measure of fiscal flexibility.

Conversely, if there were to be

further increases in commodity prices in the short term, it would be desirable to save
any resulting positive surprises to tax revenues rather than being used for permanent
tax cuts or spending initiatives

. This would avoid crowding out private spending

and create a cushion for when the commodities cycle turns.

■

Recent cuts in higher rates of personal income tax and the widening of
thresholds address concerns about the tax burden on skilled workers raised
in the previous

Survey

and are to be welcomed. Indeed, as discussed further

below, the extent of these changes are such that the priority for any future
tax cuts should now be at the lower end to address the problem of “low wage
traps”. This would build upon measures in recent years to reduce benefit
withdrawal taper rates in the Family Tax Benefit system and the targeted tax
relief recently provided to low income earners.

Recent reforms will have reduced fiscal drag but it still remains high by
international comparison due to the heavier reliance on personal income
tax. Indexing tax brackets to wage growth would increase transparency;
however, it would also reduce the flexibility to undertake further targeted
reform of the tax system. The government commissioned Taskforce report
“Rethinking Regulation” noted that attention should also be given to further
simplification of the tax system, to reduce compliance costs. A range of
measures were announced in the 2006/07 Budget that will reduce the
complexity of the tax law and compliance costs for taxpayers, dramatically
in the case of superannuation changes. The government should continue
to seek opportunities to simplify the tax system. One option which might

■

Policy Brief

ECONOMIC SURVEY OF AUSTRALIA, 2006

What are the future

fiscal pressures

from ageing?

be considered is to allow taxpayers a standard minimum deduction. While
this would be contrary to the general principle that taxpayers should be
able to deduct only expenses actually incurred, in some other countries this
approach has effectively removed the need for taxpayers with simple affairs
to lodge tax returns. A further simplification which should be considered
would involve broadening the GST base. Revenue from this measure could
be used to reduce the direct tax burden on labour and further address the
vertical fiscal imbalance. However, such a change in the tax base would
require the agreement of all state governments and would also require
significant changes to the financial arrangements between the federal and
state governments.

■

In common with most other OECD countries the major long-term fiscal
challenge relates to pressures from population ageing, although Australia
appears to be better placed than most, having just eliminated net government
debt. Pensions costs are also less sensitive to ageing than in most other OECD
countries because the public (first pillar) pension system is flat rate and
means-tested, with a comparatively low replacement rate, and an increasing
share of the elderly will rely on incomes from (second pillar) occupational
pensions. The Australian government has established the “Future Fund” to
build up assets to pay for future pension liabilities of its own employees, with
returns excluded from the governments “underlying cash balance” fiscal
objective – this implies a structural tightening of fiscal policy. The Future
Fund is explicitly quarantined from other possible medium-term objectives.
This is laudable, especially in the light of cross-country evidence which
shows that attempts to pre-fund public pension liabilities by accumulation
in social security systems have, without a high degree of explicit separation,
often been thwarted by increases in general government expenditure.

The main long-term fiscal pressures are instead likely to come from
rising health spending, where the recent and prospective rapid rise in
pharmaceutical spending is of particular concern. The Pharmaceutical
Benefit Scheme (PBS) has considerable advantages in keeping the cost of
drugs low in international comparison, while also allowing many new and
innovative drugs to be made available if they pass rigorous cost-effectiveness
analysis. The use of co-payments, with a differential between the general
population and concessionary beneficiaries, is important to promote cost
awareness and keep overall costs down. However,

the Australian government

should explore alternative indexation arrangements for PBS co-payments to increase
patient awareness of costs

. Under the present system, whereby the level of

co-payments is normally up-rated annually in line with the consumer price
index, there will be a tendency for co-payments to continuously fall as a
share of prescription costs or for the government to be required to implement
large increases at discrete intervals which may be controversial. One option
is to tie indexation to wage growth or average subsidy paid under the PBS.
Another option would be to set a minimum absolute co-payment, but above
this threshold the co-payment would be a percentage of prescription costs
rather than a fixed nominal amount as at present. All these options would
need to take account of the existing safety net arrangements and the need
to maintain access to very high cost pharmaceuticals.

In addition, an increased

■

ECONOMIC SURVEY OF AUSTRALIA, 2006

Policy Brief

How well does

fiscal federalism

work and what are

the priorities for

further reform?

focus should be placed on preventive health measures to minimise future growth in
health care costs and reduce long-term fiscal pressures

■

The special chapter in this

Survey

considers fiscal federalism, which is

inevitably a difficult and controversial issue, but one which permeates many
areas which are key to determining long-run economic performance. As in
other countries where such systems operate there is an inevitable tension
between pressures for greater subsidiarity to harness localised knowledge
and accountability and those for more centralisation to pursue national
objectives. While it is difficult to judge whether the current balance is ideal,
in international comparison the overall system does appear to work well. In
particular, there is an established co-ordination process with a proven track
record for delivering reforms, even if the process is sometimes frustratingly
slow.

Key areas of public service provision are subject to complex joint government
involvement, sometimes leading to inefficiencies. Fragmented decision
making and funding arrangements are particularly notable in hospital
services and old-age care, creating incentives for cost and blame-shifting
between government levels. States have responsibility for funding public
hospitals, while the Commonwealth funds private medical services
under Medicare and is responsible for old-age care. This can, for example,
induce public hospitals to refer patients being discharged to their general
practitioner, rather than providing post-hospital services directly. Moreover,
aged care is funded by the states if a person is in a hospital and paid by the
federal government if the person is in an aged care facility. Efficiency gains
in the health sector could be reaped by a better co-ordination of health care
supply between the central government and the states. The potential for
cost and blame-shifting between government levels seems to be lower in
education. Even so,

clarifying government roles and responsibilities in all areas

of government could significantly improve public sector efficiency

. A collaborative

approach between government levels to overcome some of these problems
has been adopted. Building on earlier arrangements, the

Council of Australian

Governments has recently endorsed a National Reform Agenda that focuses not only

Figure 3.
PRESCRIPTION COSTS
HAVE RISEN MUCH
FASTER THAN CO-
PAYMENTS
Index, 1991=100

1. On a fiscal year basis: 1991/92 to 2004/05.

Source

: Department of Health and Ageing.

■

Policy Brief

ECONOMIC SURVEY OF AUSTRALIA, 2006

How could

infrastructure

service provision

be improved?

on competition and regulatory issues, but also on human capital issues. It is imperative
that the Commonwealth and state governments co-operate closely to ensure the timely
implementation of the reform agenda

A simpler system of inter-governmental transfers involving so-called
“specific-purpose payments”(SPPs) would contribute to a clearer specification
of spending responsibilities.

The specific-purpose payments should become less

complex and inflexible

. A first step would be to develop an outcome/output

performance and reporting framework for each SPP. This is an ambitious task
as outcome/output measures of service delivery are difficult to clearly define,
measure and enforce in a robust way. Nevertheless, such frameworks could
ultimately lead to

a move towards the funding of such payments on an outcome/

output basis in certain areas, such as education

A vertical fiscal imbalance exists because the largest tax bases are assigned
to the Commonwealth, while expenditure responsibilities are significantly
more decentralised. The existence of a vertical imbalance does not by itself
indicate a problem, and there is little agreement over the ideal degree of
centralisation. But there are concerns that it undermines the accountability
to taxpayers for expenditure decisions; creates duplication and overlap
in the provision of services; constrains beneficial tax competition across
jurisdictions; and weakens incentives for tax and microeconomic reform. On
the other hand, this imbalance and the associated need for specific-purpose
payments provide the federal government with a lever with which to pursue
national objectives. If some increase in the revenue-raising capacity of the
states to meet their expenditure responsibilities were considered warranted,

the most direct solution would involve broadening the states’ land property and
payroll tax bases. A less direct option would be to allow the states to “piggyback”
on the personal income tax levied by the Commonwealth, with the centre making
“tax room” by lowering its personal income tax

. An advantage of this option is

that it would not significantly raise tax administration costs, since it would
still be administered and collected by the Commonwealth. However, a
difficulty is that its introduction would require a fundamental adjustment
of Commonwealth-states financial arrangements which would require
agreement of all jurisdictions. In any event, the efficiency of the state tax
system should be raised by eliminating the remaining distortionary stamp
duties.

■

Major progress has been achieved in providing a coherent framework for
delivering infrastructure services, but unfinished business remains. Further
reforms would raise productivity and reduce bottlenecks, including those
most visible recently when many ships were forced to queue, some up to
a month, to load commodity exports. The new National Reform Agenda
builds on and continues the National Competition Policy reform programme,
focusing on reform in the areas of energy, transport and infrastructure
regulation. However, important implementation details are still to be
determined, particularly in relation to electricity market reform and road
and rail freight infrastructure pricing, so reform outcomes remain uncertain.
Cooperation between the federal and state governments will be crucial for
establishing a final programme that delivers the necessary reforms. In the
light of regulatory delays relating to infrastructure development, the time

■

ECONOMIC SURVEY OF AUSTRALIA, 2006

Policy Brief

taken for regulatory decisions should be closely monitored, especially where
it is likely to impinge on export performance. The Council of Australian
Governments has agreed that an appropriate time for such decisions should
be at most six months, rather than as in some recent cases a number of
years. This decision was part of a broader COAG agreement on arrangements
for a simpler and consistent national approach to the economic regulation
of significant infrastructure. It is important that these arrangements be
implemented expeditiously, but if

delays continue to be excessive then further

intervention by the Commonwealth would be appropriate

. The central and state

governments should establish an integrated transport reform agenda within
a co-operative framework covering all elements of transport.

Competitive

neutrality across all transport modes should be achieved; barriers to competition in
individual modes be removed; and interfaces between modes enhanced. Governments
should also complete all outstanding National Competition Policy electricity reforms,
lifting price regulations for households and instilling stronger competition in the
electricity generation sector

. The level of government and private sector

expenditure on infrastructure has lifted markedly, partly in response to the
commodities boom. It is important that this expenditure is not pushed to a
level beyond the infrastructure supply capacity of the economy as this will
add to cost pressures. Furthermore, in the Australian context, the major
challenge is to improve pricing and regulatory arrangements, rather than
increasing the total volume of infrastructure.

The scarcity of water remains a major issue and progress in this area has
been disappointingly slow. The

National Water Initiative is a framework agreement

between the federal and state governments which provides for further reforms and it
is vital that these are pushed ahead rapidly

. It aims at establishing a water market

with tradable water entitlements. This is a prerequisite to better integrate
the rural and urban water reform agendas and to ensure that water prices
reflect the scarcity of water and of environmental amenities.

To this end,

cross-subsidisation of water usage between urban and rural users, and also between
different types of agricultural users, should be phased out

■

Industrial relations arrangements have evolved gradually from a prescriptive,
very complex, set of rules, largely set by a judicial body, the Australian
Industrial Relations Commission (and its state equivalents), to a much more
flexible system, with many enterprise and individual agreements. However,
the Commission, in setting awards, continued to restrain bargaining over
working conditions. The WorkChoices Act, which came into effect in March 2006,
moves the industrial relations arrangements towards a simpler, national
system. It also established a new, independent body, the Fair Pay Commission,
which will set and adjust a single minimum wage for adults, wages for
award classification levels and for youth wages. Its first decisions will be
taken shortly. The government now sets minimum conditions for leave and
maximum ordinary hours of work, which together with the wages set by
the Fair Pay Commission constitute the Australian Fair Pay and Conditions
Standard. Also the number of matters that are included in federal awards
has been reduced. Overall, the system has been simplified, leaving more
room for bargaining and has streamlined the process of making workplace
agreements. But the system is still complex: federal legislation runs to nearly

What will be the

effect of the recent

reform to industrial

relations?

■

Policy Brief

ECONOMIC SURVEY OF AUSTRALIA, 2006

How can labour

force participation be

further increased?

700 pages, distinct federal and state systems remain, and businesses have
complained about compliance costs.

The new system of industrial relations will need some time to bed down
before its effect on aggregate bargaining outcomes can be fully appreciated.
Opponents fear that greater flexibility will lead to widening income inequality
and poverty. Despite these concerns,

the rationale for maintaining the award

system should be questioned now that the WorkChoices Act provides for the setting
of national minimum standards in terms of wages and working conditions. Therefore,
these awards should be either gradually phased out subject to these minimum
standards or substantially rationalised further in terms of their number and content

Developments in the minimum wage will depend on the decisions of the
Fair Pay Commission. Its remit has a strong emphasis on the employability
of the low paid. The minimum wage is high in international comparison and
the number of low skilled who are long-term unemployed or disabled is also
high, thus raising concerns about the adverse effects of the minimum wage
on labour demand for the low skilled. At the same time, the minimum wage
is a blunt tool to enhance fairness, as more than half of the low paid live in
families with income above the median.

Therefore, the adequacy of incomes from

working should be addressed through other social policy instruments such as changes
in income tax rates and thresholds at lower incomes or an employment-conditional tax
credit, while maintaining the system of separate taxation of each spouse. Finally, there
remains considerable room for the up-skilling of the low paid, through a strengthening
of the vocational education and training system

■

International comparisons of labour force participation rates suggest
that there is scope for catching up with the best performing countries by
increasing participation among welfare recipients, those aged over 55 and
women with families. Accounting for hours worked makes female labour
supply even lower than headcount measures, given the high incidence of
part-time work. Despite low unemployment, reliance on income support
remains high, with the numbers of disability pensioners and lone parents
on welfare having increased markedly since the mid-1990s although these
trends have been recently reversed. In addition, the percentage of lone
parents on welfare who are also working has been increasing over the past
few years. Notwithstanding these recent improvements, a particular concern
is the high proportion of people living in jobless families, which is well above
the OECD average, with about three-quarters of such families headed by
lone parents. The promotion of individuals’ attachment to the labour force,
through reducing income support dependency, was the focus of welfare
reform in recent years. Building on previous initiatives, the “Welfare to Work”
reform package in the May 2005 Budget included a combination of changes
to payments and work incentives, workforce participation requirements, and
employment and related services for four priority groups, namely people
with a disability, principal carer parents, mature age people and very long-
term unemployed. The new arrangements comprise tighter eligibility and
participation requirements for new Disability Support Pension applicants,
with working capacity above 15 hours per week. For principal carer parents,
the reforms involve part time participation requirements for those with a
youngest child aged 6 or over, changes to Parenting Payment eligibility, and
provision of additional employment and related services.

■

ECONOMIC SURVEY OF AUSTRALIA, 2006

Policy Brief

For further

information

While recent Welfare to Work initiatives are welcome, reforms should go
further. It is particularly welcome that under these reforms employment
prospects for people 55 and over will no longer be taken into consideration
when determining eligibility for the Disability Support Pension. Greater
emphasis has also been placed on the assessment of rehabilitation needs
for people applying for a disability pension.

However, the tighter eligibility

requirements applicable to new entrants should be extended to all recipients

Similarly, tighter eligibility criteria for recipients of parenting payments
should not just apply to new claimants but be extended to the stock of all
existing recipients. Access to affordable child care also plays an important
role in promoting the employment opportunities for lone parents and
women with families. Efforts towards reducing the cost and increasing the
availability of child care places should be maintained. The structure of the
Child Care Benefit should be changed to reflect the age-related cost profile
of child care provision. This benefit should be made more conditional on
employment, in contrast to the present situation where it is still available for
up to 20 hours to families where no family member works. Steps taken to
reduce the financial disincentives to take a job for lone parents and second
earners, most of whom are women, are welcome, especially given the high
prevalence of jobless households with children. However, one consequence
of measures to reduce “inactivity traps” is that they create high effective
marginal tax rates from moving up the wage distribution as benefits are
withdrawn. Tackling such “low wage traps”, which appear more extreme
in international comparison, either by addressing allowance and parenting
payment income tests or by reducing the lowest income tax rate or raising
the threshold at which income tax is first paid, should be a priority. Relevant
considerations for evaluating these options are the fiscal cost and the labour
supply response.

To encourage older workers to continue working after they become eligible
for an Age Pension the income-test taper on earnings should be further
eased as marginal effective tax rates for the elderly can be nearly 70% over
a wide range of income. Incentives to retire early under the Superannuation
Guarantee scheme could be reduced by aligning the eligibility age of
superannuation (currently 55, but to be increased to 60 by 2025) with that
of the Age Pension (age 65) over time.

If evidence of significant “double dipping”

emerges, the generous tax-treatment of superannuation if drawn as a lump-sum
after the age of 60 should be withdrawn and limits placed on the exemption of owner-
occupied housing in the means test for the Age Pension

. Implementation of the

proposals to simplify superannuation announced in the 2006/07 Budget would
further encourage workforce participation by older workers.

■

For more information regarding this Policy Brief, please contact:

David Turner; e-mail: david.turner@oecd.org; tel.: +33 1 45 24 87 15, or see

www.oecd.org/australia

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18 Surveys are published each year. They are available individually or by
subscription. For more information, consult the Periodicals section of the
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Economics Department, including information about other publications, data
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Department’s Web site at

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Economic Outlook No. 79

, May 2006.

More information about this publication can be found
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www.oecd.org/eco/Economic_Outlook

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